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 Tennessee nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of Tennessee. Here are the details.
Form Your Tennessee Nonprofit Corporation
First, you need to form a nonprofit corporation under Tennessee state law (Tennessee Code Annotated, Title 48, Chapters 51-68 (“TCA”)).
1. Choose the initial directors for your nonprofit
You must have at least three directors on your board in Tennessee. All directors must be natural persons. You must have at least one incorporator.
2. Choose a name for your Tennessee nonprofit corporation
The name of your nonprofit corporation must be distinguishable from the name of any existing for-profit or nonprofit corporation, limited liability company, limited partnership, limited liability partnership, assumed name, and any name that has been reserved or registered for use with the Secretary of State.
To see if your proposed name is available, you can search Tennessee’s online business name database or you can call the Division of Business Services at the Secretary of State’s office. The Secretary of State’s website has business name availability guidelines with additional information about name requirements and distinguishability. Also, see TCA §48-54-101 for name requirements.
3. Prepare and file your nonprofit articles of organization
You create your nonprofit entity by filing a certificate of incorporation (charter) with the Tennessee Secretary of State. Your charter includes basic information such as:
- the nonprofit’s name and fiscal year end
- a statement that the corporation is either a public benefit corporation or a mutual benefit corporation, and if the corporation is a religious corporation, a statement to that effect
- the street address and zip code of the initial registered office
- the county in which the office is located, and the name of the initial registered agent at that office
- the name, address, and zip code of each incorporator
- the street address and zip code of the initial principal office of the nonprofit
- a statement that the corporation is not for profit
- a statement that the corporation will or will not have members, and
- provisions not inconsistent with law regarding the distribution of assets upon dissolution.
See TCA §48-52-102 for additional information about your charter.
The Secretary of State has a sample fillinable charter form for nonprofits on its website which you can use to create your nonprofit corporation. You can also file your charter online. Complete and file your charter following the instructions provided.
The charter 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 charter, 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 Tennessee nonprofit corporation
Before you file your articles of incorporation, you’ll need to have bylaws that comply with Tennessee 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 Tennessee. 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 Tennessee 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 Tennessee state tax exemptions
Nonprofit corporations are automatically exempt from franchise and excise taxes in Tennessee. To obtain an exemption from sales and use tax, you will need to file an application with the Tennessee Department of Revenue. Check with the Department of Revenue for information on how to apply for exemptions from these and other state taxes.
3. Other state reporting and registration requirements
Depending on your activities and the size of your organization, you may need to register with the state before doing any fundraising activities. Check the Tennessee Secretary of State’s website for information and forms about registration requirements for nonprofits in Tennessee.