Nonprofits FAQ

Answers to your questions about nonprofit organizations and 501(c)(3) corporations.

What are the benefits of forming a nonprofit corporation?

Nonprofit corporations enjoy an exemption from corporate income taxes on profits from activities that are related to their organizational purpose. Also, a nonprofit is permitted to raise funds by receiving public and private grant money and donations from individuals and companies. (And the tax laws encourage people and businesses to donate money and property by allowing donors to deduct their contributions on their own tax returns.) Finally, structuring an organization as a nonprofit corporation protects its directors, officers, and members from personal liability for the corporation's debts and liabilities. For more good reasons to incorporate your association, see Five Reasons to Incorporate Your Nonprofit Association.

How do I form a nonprofit corporation?

There are several steps you must take to create a nonprofit corporation. The first is filing a short document, usually called articles of incorporation, with the corporations division of your state government. To do this, you'll have to pay a filing fee of $30 to $125.

Your articles need to contain certain provisions in order to obtain tax-exempt status from the IRS. Check the IRS website for a list of what is required in your articles and for sample articles. In addition, you will need to check your state laws for any state specific requirements.

Generally, articles of incorporation contain the following permissions:

  • the name of your corporation
  • the corporation's address
  • the name and address of a registered agent for service of process in the state
  • the names and addresses of the initial directors
  • a statement of purpose
  • a statement that all of the organizations's assets will be dedicated to its exempt purpose
  • a statement that the organization will not engage in prohibited political and legislative activity, and
  • a statement that the organization will distribute its assets to another 501(c)(3) upon dissolution.

After you file your articles, you must apply for state and federal income tax exemption. The most common federal tax exemption comes from Section 501(c)(3) of the Internal Revenue Code. To obtain this exemption, you will need to complete and file a Form 1023 tax exemption application -- a fairly long and complicated form -- with the IRS. You must also write your corporate bylaws, a document that sets out the rules that govern your corporation, including procedures for making major business decisions, voting rights, and other important guidelines. Finally, before you start doing business, you must elect a board of directors and hold an initial meeting of the board. For more details, see How to Form a 501(c)(3) Nonprofit Corporation.

Is it difficult to run a nonprofit corporation?

Operating a nonprofit corporation can be both rewarding and challenging. Organizing people and raising money for a cause you believe in can be soul-satisfying. Yet you'll also have to remember that running a legally recognized "corporation" requires some attention to detail, and you will need to understand and follow some basic rules -- both corporate and tax-related IRS rules. The first rule is to hold required meetings of directors and members and to keep minutes of these meetings in a corporate records book. The IRS also has a thing or two to say about what a nonprofit can and cannot do. You will need to become familiar with the IRS rules governing tax-exempt nonprofits. For example, nonprofits cannot distribute any profits to their members, contribute money to political campaigns, or engage in lobbying activity (except in limited circumstances).

For more information about these rules, see Protecting Your Nonprofit Corporation's Tax-Exempt Status.

How do I convince people to contribute to our nonprofit before we get our tax exemption?

Contributions made to an organization that hasn't yet received tax exemption aren't tax deductible yet -- but they will be, retroactively, if and when the organization receives its tax exemption.

When considering motivating donors, however, don't forget that many of them will never receive a tax deduction for their donations anyway, because they don't itemize their deductions on their personal income tax return. Instead, they use the standard deduction. Clearly, many people are motivated by more than just how the dollars shake out every April 15th. For tips on attracting donors to your organization, see Nolo's article Getting Charitable Donors For Your Nonprofit.

Does my nonprofit need to register with the state in order to fundraise?

It depends on where (in which state) your nonprofit is soliciting contributions, but for most nonprofits the answer will be yes, you need to register. All but 11 states require nonprofits to register with a designated state agency before the organization can solicit contributions from residents of the state. These registration rules are followed in every state except Delaware, Idaho, Indiana, Iowa, Montana, Nebraska, Nevada, South Dakota, Texas, Vermont, and Wyoming.

Solicitations can include any type of requests for donations by mail, phone, advertisement, email, or Internet, regardless of whether your nonprofit actually receives any donations. Learn more about nonprofit registration requirements -- and what your organization needs to do -- in Nolo's article Fundraising Registration -- Does Your Nonprofit Need to Register?

Is it true that some nonprofits ask their board members to not only volunteer, but donate?

Yes, in fact this is quite common. It's expected that board members will play a key role in raising funds for the organization, especially at the beginning when you can't afford to hire paid development staff. That will often mean that board members ask others to contribute money. A board member who is able to say, "I and other members of the board have already given a total of $x to this cause" is in a much better position to convince others to act similarly.

Of course, you don't want to make your board so exclusive that only the rich can join. While many organizations set a suggested board donation amount, many also create a sliding scale as appropriate to bring in a broad range of community members.

What ratio of our nonprofit's funds are expected to go to services rather than administrative costs?

The Better Business Bureau (BBB)'s Wise Giving Alliance recommends, among its "Charity Standards," that nonprofit organizations spend at least 65% of total expenses on program activities.

It also recommends that nonprofits plow no more than 35% of the donations, legacies, and other gifts that come through its fundraising efforts back into further fundraising.

I want to start a nonprofit -- does it matter that I've never worked in one?

Many great nonprofits have been started by people whose main qualifications were energy and passion for a cause. However, success in the nonprofit sector is anything but guaranteed. Some important questions to ask yourself before you leap include:

  • Can you handle working long hours with no salary for the potentially long time it might take to get the nonprofit established?
  • Is there truly a need for the nonprofit you're thinking of starting, or is there another organization in your community doing something similar, which you could volunteer or work for?
  • What types of transferable skills do you already have, such as business, accounting, marketing, writing, Web design, or client services expertise -- and what skills will you need to either develop or find other people to supply? (Remember, a nonprofit is a type of business, and donors and grantmakers will judge your professionalism from the outset.)
  • Do you have friends and contacts with a similar interest in the same cause, whom you'd be willing to reach out to for help or contributions?
  • What other assets could you draw on to jumpstart your nonprofit, such as property you already own and could use for office space or a shelter?
  • What will be your minimum operating expenses for the first year, and where will this money come from (especially given that you're unlikely to receive grant funding in these early stages of getting established)?

Do some serious advance research, both by reading the many available print and online resources and talking to people in other groups. If possible, finding an organization similar to the one you have in mind and making a significant volunteer commitment to it can be the best way to learn, make personal contacts, and get ideas for how to proceed.

Also consider starting small. You can create a miniature, test project, just to see how things go. As a next step, before you apply for tax-exempt or 501(c)(3) status, you might ask an established nonprofit organization -- preferably one with a similar mission -- to become your "fiscal sponsor." This allows you to basically ride on its 501(c)(3) coattails, while it initially handles any money you receive. You can offer donors the right to tax deductions, and rely on the sponsoring organization to report and fulfill other requirements to your grantmakers.

For More Information

To learn more about managing, building, funding and marketing your nonprofit, get Nolo's Nonprofit Bundle, a three book set filled with practical advice and step-by-step instructions to get your organization off the ground and maximize its chances of success.

What is a nonprofit corporation?

A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit corporation doesn't pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. This is because the IRS and state tax agencies believe that the benefits the public derives from these organizations' activities entitle them to a special tax-exempt status.

The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations. For more information, see Nonprofit Basics.

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