Start Your Nonprofit for Sustainability - Part One by marcielynnae


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									                        Start Your Nonprofit for Sustainability – Part One

Part One of our series in starting a nonprofit will guide you through the steps of formal
incorporation. Part Two of our series will provide you with proven ways to raise those first
dollars for your nonprofit. Let’s begin.

                                So you’ve come up with a great idea and a vision to form a
                                nonprofit organization. But where do you start? Here we’ve
                                provided your roadmap to get a new nonprofit off the ground
                                with sustainability always in mind.

                                 The process of forming and incorporating a nonprofit is similar
                                 to a corporation, except for a few differences. A nonprofit
                                 cannot be formed from any of the following entities: Sole
                                Proprietorship, Limited Liability Corporation or a Corporation
                                “C” or “S”.

A nonprofit, like a corporation, is a legal entity separate from the founder(s); it can survive the
life of its founder(s) and can exist infinitely. Unlike a corporation that is owned by its
shareholders, a nonprofit does not have shareholders and is not owned by anyone, but is
managed by the board of directors. The other distinct difference between a corporation and a
nonprofit is how the income is taxed. Now, let’s take you through the process.

Step One: Recruit a Board of Directors. A board should include
diverse representation from the following: finance, legal, someone
who represents or is considered an expert with regard to your
mission, someone who represents the people you exist to serve, local
corporate executive(s) – specifically from a company who tends to
fund organizations like yours, community/professional volunteer(s) -
persons with a network of wealth, and another nonprofit executive.
Ensure that you have a job description in place which clearly indicates board member
expectations, including all information related to your nonprofit. Expectations should include:
governance, financial support, and hands-on leadership. You do not want a board of directors
that feels “just showing up” fulfills their duty. Finally, you never stop looking for good board
members. Your board should have a set tenure to ensure there is always room for fresh faces,
                                                     ideas, and connections.

                                                     Step Two: Formation Meeting. The
                                                     formation meeting is a meeting of the initial
                                                     board of directors to vote on incorporating
                                                     and pursuing the tax exemption status as
                                                     well as to establish the purpose of the
                                                     nonprofit. During this meeting and all
                                                     subsequent board meetings, make sure to
take meeting minutes to show a unanimous agreement by the board before moving forward.

                                             Step Three: Naming Your Nonprofit
                                              Name selection is important because it identifies your
                                              purpose and creates your identity and brand. Pick
                                              your organization name like you pick your child’s
                                              name—repeat it often, pretend to answer the phone
                                              using the name to hear if it has a nice ring to it. You
can choose almost any name you want for your organization as long as it is not already in use.
You can check name availability on your state’s governing website to see if it is available before
you file it. Generally this is the secretary of state’s office.

Step Four: Incorporate
The incorporation process is similar to that of a
corporation. The Articles of Incorporation are
prepared and filed with the state’s governing body;
again, typically the Secretary of State’s office. Some
states have sample articles which you can obtain and
use in drafting your articles, however, meeting the
state’s minimum filing requirement does not
necessarily mean you meet the IRS’s requirements.
Make sure you properly and carefully draft articles of
incorporation that meet the requirements of the IRS
if you plan to apply for federal tax exemption; which
you will. There is a filing fee associated with this process paid to the state. The fee for the state
is usually around $100; the filing fee for your tax-exempt status is around $850.

Step Five: The Bylaws
You are required to prepare bylaws for your nonprofit. Bylaws are the rules used by the board
to govern your nonprofit. Most states do not require a copy of the bylaws to be filed with the
                                state. Regardless of filing requirements, it is a state law
                                 requirement that an incorporated entity have written bylaws.
                                 The IRS will require a copy of the bylaws to be filed with your
                                 application for tax-exemption.

                                   Step Six: Obtain your Federal Employer Identification Number
Once you’ve completed your paperwork, you will need to apply for an Employer Identification
Number (EIN) also known as a federal tax ID from the IRS. You can do this quickly and easily
online. Don’t forget to print out a copy for your permanent records. You will also need a copy to
submit to the IRS with your tax exemption application. To apply for your EIN visit the IRS’s
website. It is important to note that simply holding an EIN number does not mean you are
approved as a 501(c)3 by your state or the IRS. You can raise money for your organization prior
to approval. However, be mindful that more often than not, granting organizations require an
approved 501(c)3 and will ask for a copy of your approved status letter.

Step Seven: Application for tax exemption to the IRS
After you have incorporated your nonprofit and obtained your EIN, then you can start your tax
exemption application to the IRS using IRS Form 1023. The form can be
obtained at the IRS website. This is a comprehensive application. You
must carefully read the instructions, learn about the laws of
compliance, complete the application, and collect & assemble the
attachments. Hiring a professional to help you is highly recommended.
If you are attempting to do this on your own, the IRS estimates a few
hundred hours are necessary to complete this application. After your
initial review, complete the application to the ‘letter’ of their
instruction. If your application is not clear or missing important
information, it will be sent back to you for more information. If it does not fit within the tax
exemption regulations, it will be denied. As mentioned above, there is a fee associated with this
application; approximately $850. The fee changes periodically, so be sure to check the filing fee
before you submit the application. The IRS is currently taking between 6-8 months to assign the
application to an exempt organization specialist. If your application is approved, you will get a
“Letter of Determination” that classifies your organization as tax exempt. The nice thing about
this long process is that the date of your exemption is retroactive to the date that the IRS first
received your application. This means that if you did receive a donation requiring 501(c)3 status
prior to your approval, you will ultimately be in compliance with the funding organization and
the IRS. Yet, it is not recommended to raise funds externally until you receive your Letter of

State Tax Exemption
Most states recognize and accept the federal tax exemption “Letter of Determination."
However, there are a handful of states that have additional state requirements to be income
tax exempt for state purposes. You will have to consult your state’s governing body to see if
there are additional state requirements.

Ongoing Compliance
After you are officially incorporated as a nonprofit
organization, there are a handful of things that you must
do to maintain compliance with state and federal
requirements. Some states require an annual report. Most
states require an annual corporate renewal, and some
states do not require state income taxes to be filed unless
the nonprofit receives a certain threshold income. As you
can see, each state operates differently. The key is to keep
yourself informed and up-to-date with the requirements of
your specific state. On the federal side, IRS Form 990 or a variation of Form 990 is required to
be filed annually. This is the annual tax return form for nonprofit organizations regardless of
income. Currently, the law states that if you fail to file Form 990 for three consecutive years,
the IRS will automatically revoke your nonprofit status. If this happens, then the nonprofit can
no longer receive tax-deductible contributions. Additionally, you will have to reapply for tax
exemption again. You have taken the time to build your nonprofit, so take the time to take care
of it and remain compliant.

                        Let’s quickly review your nonprofit incorporation steps:

                               File the certificate of incorporation
                               Select individuals to serve on the board of directors
                               Develop vision and mission statements
                               Establish bylaws and board policies
                               Obtain an employer identification number (EIN)
      File for federal tax exemption
      Follow state and local nonprofit regulations

Next month look for a step by step process to raise those very first dollars for your newly
incorporated nonprofit.

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