Most nonprofits are 501(c)(3) organizations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. To create a 501(c)(3) tax-exempt organization, first you need to form a South Dakota nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of South Dakota. Here are the details.
Form Your South Dakota Nonprofit Corporation
First, you need to form a nonprofit corporation under South Dakota state law (Chapter 47-22 of the South Dakota Codified Laws (“SDC”)).
1. Choose the initial directors for your nonprofit
You must have at least three directors on your initial board in South Dakota. Your initial directors are named in your articles.
2. Choose a name for your South Dakota nonprofit corporation
The name of your nonprofit corporation must be distinguishable from any other corporate name on file with the Secretary of State. To see if your proposed name is available, you can search South Dakota’s online business name database or you can call the Secretary of State’s office. You can reserve a corporate name for 120 days by filing an application with the Secretary of State.
3. Prepare and file your nonprofit articles of organization
You create your nonprofit entity by filing a certificate of incorporation with the South Dakota Secretary of State. Your articles of organization include basic information such as:
- your nonprofit’s name
- its duration
- its purpose
- whether your nonprofit will have members and information about membership classes, if applicable
- a statement about how directors will be elected or appointed
- a provision for distribution of assets on dissolution
- information regarding the nonprofit’s registered agent as required by SDC § 59-11-6;
- the number of directors constituting the initial board of directors and their names and addresses, and
- the name and address of each incorporator.
You must have three or more incorporators in South Dakota. See SDC §47-22-6 for additional information about your articles.
The Secretary of State has a fillinable articles of incorporation form for nonprofits on its website which you can use to create your nonprofit corporation. Complete and file your articles following the instructions provided.
The articles form on the Secretary of State’s website does not include language required by the IRS to obtain tax-exempt status. To receive 501(c)(3) tax-exempt status from the IRS, you'll need to have additional specific language in your articles, including:
- a statement of purpose that meets IRS requirements
- statements that your non-profit will not engage in prohibited political or legislative activity, and
- a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution.
For more information on IRS requirements for tax exemption, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website. Make sure you include both the state and federal tax-exempt required language in the articles you create.
4. Prepare bylaws for your South Dakota nonprofit corporation
Before you file your articles of organization, you’ll need to have bylaws that comply with South Dakota law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in South Dakota. Your bylaws do not need to be filed with the state -- they are your internal operating manual.
5. Hold a meeting of your board of directors
Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
- approving the bylaws
- appointing officers
- setting an accounting period and tax year, and
- approving initial transactions of the corporation, such as the opening of a corporate bank account.
After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board.
6. Set up a corporate records binder
You should set up a corporate records binder for your nonprofit to hold important document such as articles of incorporation, bylaws, and minutes of meetings. For more information, as well as minutes forms, consent forms, and other resolutions, see Nonprofit Meetings, Minutes & Records, by Anthony Mancuso (Nolo).
Obtain Your Federal and State Tax Exemptions
Now that you have created your nonprofit corporation, you can obtain your federal and South Dakota state tax exemptions. Here are the steps you must take to obtain your tax-exempt status:
1. File your Form 1023 federal tax exemption application.
To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. For line-by-line instructions on how to complete the Form 1023, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that is filed online. Only smaller nonprofits--those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000--are eligible to use the streamlined 1023-EZ application.
See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.
2. Obtain your South Dakota state tax exemptions
There is no corporate income tax in South Dakota. Your nonprofit may be eligible for exemption from other state taxes, including sales, use, and property taxes. Check with the South Dakota Department of Revenue for information on how to file for exemptions from other state taxes.
3. Other state reporting and registration requirements
South Dakota does not require nonprofits to register with the state before soliciting contributions from state residents. You may have to register your nonprofit in other states before you engage in any out-of-state solicitations.