Charities are an essential part of American life. Every day new nonprofit organizations are started to benefit a cause. However, there is a series of steps that one needs to follow in order for the charity to be legally established. This article details those steps and the care that must be exercised.
IRS codes section 501(c)(3) allows organizations to collect and disperse money tax free given certain requirements are met. The first requirement is that the organization must incorporate in the state where the organization has headquarters. Even though the organization is a corporation, there is no need to issue stock. However, most states require that there be a board of directors already chosen and a unique name picked out for the organization. When filing the incorporation papers with the state, the form usually requires information about who is on the board of directors and who has authority to make decisions for the organization. In addition, the new organization cannot adopt a name that is already in use in the state; the name must be unique. Most states have online databases to determine uniqueness. Also filed with the state incorporation forms is a statement of the desire to be a nonprofit organization. This statement might be a separate section of the state’s incorporation form or a separate form altogether. Many states require that an attorney view and sign the incorporation form. This can be done rather inexpensively by filling out the forms and then having the attorney review them.
The next step is to create the corporation bylaws. The bylaws are very general rules on how the organization is going to have meetings and elect officers. The board of directors must meet to approve the bylaws. This first meeting also decides other basic information about the organization such as accounting period, election of officers, and approval of initial transactions of the organization. One requirement by the IRS is if the organization closes down, the assets of the organization will go to another nonprofit organization. If the state has not already required the name of the successor nonprofit organization, the board should decide at this point. The bylaws, minutes of this first meeting, and minutes from future meetings should be kept in a records binder that is easily accessible.
At this point most of the state requirements have been met. The next step is to file a Form 1023. This form currently is twenty-six pages long and goes into great depth about the organization. The form requests information about directors, officers, employees, and even independent contractors. It also goes into depth about financial issues, particularly how the organization plans to raise money and the causes that are the beneficiaries. Most organizations will not have to fill out all the form. There is a fee for filing this form. If the organization plans to have less than $10,000 in gross receipts in each of the next four years the fee is $300. Otherwise the fee is $750. Once the IRS gets the form and reviews the information, the IRS will decide whether to grant nonprofit status. If the IRS denies the nonprofit status, the fee paid will not be refunded.
Once the IRS has granted nonprofit status, then the organization must usually complete a similar filing with the state to get state nonprofit status. In addition to this, there may be other state filings required such as for raising money in the state. Once all the forms have been filed and the nonprofit status has been granted, the organization can begin operating as a full-scale nonprofit organization. Each year the organization must file an informational tax return, a Form 990, on which the organization must describe in detail the amount of money raised and how it was spent, particularly with regard to employee and officer compensation.
There are many things that must be done to start a charitable organization. State and Federal requirements must be met and approval must be given. In spite of the rigorous set up process, charitable organizations continue to be created because there is always a cause to be found.