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 Kentucky corporation, then you apply for tax-exempt status from the IRS and the State of Kentucky. Here are the details.
Form Your Nonprofit Corporation
1. Choose who will be on the founding board of directors for your nonprofit corporation.
In Kentucky, your nonprofit corporation must have three or more directors.
2. Choose a name for your Kentucky nonprofit corporation.
The name of your nonprofit corporation cannot be the same as the name of another nonprofit corporation on file with the Kentucky Secretary of State. To see if your proposed name is available, you can search Kentucky's name database at http://sos.ky.gov/business.
In Kentucky, your nonprofit corporation name shall include "corporation," "incorporated," "company," "inc.," or "co."; but if "company" or "co." is used, it may not be immediately preceded by "and" or "&."
3. Prepare and file your nonprofit articles of incorporation.
You will need to create and file nonprofit articles of incorporation with the Kentucky Secretary of State's office. The articles of incorporation need to include basic information such as your nonprofit's name, your nonprofit's purpose, the name and address of your registered agent (the person to whom legal notices should be sent), the corporation's mailing address, the name and address of your incorporators and directors, and other information. The Secretary of State has a nonprofit articles of incorporation form on its website that you can fill in and then print and mail in. Complete everything as indicated on the Secretary of State's form and follow the instructions on the website for filing the form.
In addition to what's required in your articles of incorporation under state law, you'll need to include certain provisions in your articles to meet IRS requirements for 501(c)(3) tax-exempt status. For IRS purposes, your articles must include: (a) a statement of purpose that qualifies your organization for tax-exempt status, (b) statements that your nonprofit will not engage in prohibited political or legislative activitiy, and (c) a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution. For more information on IRS requirements for articles of incorporation, see IRS Publication 557, Tax-Exempt Status for Your Organization (available on the IRS website). You can also refer to How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo) for guidance on drafting articles that satisfy both state and IRS rules for 501(c)(3) nonprofits.
4. Prepare bylaws for your Kentucky nonprofit corporation.
You'll need to prepare bylaws that comply with Kentucky law and 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 Kentucky. For more information, see Nolo's article Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes or, for help creating your bylaws, see Nolo's book How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). Your bylaws do not need to be filed with the Kentucky Secretary of 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, minutes of the meeting should be created.
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 Kentucky 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 Kentucky state tax exemptions.
Once you have your federal tax exemption, you need to obtain your Kentucky state tax exemptions. This may include exemptions from income, property, sales, and other state taxes. Kentucky's tax agency will have a form you need to file to obtain your state tax exemption.
3. Other state reporting and registration requirements.
Depending on your activities and the size of your organization, you may need to register with the Kentucky attorney general before doing any fundraising activities. Check with Kentucky's attorney general website for additional rules. For more information about fundraising registration requirements, see Nonprofit Fundraising Registration: The 50-State Guide, by Ronald Barrett and Stephen Fishman (Nolo).