A nonprofit corporation is typically created by filing articles of incorporation with the secretary of state in accordance with state law. A nonprofit corporation may be created for any lawful purposes, but such must be fully stated in the articles of incorporation. Not all nonprofit corporations are entitled to exemption from state or federal taxes.
Is a nonprofit corporation exempt from taxes?
Exemption from federal and state taxation is not automatic and eligible corporations must apply with the Internal Revenue Service (“IRS”) and state agencies to obtain an exemption. Not all nonprofit corporations are entitled to exemption from state and federal taxes. Churches are the sole exception, but must apply if they wish to offer their supporters tax deductibility on their donations.
How does a nonprofit organization, including a nonprofit corporation, obtain exemption from federal income taxes?
You have questions and are looking for answers and solutions. This is exactly what we provide for our clients. We not only handle the IRS application and complete incorporation, we will educate you on exactly what we do, what the process involves, and how long it will take. We want you to understand it, just not have to do it, that’s our job. The process is complex, but essentially involves completing and submitting the application Form 1023 (or Form 1024) to the IRS.
How do I form a “501(c)(3)” corporation?
A nonprofit corporation is created, when articles of incorporation are filed with your state’s secretary of state pursuant to state law governing nonprofit corporations. Designations such as 501(c)(3) relate only to federal tax provisions, and specific statutory language must be included in the Incorporation documents.
Do you have to be a U.S. citizen or a US resident to incorporate and/or own a corporation?
Generally no. Most states do not place any restrictions on who can incorporate or own shares in a corporation except that the incorporator must be age of majority, typically at least 18 years old. A corporation may provide residency or citizenship limitations in its articles of incorporation or bylaws.
What is a registered agent for service of process? What are the agent’s duties? Where may a registered office be located? Can the secretary of state be designated as the registered agent of a corporation, limited liability company or limited partnership?
A registered agent is a natural person or an entity which is authorized to transact business in the subject state that is responsible for receiving service of process or official notices addressed to the entity. A registered agent generally has a contractual obligation to forward any such process or notice to the entity. Essentially the agent for service of process is someone (i.e., you, a board member, an entity you hire) who lives in the state the organization is located in and has agreed to receive mail on behalf of the organization. The secretary of state may not be appointed to be the registered agent of a corporation, limited liability company, or limited partnership.
The registered office must be a physical address where the registered agent may be located during business hours. It cannot be a post office box or a lock box that is part of a commercial mail/message service unless that commercial enterprise is designated to be the registered agent.
Where does the corporation obtain its corporate seal, stock certificates and books for its minutes and other records?
Most states no longer require that a corporation have a corporate seal. Seals, stock certificates and corporate minute books generally may be purchased from legal materials suppliers, corporate service companies, or from an attorney.
Can a nonprofit corporation pay a salary to its officers, directors and/or employees?
Yes. Any corporation may pay reasonable compensation for services rendered to the corporation. Salaries are set by the Board of Directors and must reflect the experience, services and fair market values. The IRS does scrutinize compensation levels, so we suggest you seek professional advice.
Are the books and records of a nonprofit corporation available for inspection?
State laws require that nonprofit corporations maintain complete books and records of accounts, minutes of the proceedings of its members, boards of directors, and committees having the authority of the board of directors. These books and records should be available for examination and copying by members of the corporation.
In addition any IRS form 990 filed with the IRS must be made available to the general public.
How do we get a tax ID number or EIN?
Use IRS Form SS-4 to obtain an EIN (Employer Identification Number), an identifying number for all Federal tax purposes, whether you plan to have employees or not. It is essentially like a social security number for your nonprofit. You can apply for an EIN online at irs.gov or mail the form in with your application for tax exemption. NOTE: This number does not, in any way, indicate whether or not your organization is exempt from tax. It is for identification purposes only. You must obtain an IRS tax exempt status determination letter through filing a 1023 or 1024 application with the IRS and if required an application with your state.
What form do we file to get our tax exempt status?
Organizations seeking 501(c)(3) status (generally, charitable, educational, scientific and religious organizations) file IRS Form 1023. Other groups, such as social welfare organizations, labor unions, professional associations, or social clubs use form 1024.
How much will it cost to get our tax exempt status?
The IRS has charged a non-refundable processing fee for exemption applications since 1987. There is currently a two tier fee schedule. Organizations whose gross receipts have averaged, or will average, not more than $10,000 per year pay $400. Larger organizations pay $850. A new IRS Revenue Procedure announcing the fees comes out each January; if you are submitting your application late in the year, there may be some benefit to getting it in before January 1st.
[Other costs you might incur when setting up a new non-profit organization include incorporation, charitable solicitation and other registration fees to state and local authorities, and fees to have your articles of incorporation, bylaws and exemption application professionally prepared.]
What are the chances of having our exemption application approved?
Recent statistics show the IRS approving tax exempt status for a little more than 70% of the applications they receive, and denying tax exempt status for less than 1% of the applications they receive. The other 29% or so are mostly organizations who become discouraged by the numerous questions the IRS asks, and give up before they actually get a ruling.
Does a small organization really need to apply?
Tax law does not require a 501(c)(3) application when an organization normally has gross receipts less than $7,500 per year. A small organization may want to apply anyway to save donors possible inconvenience in an audit, to be able to apply for grants, or to obtain a bulk mailing permit. An organization which no longer qualifies for this low gross receipts exception must submit its application to the IRS within 90 days of the end of the year in which average gross receipts exceed $7,500.
Can we pay salaries to our board members? Can we rent a building owned by a board member, or purchase equipment from a board member?
Tax law always permits the payment of reasonable compensation for goods or services actually rendered. If the IRS finds that amounts received by insiders are unreasonably high, however, they can fine both the insider who received the payment, and the board members who approved the payment. In extreme cases, they can take away the organization’s tax exempt status.
It is a good idea, therefore, to fully document the board’s decision-making process when any kind of payment will be made to an insider. Place copies of all relevant information (salary surveys, job description, resumes, salary history, real estate appraisals, rent “comparables”) in the minutes, and never let a board member vote on his or her own compensation, or on the compensation of anyone related to him or her.