Forming a non-profit organization and seeking tax exempt status (the basics)

The steps required to form a non-profit organization and obtain tax exempt status can be time consuming, cumbersome and confusing.  We hope to provide you with a basic understanding of these steps in this blog. 

Key steps to creating your non-profit organization
You have decided to form a non-profit organization for a specific purpose.  The next  key steps you will need to address include:
Naming your non-profit

o The name cannot be the same as the name of any other corporation on file with the state's corporations division.
o About half of all states require the name to end with a corporate designator, such as Corporation (Corp.), Incorporated (Inc.) or Limited (Ltd.).
o Your name cannot contain certain designations reserved for the state, such as United States, Reserve, Federal, National, Cooperative or Bank
Filing the Necessary documents
o Articles of Incorporation
o Apply for a federal employer identification number
Organizing your Corporation

o Draft and adopt bylaws
o Form a Board of Directors and elect officers
Developing a Financial plan

o Develop a budget
o Have a record-keeping system

Applying for tax exempt status
After you have created your non-profit organization entity, you are ready to consider tax exempt status.  Non-profit organizations are taxable at the federal and state level, unless they are exempt.  Depending on the purpose and function of the non-profit, it may qualify for tax exempt status at one or both levels, or it may not qualify at all.

Exemption from Federal Income Tax

The IRS recognizes several different non-profit federal tax exemptions, and the application procedure for all of them can be found in  IRS Publication 557.  One of the most common exemptions is the 501(c)(3) exemption, which applies to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.

Some Examples:
· Non-profit old-age homes
· Parent-teacher associations
· Charitable hospitals or other charitable organizations
· Alumni associations
· Schools
· Chapters of the Red Cross
· Boys’ or Girls’ Clubs
· Churches
Exemption from state income tax and sales tax

Obtaining a 501(c)(3) or other exemption at the Federal level does not exempt your organization from having to pay state income taxes and state sales taxes. Nor does it guarantee that your organization qualifies for an exemption at the state level. Be sure to give consideration to filing for a tax exempt status at the state level as well.

Hire a Lawyer
Forming a non-profit organization and applying for Federal and state tax exemptions is a big step and an important undertaking, with many opportunities for things to go wrong.  Hiring a lawyer to handle the process for you or to assist you with the process may help the process go much smoother.  Please contact us if you have any questions about forming a non-profit organization.

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