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 Vermont nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of Vermont. Here are the details.
Form Your Vermont Nonprofit Corporation
First, you need to form a nonprofit corporation under Vermont state law (Title 11B of the Vermont Statutes Annotated).
1. Choose the initial directors for your nonprofit
In Vermont, you must have at least three directors on your board.
2. Choose a name for your Vermont nonprofit corporation
The name of your nonprofit corporation cannot be the same as or similar to, or likely to be confused with, another corporation or business name already registered with the Secretary of State. In addition, the name must include the word "corporation," "incorporated," "company," or "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd" and you cannot use the word "cooperative" or an abbreviation of that word in your name. To see if your proposed name is available, you can search the Vermont Corporations Database Keyword search on the Secretary of State’s website.
3. Prepare and file your nonprofit articles of organization
You create your nonprofit entity by filing a certificate of incorporation with the Vermont Secretary of State. Your articles of organization must include basic information such as:
- the name of your nonprofit
- whether your nonprofit is a public benefit corporation or a mutual benefit corporation
- the street address of the initial registered office and the name of your initial registered agent at that office
- the name and address of each incorporator
- whether or not the corporation will have members; and
- provisions regarding the distribution of assets on dissolution.
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. Be sure to include the language required by the IRS to obtain 501(c)(3) tax-exempt status. For tax-exempt status, the IRS requires:
- 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, including sample language, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website.
4. Prepare bylaws for your Vermont nonprofit corporation
Before you file your articles of organization, you’ll need to have bylaws that comply with Vermont 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 Vermont. 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:
- electing directors (if not named in the articles)
- 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 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 Vermont 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 Vermont state tax exemptions
Once you obtain your federal 501(c)(3) tax-exempt status from the IRS, your nonprofit is eligible for certain state tax exemptions. For information and filing requirements for exemptions from income, property, sales, and other state taxes, check with Vermont’s Department of Taxes.
3. Other state reporting and registration requirements
If your nonprofit has paid fundraisers, you are required to register with the state before doing any fundraising activities. Check the Attorney General’s website for information and rules about fundraising and registration requirements for nonprofits in Vermont.