Steps to Become a Charity

A 501(c)(3) CHARITY ORGANIZATION

Steps how to be a Nonprofit Charity

Awesome. You’ve decided to form a charitable nonprofit. CAUTION: Wait before filing any government documents until you have decided how to classify your organization in state and federal records—a state legal structure (such as a corporation) and federal tax exemption (such as an IRS 501(c)(3) public charity) for your nonprofit.

Step 1: Choose a Legal Structure

The first step is to determine whether the organization is ultimately a not-for-profit.

Primary purpose: Your primary purpose of the organization will align with a traditional 501(c) exemption – such as a charitable, religious, or educational purposes.
Unrelated Business Income (UBI): 501(c)s are limited to conducting the exempt purpose stated in their formation documents. In practice, 501(c)s may collect unrelated business income and are required to pay taxes on this portion. If you start collecting too much UBI, you are at risk of losing your 501(c) status and owing back-taxes. The IRS decides this by conducting an “operational test” to consider if the nonprofit is being run in line with its exempt mission.
Private Funding: Your Nonprofit 501(c) will primarily obtain funding from donations, grants, membership dues, and other tax-exempt income sources. Unlike For-profits, you may not attract shareholder-like investors or obtain SBA-backed loans. Nonprofits never disburse profits to owners and investors; they are prohibited from private inurement.
Control of the organization: The founder of a non-profit should expect community-based decision-making by the board of directors. Control in for-profit corporations is clearly in the hands of shareholders who vote their shares. A founder can keep control by holding 51% or more of outstanding shares.
Personal payout: A non-profit permits a “reasonable” salary. You can never “sell” a nonprofit for a pay-out.

Step 2: Filling Out the Paperwork

STATE:
File an application packet for a non-profit organization with your Secretary of State. A non-profit charity is considered a corporation, so application paperwork should be directed to the corporations division within the Secretary of State’s office. There is usually a small fee associated with filing. The packet will include the articles of incorporation that you filled out earlier.

Do not apply for an EIN until your organization is legally formed. Applying for an EIN signals to IRS computer systems that an organization has been created, and, therefore, triggers filing requirements.

FEDERAL:
Get a Federal Employer Identification Number (EIN). This is the number the IRS will use to identify your organization for tax purposes. You’ll enter the EIN on just about every form you fill out, including IRS paperwork and grant submissions.

You can call the IRS at (800) 829-4933 or apply online to get an EIN assigned immediately, or you can apply by mail or fax. For this you will need IRS Form SS-4.

Record Keeping is extremely important for a 501(c)(3) organization. Be sure to save all of documents within a Nonprofit Board Portal like Board Director.

Save Your Documents

Step 3: Get Your IRS Approval for Tax Exempt Status

The IRS code allows you to operate as a nonprofit, tax-exempt organization. We recommend having a lawyer and accountant with nonprofit experience advise you on the proper steps to register and operate within government rules.

A PUBLIC CHARITY organization must meet a 509(a) exception.

509(a)(1)

The criteria for being a 509(a)(1) public charity simply refers to organizations engage in inherently public activities described in Section 170(b)(1)(A)(i)-(vi):

IRC § 170(b)(1)(A)( i) – Churches
IRC § 170(b)(1)(A)(ii) – Schools
IRC § 170(b)(1)(A)(iii) – Hospitals
IRC § 170(b)(1)(A)(iv) – Endowment for a college/university
IRC § 170(b)(1)(A)(v) – Governmental entities
IRC § 170(b)(1)(A()vi) – Publicly supported charities

509(a)(2)

Publicly supported organizations:

More than one-third of support from gifts, grants, contributions, membership fees, and certain gross receipts
Not more than one-third from gross investment income and net unrelated business taxable income.

509(a)(3)

Supporting organizations that, in general, support organizations described in IRC § 509(a)(1) or (2), although they themselves are not publicly supported.

509(a)(4)

Organizations that are organized and operated for the purpose of testing products for public safety.

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