How To Get a Nonprofit Status in 6 Steps
Nonprofit organizations are entities whose purpose is other than profit generation. These organizations can and often do earn a profit, but these profits must advance the overall purpose of the organization itself. This is the primary factor distinguishingthem from business corporations. Regardless of where you form your nonprofit, the overall process and considerations are likely similar.
1. Organize Your Entity
Though all countries will have their specific provisions about these matters, bear in mind that not all entities are entitled to receive nonprofit status. The three entities that most often receive nonprofit status are:
- Corporations, which are owned by shareholders.
- Unincorporated Associations, which must consist of at least two members and be registered under applicable law.
- Trusts, in which property is held by one party for the benefit of a second.
Your entity’s organizing document will play a large role in determining the success of your application. In particular, your organizing document will need to establish:
- That your entity’s activities conform to what is allowed for nonprofit status. For example, the U.S. Internal Revenue Service allows nonprofit status for entities that pursue educational, charitable or scientific endeavors, as well as other examples that are maintained on their website. This information should be listedin your Purpose Clause.
- That you have provisions in place for the redistribution of assets in the event of your entity’s dissolution. Depending on the specific laws of the area you’re applying in, this sort of Dissolution Clause may not be required.
2. Establish Your Charity Status
Charitable organizations receive more favorable tax exemption statuses, but forming a nonprofit organization does not necessarily guarantee these exemptions. In the United States, private foundations that qualify for tax exemption under IRS Section 501(c)(3) are considered charities. These are organizations whose purpose is relatedto a perceived public good, such as a scientific or educational ideal. There are other provisions, such as 501(c)(4), that may afford tax exemption status without granting charity status.
In addition, charity status can be determined by the amount of the organization’s income that is distributed to itself to fund its ongoing operations. Entities such as hospitals and churches may be considered Public Charities for tax purposes.
3. Fill Out Necessary Documentation
Organizations that wish to receive nonprofit status will be required to fill out necessary documentation to that effect. In the United States, this will entail completion of IRS Form 1023 and the requisite schedules.
Form 1023 covers your entity’s application for exemption under 501(c)(3). You will need to include information concerning your intended board of directors, descriptions of the services you will provide, descriptions of how you will manage your budget and more. No matter the nation you’re applying for nonprofit status in, these are the sorts of considerations you will need to understand as you move through the application process.
Some types of entities, such as hospitals or universities, may be required to complete additional forms of documentation pertaining to that status. For U.S. entities, the IRS maintains a list of additional schedules that must accompany completed 1023 applications.
4. Receive Your Employer Identification Number
If your entity is located in the United States or U.S. Territories, you may wish to apply to receive your Employer Identification Number soon after incorporation. To obtainan EIN, complete IRS Form SS-4. All organizations with tax exemption in the U.S. are required to have an EIN, but as it can take up to five weeks to receive a response, it’s best to begin this process sooner rather than later.
5. Comply With All Additional Regulations
Depending on where you operate, there may be additional considerations that require your attention. For example, if you operate a 501(c)(3) organization in the United States and intend to solicit charitable donations, many states require registration to that effect. Soliciting donations without registration can potentiallylead to stiff penalties.
Furthermore, 501(c)(3) entities in the U.S. may be entitled to additional tax exemptions at the state level, but these exemptions may need to be applied for as well. It’s important to understand the applicable laws in your nation to more fully determine the advantages your nonprofit status affords you.
6. Protect Your Status
U.S. nonprofit organizations are required to fill out annual operations reports with the IRS and additional monitoring agencies at the state level. These reports will analyze the organization’s internal operations and finances to verify their continued eligibility for nonprofit status year after year.
In general, the activities that can endanger your nonprofit status are:
- Those that involve a substantial amount of lobbying. In the U.S., some amounts of lobbying by a tax-exempt organization may be acceptable, but it must notconstitute the majority of the entity’s activities. This can also include extensive advocacy on behalf of a political campaign.
- Those that further private rather than public interests. If your nonprofit’s income is found to benefit insiders, such as members of your board of directors, your taxexemption may be revoked.
- Those involving income from unrelated activities. If your entity receives significant amounts of income from business pursuits that are unrelated to your purpose, as stipulated in your initial organizing document, it can call your continued eligibility into question. In the United States, nonprofit organizations that benefit from additional business income can file IRS Form 990-T and pay an income tax.
Know your entity’s purpose and what you hope to accomplish with it. Though the paperwork can seem overwhelming, it’s meant to ensure only eligible organizations that serve the public interest receive recognition as nonprofits. If you understandyour goals and hold to them diligently, you’ll have no problem achieving and preserving your status.