Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. The basic steps to follow include:
- Obtain nonprofit materials from your state’s corporate filing office. This packet should include sample or fill-in-the blank articles of incorporation and your state’s nonprofit corporation laws. It should also contain a filing fee schedule, as well as forms and instructions for checking the availability of your proposed business name. The articles of incorporation will contain the name of your corporation, the corporation’s address, a “registered agent” (a person who agrees to receive legal papers on behalf of the corporation), and sometimes the names of the corporation’s directors.
- Choose an available business name that meets the requirements of state law. State requirements vary, but generally, the name of your nonprofit cannot be the same as the name of another corporation on file with the corporations division, the name must end with a corporate designator, such as “Corporation,” “Incorporated,” “Limited,” or “Corp.,” “Inc.” or “Ltd.”, and the name cannot contain certain words prohibited by the state, such as Bank, Cooperative, Federal, National, United States or Reserve. Also, you must make sure your name won’t violate a trademark owned by another company (in your state or out of state). To do this, you’ll need to conduct a trademark search. You aren’t usually required to file or reserve the name with your state. Once you file your articles of incorporation, your nonprofit’s name will be automatically registered.
- File formal paperwork, usually called “articles of incorporation,” and pay a small filing fee (typically $30 or $40).
- Apply for your federal and state tax exemptions. The IRS requires you to submit a copy of your filed articles with your application. To apply for your exemption, you must complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and IRS Package 1023, Application for Recognition of Exemption. For instructions on filling out these forms, read IRS Publication 557, Tax-Exempt Status for Your Organization.
- Create corporate “bylaws,” which set out the operating rules for your nonprofit corporation, including procedures for holding meetings, making major business decisions, voting rights and other important guidelines.
- Appoint the initial directors. Directors, who meet and make decisions collectively as the board of directors, have the authority (and responsibility) to manage and run the nonprofit corporation. Some states allow nonprofits to have just one director, but other states require at least three. Some states require the directors to be chosen before filing the articles of incorporation because you must list their names in the document.
- Hold the first meeting of the board of directors. Before you start doing business, you must elect a board of directors and hold an initial meeting of the board. Typically, the bylaws are adopted by the corporation’s directors at their first board meeting. The directors also will elect officers — state law usually requires a president, secretary and treasurer, and sometimes a vice president as well. Then, the directors should authorize the newly elected officers to take actions necessary to start the business of the nonprofit, such as setting up bank accounts and admitting members. Minutes of the meeting should be created and filed in the corporate records book.
- Obtain licenses and permits that may be required for your corporation. A local business license (sometimes called your “tax registration certificate”) may be required for your activities, and if you sell anything to consumers, you’ll need a sales tax permit.
After the IRS reviews your application, it will send you a letter indicating that it has approved your nonprofit status, or it might ask you for more information about your organization. The IRS can also deny your application outright.
A few states require you to complete a separate application to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption.
An unincorporated association involves two or more persons who combine their efforts to further a common purpose, usually nonprofit. Social clubs, fraternal associations, and sororities are common examples of unincorporated associations. Unless provided otherwise by statute, an unincorporated association does not have any legal existence. It is not a separate legal entity. It cannot sue or be sued in its own name. Generally, the members of an unincorporated association are not liable for debts or liabilities of the association merely because they are members. Generally, they must authorize or ratify the act in question before they can be held liable for it.