Creating a 501(c)(3) Organization

If you’ve been thinking about creating a non-profit organization, often referred to as a charitable organization, check out this month’s Blog to see if this type of organization is appropriate for your vision.

A non-profit entity is organized and operated exclusively for an exempt purpose, recognized by the Internal Revenue Service (IRS) in Section 501(c) of the Internal Revenue Code. Most non-profit organizations fall under Section 501(c)(3) of the Code, which includes organizations for charitable, religious, educational, scientific or literary purposes. The Code includes twenty-eight types of organizations that qualify for tax-exempt status, and include organizations as diverse as:

  • Civic or Business Leagues
  • Fraternal Societies
  • Social Clubs
  • Veterans Organizations
  • Credit Unions
  • Private Foundations
  • Employee Benefit Associations or Funds

Qualifying non-profit organizations are exempt from federal taxation on income tax and property tax as well. State and local tax exemptions from income, sales and property taxes may also be available, depending on state and local law. Contributors to your organization are permitted an income tax deduction for donations of money and property.

The process of establishing a 501(c)(3) organization can be intimidating. It can take many months to complete the process necessary to receive IRS recognition for your organization but you can help speed things along by following these steps.

Establish your primary objective and develop a mission statement. Describe the purpose and vision for your organization. Create an appropriate name for the organization and verify its availability with the appropriate office for your state (usually the Secretary of State). Create a plan, start a website and find people (usually 3 or more) who will serve as trustees.

Choose your legal entity and get organized. A non-profit may organize as a corporation, partnership, individual enterprise, unincorporated organization or foundation. Most choose to organize as a corporation, primarily for the liability protection a corporation provides to its officers, directors and other key members. Develop an organizational charter and be sure it stays focused on the charitable purposes of your organization. Be sure to include the provision that upon liquidation, net assets will go to another 501(c)(3) organization. Establish a board of officers and ensure that most of the board members are NOT employed by the organization.

Obtain IRS Recognition. This step can be challenging. The IRS Form 1023 by itself is 28 pages and should be considered very much like an IRS examination. Rather than an audit of your tax return, this process is more like an audit of your non-profit’s proposed activities. The IRS will scrutinize your organization’s governing structure, purpose and programs to ensure it is formed exclusively for 501(c)(3) purposes and that its activities fulfill the stated purpose of the organization. Form 1023 must be filed within 27 months of the organization’s creation but it’s best to file as soon as possible. This allows donors to claim deductions for donations they make until the IRS disallows your application. Don’t forget to register your organization (usually through your state’s Office of the Attorney General). Most states require Charitable Solicitations Registration before you can begin asking for donations.

Operate the non-profit organization in full compliance with Federal and State Law. In addition to keeping up with all of the various payroll tax forms, you’ll also need to provide timely Information Returns (990-N, 900-EX or 990 with attachments). You’ll also need to provide timely tax documentation to your donors, acknowledging cash donations of $250 or more within the calendar year in which they are received. Property donations, such as cars, have their own documentation requirements at Federal and State levels. Make arrangements for regular financial statement audits if your state requires it. Keep your charitable spending efficient—the goal is to apply 80-85% of receipts for the purposes of the charity. Finally, keep your board comprised of a majority of independent trustees. An independent trustee is one for whom there are no business transactions between the charity and the trustee, the trustee’s family or entities related to the trustee. It’s important to keep salaries for non-independent trustees or officers of the charity within a range comparable to other similar non-profit organizations and salaries should be approved without the officer present. While trustees are free to make 0% interest loans to the organization, you should avoid making loans from the charity to any trustees or officers of the organization.

If this quick overview of 501(c)(3) organizations seems like a good fit for your vision of a charitable organization, we’d like to talk with you. With BGC LLC, you know you’ll be discussing your ideas with career professionals who have helped many other organizations with timely business and financial advice. We can help you properly structure your non-profit organization to expedite IRS approval and, more importantly, get you started in the right direction for long term success.