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 Maryland corporation, then you apply for tax-exempt status from the IRS and the State of Maryland. Here are the details.
Form Your Maryland Nonprofit Corporation
1. Choose who will be the incorporator of your nonprofit corporation.
You can have one or more incorporators; each incorporator must be at least 18 years old.
2. Choose a name for your Maryland nonprofit corporation.
The name of your nonprofit corporation cannot be the same as the name of another entity on file with the Maryland Department of Assessments and Taxation. To see if your proposed name is available, you can search Maryland's name database or call the Department of Assessments and Taxation. Your nonprofit corporation name must contain "Corporation", "Incorporated","Limited", "Inc.", "Corp.", or "Ltd."
3. Prepare and file your nonprofit articles of incorporation.
You will need to create and file nonprofit articles of incorporation with the Maryland Department of Assessments and Taxation office. The articles of incorporation must include the following:
- your incorporator's name and address
- your nonprofit's name
- a description of the corporation's business
- the street address in Maryland of the principal place of business
- the name and street address of your registered agent in Maryland
- the number of directors and the names of the initial directors, and
- statements for state and federal tax-exempt purposes regarding use of funds, restricted activities, and distribution of assets upon dissolution.
The Maryland Department of Assessments and Taxation has a nonprofit articles of incorporation form which you can use to create your articles. Follow the instructions on the website for completing and filing the articles form.
The Maryland form includes certain language required by the IRS for Section 501(c)(3) tax-exempt status. For more information on IRS requirements for federal tax exemption, including sample language for articles of incorporation, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website.
4. Prepare bylaws for your Maryland nonprofit corporation.
You'll need to prepare bylaws that comply with Maryland 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 Maryland. Your bylaws do not need to be filed with the Maryland Department of Assessments and Taxation -- they are your internal operating manual.
For more information, see Nolo's article Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes. For help creating your bylaws, see Nolo's book How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
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.
Be sure to create and keep minutes of all your board meetings.
6. Set up a corporate records binder.
You should set up a corporate records binder for your nonprofit to hold important documents 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 Maryland 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 Maryland state tax exemptions.
Once you have your federal tax exemption, you can apply to the Comptroller of the Treasury for an exemption from state income taxes. You will need to submit the following documents to the Legal Department of the Revenue Administration Division:
- a request for exemption from Maryland income tax
- an explanation of the nature, purpose, and scope of your organization
- a copy of the IRS tax determination letter
- a copy of your bylaws; and
- a copy of the latest financial statement of your organization.
You may also be eligible for property and sales and use tax exemptions. See the Charitable Organizations Division of the Office of the Secretary of State for information on how to apply for state tax exemptions.
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's Charitable Organization Division before doing any fundraising activities. Check the Maryland Charitable Organization website for rules and registration requirements.