Are you looking to start a charitable foundation? Choosing the right classification is key for tax purposes! The 501(c)(3) classification is the IRS label for a tax-exempt, nonprofit organization. The two main tax-exempt categories under 501(c)(3) are public charities and private foundations. Some other examples of organizations who usually get classified under this category include:
- Religious or scientific organizations
- Educational or literary groups
- Testing initiatives for public safety
- child or animal cruelty prevention causes.
Applying for 501(c)(3) Status
To gain 501(c)(3) status, you need to apply by filling out the IRS Form 1023 or 1023-EZ. As with all tax documents, this process may seem far more simple than it really is. You'll need to take some preparation steps before diving into completing this form. Here are the steps you need to take before beginning:
1. Know Your Eligibility Status
To claim tax-exempt status, you must meet the IRS eligibility requirements. Those requirements include:
- Having an organization (corporation, trust, association, etc.),
- that will permanently work within the confines of the 501(c)(3) tax law (no private earnings, no politics, restricted lobbying, etc.),
- with an organizing document stating its exempt purpose (a description of your company, typically including a mission statement).
If you haven’t formed an organization, then that’s the first thing you need to do before applying for tax-exempt status. Individuals cannot apply for tax-exemption. You will have to take steps to create partnerships with likeminded people, businesses, and donors.
2. File Articles of Incorporation with Your State
Your foundation must incorporate, or in other words, form an incorporated association.
To officially form your organization you need to:
- Choose a name (make sure it's original and appropriate to the service you'll be offering. By law you cannot use a name that's already been claimed by another organization.)
- Prepare bylaws
- Establish a governing board
- File articles of incorporation with your state
The rules for creating a nonprofit organization vary by state. Make sure to go over all state requirements thoroughly before filing articles.
Always keep in mind the state determines your nonprofit status, not the federal government. So take extra care to get this part right. The IRS only gives the tax-exempt status. The federal government relies how your state recognizes you as evidence your foundation is in good standing as a nonprofit organization.
3. Obtain an Employer ID
Possibly the least intensive part of this process is applying for your EIN (Form SS-4). Once your organization gains state recognition, you can apply for an EIN by fax, mail, or even online.
4. Complete Form 1023 (Finally!)
Once you finish all the state-level legwork and have your EIN, you’re in the best position to start working on Form 1023 or 1023-EZ. You should do your best to fill out the form as completely as possible. The form itself can seem a little daunting as it consists of dozens of pages
Some things you will need include:
- Your organizing documents
- Your bylaws and rules
- Statements of receipts and expenses
- The proper user fee ($600 for Form-1023, subject to change)
The application will also require a detailed breakdown of your proposed activities.
When filing the application, do so as soon as possible. Once you gain your tax-exempt status, it will retroactively go into effect to the day your organization legally formed. Once you file and your application goes into pending status, you can begin operating as a tax-exempt organization!
Maintaining Your Tax-Exempt Status
You will need to follow the state’s laws to keep your nonprofit status and stay in compliance with the IRS to keep your tax-exempt status. Always adhere to the restrictions and legal practices that are expected, and always promptly respond to any query from the state or the IRS.
You must file annual returns (IRS Form-990) for each year starting from your organization’s formation date. Failure to file Form-990 can result in revocation of your application!
Once you start digging into all the language and requirements, the task can seem daunting. For any specific question you may have during the process, you’ll find a lot of information readily available. The IRS website’s section on charities and non-profits offers an almost dizzying amount of relevant information.
There, you can find details for every step of the process. You can also find samples and other information to help you draft your bylaws properly and format you organizing documents the right way.
Grow Your New Foundation With dreamOway!
Once you've gotten through the legal process, you can start focusing on making a difference in the lives of others, and dreamOway can help! Their crowdfunding platform has all the tools you need to begin inspiring and connecting with likeminded people who want to support your organization. Sign up for their app on iOS or Android today and make sure to check out more tips and advice for charitable organizations on the dreamOway blog!