The decision to form and operate a new nonprofit 501(c)(3) organization is an exciting one, but the process to do so can be daunting. Many do not know where to start, or even the questions they should be asking as they move ahead toward goals of tax exemption and program progress. Below is a quick summary of some key information with which to be familiar before taking that next step:
A. State and Federal Requirements
There is both a state and federal element involved in starting a nonprofit organization. Formation of the nonprofit entity itself, often as a nonprofit corporation, is a matter of state law. In Colorado, this begins with filing articles of incorporation with the Secretary of State, and continues with the adoption of other corporate governance including bylaws and corporate policies.
However, applying for recognition of 501(c)(3) tax-exempt status is a separate process with the IRS. If an organization is formed as a nonprofit corporation but doesn’t submit the Form 1023 and obtain a determination letter from the IRS, it is not exempt from taxation and cannot accept deductible contributions (subject to a few exceptions, however). The Form 1023 requires a variety of information about the organization’s programs, leadership, finances, governance and fundraising. There is a filing free of $850 for organizations with annual gross receipts expected to be over $10,000, and a fee of $400 for organizations with annual gross receipts expected to be $10,000 or less.
An organization’s determination letter will state that it is exempt under section 501(c)(3), and further classify it as an institutional charity (e.g., hospital, church or school), publicly supported charity, private foundation, or otherwise.
B. Fundraising Requirements
Fundraising for a nonprofit comes with additional requirements. Subject to some exceptions, a nonprofit may need to register with the Colorado Secretary of State for this purpose (which is separate from forming as a nonprofit corporation and any reporting relating to its corporate status). Depending on its activities, it may need to register to conduct charitable solicitations in other states, as well. This registration process is aimed at helping to protect and support donors by giving them information about how an organization operates and how it spends its money, and requires annual updates.
C. Annual Compliance
A nonprofit organization generally should be prepared for annual reporting at both the state and federal level. Again, subject to some exceptions, organizations will need to file a form of 990 with the IRS; smaller organizations (gross receipts less than $200,000 and total assets less than $500,000) can file an abbreviated Form 990-EZ, and smaller still (annual gross receipts normally $50,000 or less) can file the 990-N postcard filing. A private foundation of any size must file Form 990-PF.
A 501(c)(3) organization is subject to ongoing requirements and prohibitions in order to maintain its status, and the 990 contains questions to flesh out whether an organization is compliant. It is crucial that an organization gets familiar with, and maintains ongoing awareness of, key issues including political activity, lobbying, private benefit, unrelated business activity, and conflicts of interest. Private foundations are subject to an additional set of regulations that further restrict what they are able to do.
An organization also may need to file a Form 990-T if it has any unrelated business taxable income, as well as a state return for the same.
Other state filings include a corporate periodic report (for nonprofit corporations), charitable solicitation renewals (discussed above) and potentially state and local sales tax returns.
Note: This post is far from a comprehensive checklist for forming and operating a nonprofit organization, but rather is meant to provide some preliminary information to those thinking of starting the process. Please contact us if we can assist you with questions or concerns about starting a nonprofit.
