Numerous passionate people wish to serve the community to change people’s lives for a good cause. They, therefore, decide to join a charitable organization or start their own. Running such an institution requires planning and excellent management skills. The first step when establishing a new nonprofit organization is applying for the 501c3 status.
Unfortunately, the application process may seem daunting for startup firms who lack enough knowledge of what it entails. We have put together a detailed guideline to help you through the process.
What Is A 501c3?
It’s merely an IRS tax code that allows tax exemption for charitable organizations. The application involves filling in form 1023 by corporations that deal with public charities. For your organization to qualify for the exemption, it needs to deal with various activities, including religious and educational tasks. It also covers establishments conducting scientific testing for public safety or advocating for human and animal rights. A 501c3 organization enjoys exemptions from federal income tax, reducing the donor’s taxable income.
Other benefits include easy access to grants from other private and government foundations. Obtaining the status, therefore, makes a firm more legible to numerous funding opportunities. Besides, the organization benefits from high discounts on the postage rates. Still, a 501c3 firm enjoys special mailing services and better or free media rates. It can also help an establishment receive international recognition as a nonprofit organization.
Thus, the firm attracts a larger audience and a better reputation. The firm’s good cause helps it to win over more international volunteers who help support the operations. The charitable organization will also have better networking opportunities. It can partner with international groups and NGOs to gain some global exposure.
The Differences Between 501c3 & 501c
Most people think that 501c3 and 501c mean the same. Well, both status exempts the charitable organizations from tax. However, based on the IRS, they appear as two different categories of nonprofit organizations. The numbers and letters stand for different tax categories in the IRS.
A 501c charitable organization allows its supporters to enjoy tax deductions for their contributions, including assets, money, or goods. However, it may not allow donors to write off their donations.
On the other hand, a 501c3 organization begins as nonprofit corporations that later become tax-exempts. Its charitable status allows donors to write off their contributions. These types of organizations also enjoy tax exemptions from its income and sales.
Nonprofit establishments can make substantial returns. Nonetheless, any profit made by a 501c3 enterprise must not benefit any directors in the firm. Still, the organizations shouldn’t offer dividends. Additionally, if the organizations shut, the individuals’ shouldn’t share the assets available.
How To Start A 501c3 Nonprofit Charitable Organization
Is your organization involved in charity activities like educational, religious, and other nonprofit endeavors? You may seek a 501c3 status application by filling in the form 1023 to protect you and your director’s assets and enjoy some tax benefits. Here are various steps to guide you through.
Be Able To Communicate Your Charitable Cause & Purpose
You need to precisely state your charitable organization’s purpose to develop an excellent company lookup. First, ask yourself what issues you see in your community that you intend to address.
Although you clearly understand your nonprofit organization’s goals, you still need to communicate them to others. Express your mission and purpose to create a good company lookup that will build a positive public image. Please focus on your enterprises’ work and relationships that contribute to the firm’s growth and development. To help present your organization’s apparent purpose, ask yourself who will benefit from your good cause.
Determine who will administer your services, your stakeholders, and volunteer staff. Additionally, develop a clear mission statement to communicate your purpose efficiently. State the values that drive your activities to define your passion. Consider whether you need to establish a local initiative, a regional project, or an international scope. Finally, outline how you intend to accomplish your mission.
Make Sure Your Organization Fits One Of The Categories
It would be wise to confirm whether your operations fall in the right categories before applying for a 501c3 charity status. You might need to go through the IRS lookup to check your legibility. The main types involved include private foundations, private operating foundations, and public charity.
A private foundation generates income from a tiny group of donors. These organizations don’t receive public support. Moreover, private foundations’ donations can be tax deductible up to 30% of the donor’s income. An example of such an enterprise is a family charitable organization.
The public charities contain active programs, including animal welfare, churches, educational, and other benevolent organizations. These types of establishments depend on the public and the government for financial support. An individual donor’s income in the organization gets subjected to a 60% tax deduction and a corporate limit of 10%.
On the other hand, private operating foundations maintain programs similar to public charity but with close governance like in foundations. It also has the deductibility of a donation identical to that of public charities.
Create a Brand
Before filling in the form 1023 during the 501c3 status application, you need to develop a brand name based on the firm’s operations. Every state has different regulations for picking a brand name, but you must select a unique one. It’s a crucial decision that will influence your organization’s lookup in years to come.
Make the brand name easy to remember, and you can even use abbreviations. Try brainstorming to come up with inspiring names that support the mission. It would be wise to look up various web domains to help develop the appropriate brand name.
Use a descriptive word that brings out a clear depiction of your charitable organization. To help build a strong brand, describe the market you intend to serve, for instance, children, homeless, or hungry. Further, write down actions that define your firm like, feed, rescue, teach, or heal.
Hire Dependable Board Members
An active board is essential in any nonprofit organization. It avails the required expertise to help accomplish charitable organizations’ goals. Your board can also help you in compliance with regulations and the incorporation of challenging processes. Therefore, before filling out the form 1023 for application purposes, please pick out the right people to help you out.
A reliable leadership team comprises a passionate board of directors, an executive director, and other volunteers. Take time to define each individual’s specific roles to create a dependable and organized team that works toward a common goal.
Go through your state’s rules to determine whether it requires a list of the board members in incorporation documents. Let your team work together to help remain focused on the establishment’s mission and vision. To achieve this, ensure open communication with all members and avail multi-user systems.
Ensure Your Bylaws Meet The Requirements
Before proceeding to the application process, you also need to set up some operating rules and regulations. They help outline the undertakings in your nonprofit organizations as well as promote accountability. Feel free to look up some bylaws online to ensure that your organization meets all the requirements.
Please note that your charitable organization needs to refrain from political and legislative activities. Additionally, the IRS limits the events of your corporation. The bylaws help in governing the organization, managing fundraising, and set strong precedents. Ensure that the rules explicitly define financial reporting and donations protocols.
Further, state the roles of each staff, committee structures, and membership programs. Besides, the bylaws need to outline conflict resolution and compensation setting policies. Also, describe the required procedure in case of bylaw amendments. The rules act as a lookup function to ensure that all members remain accountable and committed to the firm’s continuity. It will thus help stabilize growth, especially in the initial stages.
File your Articles of Incorporation
Next, you need to fill in your formal paperwork, including the article of incorporation, just before you complete form 1023. Do proper research on your state’s nonprofit bylaws regulations. Fill in the document with your company’s legal name, the firm’s precise location, operations, trustees, and board members’ addresses.
Please note that all board members need to sign the document before submission. Lookup for your state’s incorporation office in which you conduct your activities to file the report. You may also need to open an employer identification number to help track your financial movements. Further, it will help you hire employees in the future and open a bank account.
When the state approves your articles of incorporation, you can now hold your initial board meeting. Make the document a formal record, adopt bylaws, issue membership, and authorize committee establishment.
You are Ready to Start the Application Process
File for the 501c3 tax-exempt status by completing the IRS form 1023. It would be best to fill in the form within 27 months from the time you present your articles of incorporation documents. IRS requires the presence of specific details during the application.
Present a statement of your exempt purpose and conflict of interest clauses in your bylaws. Also, prepare to give the necessary information concerning your nonprofit organization. Avail your company lookup, for instance, contact information, and a detailed description of your establishment activities.
Unveil information about compensation and financial plans with your trustees, directors, and employees. IRS then goes through your data thoroughly for verification.
Check for any State-Specific Charity Requirements
You need to find out and comply with any state-specific rules and regulations concerning nonprofit tax exemptions. Please check with the association of state charity in your area since laws differ in various states.
In some states, you may have to publish a notice of incorporation in the local papers. Note that multiple states seek a charitable solicitation sign up through the attorney general before you request for fundraising. Furthermore, Texas and California require state-based charity status applications, other than the 501c3.
You Might be able to Apply with 1023-EZ
Please note that it’s also possible to use a shorter application format, the 1023-EZ. It’s a condensed format of form 1023 used by an organization with less than $50,000 gross income and $250,000 property value.
Still, you must fulfill the article of incorporation requirements and bylaws in the application. It would be wise to check the IRS website lookup list to confirm your eligibility and instructions about this streamlined form.
Maintain Your Tax-Exempt Status
After obtaining the 501c3 status for your charitable organization, you now need to ensure continuous compliance with the availed rules. Please prepare for annual report presentations to show your financial activities. Therefore, keep a clear record of all liabilities expenses and incomes in the establishment. Indicate workers compensations, payroll records, and other miscellaneous income.
Also, your establishment needs to remain open to public inspection. Keep your tax-exempt status updated and annually fill in form 990. Review and update all your state-specific charitable organization requirements. Also, register and maintain a fundraising license and conduct regular leadership meetings at the end of a term. If you observe all the rules, then you should face no problem with your tax-exempt status.
Reaping The Fruit of Your Labor Takes Time
Establishing a charitable organization is a fulfilling and rewarding good cause. Besides, obtaining a 501c3 status for your nonprofit organization will help open up more doors. Don’t feel discouraged to apply since it can massively boost your firm’s growth.
The above guideline aims at helping you understand the application process for a tax exemption position. To succeed, you need the right tools, commitment, and a long-lasting organization structure. Always remember why you started the organization and keep your beneficiaries in mind whenever you face obstacles.
501c3 status FAQ
❔ What does it mean to be a 501c3?
Being a 501c3 organization means that the IRS approves an establishment’s credibility for tax exemption. The benefiting organizations must not contribute to private interests, and its net income shouldn’t benefit individual shareholders.
🙋 How many board members does 501c3 need?
The IRS requires at least three board members before establishing a charitable organization. However, the number may vary based on state-specific requirements.
💸 Is it expensive to set up a nonprofit organization with a 501c3?
The tax-exempt status filing fee can range from $275 for a 1023-EZ to $600 for a 1023 form for an organization not expecting more than $50,000 annual revenue.
⏲️ What is the approval time of a 501c3?
A 501c3 status complete approval may take between two to 12 months. You may receive follow up questions concerning your application. Thus, some applications take a little bit longer or less time.
✔️ Where can I check my 501c3 status?
For tax-exempt organizations wishing to check their 501c3 status, they can go through the IRS.gov.