If you’ve landed on this article then it’s probably safe to say that you’re thinking about starting a non-profit but you aren’t sure where to begin or if it’s even right for you. It’s important to have all the facts and know exactly what to expect when forming a non-profit. Non-profits require a lot of work to get started on top of staying in compliance. As we move into the article we will answer the biggest questions such as needed forms, costs, and legal aspects and walk you through the process of what creating a non-profit will look like.
Table Of Contents
- What Is A Non-Profit?
- Is Starting A Non-Profit Right For Me?
- What Is My Goal/Foundation?
- Do I Need To Form A Board To Create A Non-Profit?
- How Many Board Members Do I Need?
- Do I Have To Be Tax-Exempt? What Are The Pros and Cons?
- How Do I File For A 501(c)(3)?
- What Are The Costs For Filing?
- What Is A Registered Agent? Do I Need One?
- Do I Need To Register With The State?
- Do I Have To Incorporate? How Do I Incorporate?
- How Do I Stay In Compliance?
What Is A Non-Profit?
A lot of people have an idea of what a non-profit is, but with differing definitions. So let’s clear that up: a non-profit (also known as a non-business entity) is formed to support a local or national cause, such as funding medical research or providing resources for those lacking necessities.
A non-profit is often confused for a not-for-profit entity. The difference between the two boils down to how the business structure runs. Non-profits have volunteers, but not-for-profits have employees. When excess money is leftover, non-profits return the money to the organization, while not-for-profits use the excess money to pay their employees. The two establishments are tax-exempt as well. Non-profits are tax-exempt under 501(c)(3) and not-for-profits are tax-exempt under 501(c)(7).
Is Starting A Non-Profit Right For Me?
The primary goal is to provide aid, whereas a for-profit entity is solely focused on creating profit (not to say that for profit companies can’t help with social causes). So if creating an organization to make a great profit is your motivation, then you may need to change the route in which you create your company. Not-for-profit might be a better avenue or perhaps a business structure that only focuses on profitable gains and then helping in social causes with your excess profits could be a better option for you.
What Is My Goal/Foundation?
Now for the most important question you must ask yourself: what is my goal? Determining the answer could be helped by asking other questions, such as: Who am I targeting? How will I help my community or provide aid internationally? Is what I’m offering unique? Is anyone else doing this, if so then how do I get an edge up? We all want to help our community or a certain cause that is important to us, but you also have to survive as an organization. Research is something that must be done. Research, and when you think you’re done, research some more. The consensus put together by experts is that less than half of non-profits last longer than five years. The results vary, but it goes to show that creating a non-profit is no easy challenge. Those that do survive past five years often find themselves under financial stress.
Do I Need To Form A Board To Create A Non-Profit?
Yes, this will be one of the first things you will need to do after creating your business model. This board is going to be made up of those who you trust and share the same passion that you have. Your board will help with the distribution of work and to help with legal issues. The board will change over time and so will the responsibilities of this board after the company grows and changes.
How Many Board Members Do I Need?
Each state varies on their conditions but normally a board of directors must have a minimum of three members. It’s important to learn the requirements of your state. You don’t want to have an unnecessary amount of board members, but you want to have enough to help you get your non profit going. It’s going to be a lot of work for you and the board members at the start, but the payoff of your efforts are well worth it!
Do I Have To Be Tax-Exempt? What Are The Pros & Cons?
No, you do not need to file for a 501(c)(3) to exist as a non-profit. So then what are the pros and cons of choosing to be tax-exempt?
Pros Of Being Tax-Exempt:
- Exemption from paying federal corporate income tax.
- Protects the assets of your members from the debts of the non-profit.
- Your organization can hand out tax deductions for any charitable donations.
Cons Of Being Tax-Exempt:
- The costs can add up quickly, leaving you overwhelmed.
- Lots of paperwork up front, such as all of the forms that are filled out in the beginning and annual reports to the IRS
- Being tax-exempt means all of your transactions become transparent to the general public. If the public becomes unhappy with your spendings, you’ll hear about it and could have some bad PR to handle.
- You can lose power over your company. Some states require more than one director for your organization. Plus you now have to deal with state and federal laws as well
How Do I File For A 501(c)(3)?
Now we get to the fun part: Filling out all of the required forms and signing papers. You must file separately for state and federal tax exemption. You’ll need to file for Form 1023 if you have already filed for your non-profit articles of incorporation (it’s best to do this within 27 months of filing). Doing so allows your tax-exemption to go into effect on the date of incorporation. If you find yourself waiting too long to do so, you will need to explain to the IRS why you have waited so long. If they do not find a valid reason in your excuse then the date of your tax exemption will be the date the form is sent. This means that nothing before this date can be deductible.
What Are The Costs For Filing?
Filing for tax exemption can actually be free if your income is more than $57,000. If you find yourself making more than that, or you are expecting to do so, then you will have to pay the standard fee of filing, which is $750. However, if you don’t expect to hit $40,000, the fee can drop to $400. In addition, incorporation will cost you $25 to $100 and reserving your name and trademarking $25 to $450.
What Is A Registered Agent? Do I Need One?
Yes, but you have a few options when it comes to who you have as a registered agent. First, let’s define a registered agent. They can also go by the name of a clerk, statutory agent, and may be called an agent for service of process. A registered agent is a person or entity that will receive the appropriate papers if your non-profit is ever sued. The registered agent will receive any legal papers.
Now you can actually be your own registered agent, you can also choose a business to be your registered agent. So you can make your own non-profit the registered agent. Some people will have a law firm that they use, be their registered agent or you can even hire a registered agent. Either way, having a registered agent is highly important; if it is discovered that you don’t have one, legal action can be taken against you.
Do I Need To Register With The State?
It varies from state to state, but generally you will need to register with your state and any other state you are based out of. The following eleven states are the only ones in the United States that are exempt at the time of this writing. These laws can change over time, so it’s important to check with each state you’re planning to start your non-profit in or expand to.
- South Dakota
Do I Have To Incorporate? How Do I Incorporate?
Yes, this is a process of creating your non-profit that cannot be skipped. You will always have to file what is typically called the Articles of Incorporation. These Articles of Incorporation contain general information about your non-profit such as the name of your non-profit, tax exemption status, who your registered agent is, the location of your registered agent office, membership structure, and who you will dedicate the non-profit’s assets to if the non-profit ever ends up going under. This will cost anywhere between $25 to $100. As soon as this is completed, your non-profit entity becomes a corporation.
How Do I Stay In Compliance?
The guidelines for staying in compliance with the IRS can vary depending on the state you are based out of. So it’s important to know what is needed in your state, especially if you are based out of multiple states. At the end of each year, you will need to file a 990 tax form with the IRS. This happens whether you are a private or a public non-profit.
The main compliance actions to look for are:
- Maintaining state & federal tax exemption
- Filing a corporate tax return
- Filing an annual report
- Maintaining a registered agent
- Maintaining charitable solicitation or fundraising registration
Failure to stay in compliance can lead to some pretty serious issues, such as being responsible for daily fines or even losing your tax exemption status. In addition, the state that you are registered in can also dissolve your non-profit corporation and impose heavy fines. All of that to say, the cost of staying in compliance is nothing compared to what can happen if your non-profit falls out of compliance.
Starting a non-profit can be one of the best ways to get involved in a social cause in your community or abroad. Now that we have covered how to create a non-profit and how to stay in compliance, hopefully you have fewer questions and more answers. If after reading all of this you still believe that starting a non-profit is the best route for you and your idea. Then it’s time to refine your vision and get to work. It never hurts to have a helping hand along the way. Davis Business Law is here to help you and your team achieve your dreams. If you have any other questions or want to discuss how we can help you start the perfect non-profit, contact us today.
The content on this page has been reviewed and approved by Matthew Davis: CEO of Davis Business Law.