Starting a Nonprofit Organization: Legal Guide
Forming a nonprofit organization involves both state incorporation and federal tax-exempt status. While the process requires careful planning and paperwork, thousands of organizations successfully achieve 501(c)(3) status each year.
Step 1: Define Your Mission and Structure
Before filing any paperwork:
Articulate your mission: What specific charitable, educational, scientific, or religious purpose will your organization serve?
Conduct a needs assessment: Is there a gap that your organization will fill? Are other organizations already serving this need?
Assemble a board of directors: Most states require at least 3 directors. Board members should bring diverse skills (legal, financial, programmatic, fundraising).
Choose a name: Check availability with your state's Secretary of State and search the IRS exempt organizations database.
Step 2: Incorporate in Your State
File Articles of Incorporation with your state's Secretary of State. Your articles must include specific IRS-required language:
Purpose clause: A statement that the organization is organized exclusively for one or more exempt purposes under Section 501(c)(3)
Dissolution clause: Stating that upon dissolution, assets will be distributed to another 501(c)(3) organization or to the government
No private inurement clause: Stating that no part of the organization's net earnings will benefit any private individual
Filing fees range from $50 to $250 depending on the state.
Step 3: Obtain an EIN
Apply for an Employer Identification Number (EIN) from the IRS at irs.gov. This is free and you will receive your number immediately if you apply online.
Step 4: Draft Bylaws
Bylaws are the internal operating rules for your organization. They should address:
Board composition, terms, and election procedures
Officer positions and responsibilities
Meeting frequency and quorum requirements
Conflict of interest policy
Amendment procedures
Fiscal year
Committee structure
Step 5: Apply for Federal Tax-Exempt Status
File Form 1023 (or Form 1023-EZ for smaller organizations) with the IRS:
Form 1023-EZ (streamlined application):
Available to organizations with projected annual gross receipts under $50,000 and total assets under $250,000
Filing fee: $275
Processing time: 2-4 weeks
Form 1023 (full application):
Required for larger organizations
Filing fee: $600
Processing time: 3-6 months
Requires detailed narrative descriptions of activities, financial projections, and governing documents
Step 6: State Registrations
Depending on your state, you may need to:
Register for state tax exemption (not automatic with federal approval)
Register for sales tax exemption
Register for charitable solicitation (required in most states before fundraising)
File for property tax exemption if you own real property
Step 7: Ongoing Compliance
Annual Federal Requirements
File Form 990 (or 990-EZ or 990-N) annually with the IRS
Failure to file for 3 consecutive years results in automatic revocation of tax-exempt status
Make Forms 990 and exemption application available for public inspection
Governance Requirements
Hold regular board meetings and maintain minutes
Comply with conflict of interest policies
Ensure executive compensation is reasonable
Do not engage in political campaign activities
Limit lobbying activities (or elect the 501(h) expenditure test)
State Requirements
File annual reports with your Secretary of State
Renew charitable solicitation registration annually
Comply with state employment and tax laws
Common Mistakes to Avoid
Confusing nonprofit with "no revenue" — nonprofits can and should generate revenue; they just cannot distribute profits to individuals
Failing to maintain corporate formalities (meetings, minutes, separate bank accounts)
Board members with conflicts of interest making decisions that benefit themselves
Not registering for charitable solicitation before fundraising
Engaging in excessive lobbying or any political campaign activity
Treating the nonprofit as a personal organization rather than a public charity
Key Terms: 501(c)(3) — the IRS code section providing tax-exempt status to charitable organizations. Form 990 — annual information return filed by tax-exempt organizations. Private inurement — prohibited personal benefit to insiders. Charitable solicitation — any request for donations.
Disclaimer: Nonprofit law involves both federal and state requirements. Consider consulting a nonprofit attorney, especially for the IRS application. Many state bar associations offer pro bono services for new nonprofits.