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 Minnesota nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of Minnesota. Here are the details.
Form Your Minnesota Nonprofit Corporation
1. Choose who will be the initial directors for your nonprofit.
In Minnesota, your nonprofit corporation must have three or more directors who are natural persons (not corporations or companies). A majority of the directors must be adults. In addition, the incorporator or incorporators of the nonprofit must be at least 18 years old.
2. Choose a name for your nonprofit corporation.
The name of your nonprofit corporation must be distinguishable from the names of any other business entity on file with the Minnesota Secretary of State. To see if your proposed name is available, you can search Minnesota's name database on the Secretary of State’s website.
3. Prepare and file your nonprofit articles of incorporation.
You will need to create and file nonprofit articles of incorporation with the state. The Secretary of State has a fillinable articles of incorporation form on its website or you can file your articles online. However, the articles on the Secretary of State’s website contain only the basic information required to form your nonprofit under Minnesota state law. To obtain 501(c)(3) tax-exempt status from the IRS, you will need to have additional specific language in your articles including:
- a statement of purpose that meets IRS requirements
- statements that your nonprofit 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.
The Minnesota Secretary of State’s website refers you to the Minnesota Council of Nonprofits for a sample articles of incorporation form with the required IRS language. Make sure you include both the language required to form a nonprofit under state law and the additional language required by the IRS for tax exemption. For more information on IRS requirements for tax exemption, refer to IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website.
4. Prepare bylaws for your Minnesota nonprofit corporation.
You'll need to prepare bylaws that comply with Minnesota 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 Minnesota. Your bylaws do not need to be filed with the Minnesota Secretary of State -- 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 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 keep minutes of the meeting 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 Minnesota 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 Minnesota state tax exemption.
Once you receive an IRS federal determination letter that your nonpofit qualifies as a 501(c)(3) tax-exempt organization, then you are also exempt from state corporate income tax. Check with the Minnesota Department of Revenue to find out whether you are eligible for property and sales 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 Minnesota Attorney General before doing any fundraising activities. Check the Minnesota Attorney General website for registration rules.