Starting a Nonprofit Organization: Our Hoffman Estates Attorneys Explain the Steps Involved
Nonprofit organizations that engage in charitable, religious, educational, literary or scientific endeavors, as well as organizations that perform tests for public safety, work to prevent child or animal cruelty, or foster amateur sports competition, do not have to pay taxes on income derived from activities related to the organization’s objectives, as these activities benefit the public.
These nonprofit organizations are exempt under Section 501(c)(3) of the Internal Revenue Code and are often referred to as 501(c)(3) corporations. Forming a 501(c)(3) corporation involves a number of steps and considerations. If you plan to start a nonprofit organization, an experienced Hoffman Estates attorney can assist you with the entire formation process, as well as with future operational matters including real estate transactions and employee issues.
The following types of nonprofit organizations usually qualify for 501(c)(3) status:
- Churches, synagogues, mosques and other places of worship
- Schools and universities
- Charitable hospitals and community health clinics
- Child and animal welfare agencies
- Wildlife conservation groups
- Homeless shelters
- Performing arts groups
- Youth sports organizations
- Public safety institutes
Other organizations may also qualify for tax-exempt status under Section 501(c)(3) or other sections of the Internal Revenue Code. In addition to not paying taxes on income derived from related activities, 501(c)(3) organizations can offer tax deductions to donors and are eligible for private foundation grants and lower bulk mail rates.
Forming a Nonprofit Organization
Forming a 501(c)(3) nonprofit organization involves many of the same steps as forming a for-profit corporation. You will need to:
- Register a business name
- Appoint initial directors
- Draft the articles of incorporation
- File the articles of incorporation
- Decide how the board of directors will be structured and how it will operate
- Draft the bylaws
- Hold an organizational meeting and keep meeting minutes
Additionally, you will need to apply for state and federal tax-exempt status. A nonprofit organization must obtain a federal employer identification number before filing for 501(c)(3) status, even if it has no employees.
Maintaining Tax-Exempt Status
In order to maintain its tax-exempt status, a nonprofit organization must meet the IRS’s annual reporting requirements and keep good corporate records. 501(c)(3) organizations also have to abide by the following rules, including that the organization:
- Cannot engage in any political activity or make campaign contributions
- Can engage in limited lobbying activities only
- Cannot distribute profits to members, officers or directors
- Must pay taxes on income derived from unrelated activities
- Cannot derive substantial income from unrelated activities
- Distribute assets to another tax-exempt organization upon dissolution
If you are forming a new nonprofit organization, want to convert your existing business into a 501(c)(3) corporation or need assistance with operational issues or maintaining your nonprofit’s tax-exempt status, contact a qualified Hoffman Estates lawyer today.