The short version
To operate properly — and potentially receive federal tax-exempt status — you'll need to establish the organization at the state level, obtain an EIN, create governing documents, and apply for recognition of tax-exempt status with the IRS. Here's how the process generally works.
1. Define Your Nonprofit's Mission
Start with a clear charitable purpose.
Your mission should explain what your organization does, who it serves, and why it exists. This becomes important when preparing formation documents and applying for federal tax-exempt status.
Common nonprofit purposes include charitable, educational, religious, scientific, and certain other qualifying activities.
2. Choose a Name and Form the Nonprofit
Most organizations begin by forming a nonprofit corporation in their state.
You'll generally need to:
- Select an available organization name
- File nonprofit articles of incorporation
- Designate a registered agent
- Include appropriate nonprofit and tax-exemption provisions in the articles
State requirements vary, so forming the corporation correctly from the beginning is important.
3. Obtain an EIN
Your nonprofit will generally need an Employer Identification Number (EIN) from the IRS.
An EIN is used for federal tax administration and is commonly needed to open a bank account, file tax returns, hire employees, and apply for tax-exempt status.
A nonprofit can need an EIN even if it has no employees.
4. Create Bylaws and Establish a Board
Bylaws establish how the nonprofit will be governed.
They typically address matters such as:
- Board responsibilities
- Officer positions
- Voting procedures
- Meetings
- Conflicts of interest
- How directors are appointed or removed
The organization should also establish its initial board of directors and document important organizational decisions.
5. Apply for 501(c)(3) Tax-Exempt Status
Forming a nonprofit corporation does not automatically make the organization federally tax-exempt.
Organizations seeking recognition under Section 501(c)(3) generally apply to the IRS using Form 1023 or, when eligible, Form 1023-EZ.
The IRS application may require information about the organization's:
- Mission and activities
- Leadership
- Compensation
- Financial projections
- Fundraising
- Governance
- Relationships with other organizations
- Potential conflicts of interest
The IRS reviews this information to determine whether the organization qualifies for federal tax-exempt status.
6. Complete State Registration Requirements
Federal tax exemption and state compliance are separate issues.
Depending on where the nonprofit operates, additional filings may be required for state tax exemption, charitable solicitation, fundraising, and other regulatory requirements.
Organizations operating or fundraising in multiple states may have additional registration obligations.
7. Open a Nonprofit Bank Account and Set Up Accounting
Nonprofit funds should be kept separate from the personal finances of founders, directors, and officers.
Establishing proper accounting procedures from the beginning is also important.
Nonprofits may need to track:
- Donations
- Grants
- Restricted funds
- Program expenses
- Administrative expenses
- Fundraising expenses
- Payroll
- Contractor payments
Good records make annual tax filings and financial reporting significantly easier.
8. Understand Annual Nonprofit Tax Filings
Receiving 501(c)(3) status does not mean the organization can ignore tax filings.
Most tax-exempt organizations have an annual IRS filing requirement, generally through the Form 990 series.
Depending on the organization's size and circumstances, this may include Form 990-N, Form 990-EZ, or Form 990.
Three missed years = automatic revocation
Failing to file a required Form 990-series return for three consecutive years can result in automatic revocation of federal tax-exempt status.
How Much Does It Cost to Start a Nonprofit?
The cost of starting a nonprofit varies based on the state, complexity of the organization, professional assistance required, and whether the organization qualifies to use Form 1023-EZ instead of the full Form 1023.
Larger or more complex organizations may require significantly more planning, particularly when they involve multiple programs, substantial fundraising, employees, related organizations, or plans to operate across multiple states.
Do You Need an Accountant or Attorney to Start a Nonprofit?
You are not necessarily required to hire a professional to form a nonprofit.
However, professional assistance can be valuable when the organization has a complicated structure, substantial funding, multiple founders, compensation arrangements, related businesses, significant fundraising plans, or questions regarding tax-exempt eligibility.
Correcting an improperly structured nonprofit later can be considerably more complicated than establishing it correctly from the beginning.
Start Your Nonprofit With Valoria Consulting
Valoria Consulting assists nonprofit organizations with formation, federal tax-exempt applications, and ongoing tax compliance.
Our nonprofit services may include:
- Nonprofit formation assistance
- EIN applications
- 501(c)(3) applications
- Form 1023 and Form 1023-EZ
- Nonprofit tax planning
- Form 990 preparation
- Reinstatement of tax-exempt status
- Multi-entity and chapter organization planning
- Ongoing nonprofit accounting and tax compliance
Related reading
- What Happens If My Nonprofit Loses Its Tax-Exempt Status?
- What Happens When a Nonprofit Misses Three Years of Form 990 Filings?
- When Should You Change Your Business Entity? LLC vs. S Corp vs. C Corp
- What Are My Options If I Owe the IRS?
This article is for general informational purposes and does not constitute legal, tax, or accounting advice.
Ready to Start a Nonprofit?
Whether you're forming a new charitable organization or developing a more complex nonprofit structure, Valoria Consulting can help you understand the tax and compliance requirements involved.