Operating a nonprofit is a great way to give back to the community and support a cause you care about. The goal is to do good – a philosophy that is pretty straightforward. Obtaining 501(c)(3) tax-exempt status, on the other hand, is not so simple.
Here is a brief rundown of five things you need to keep in mind when trying to become a 501(c)(3).
The nonprofit must be for a qualified exempt purpose
The Internal Revenue Service (IRS) has specific guidelines concerning what types of organizations can obtain 501(c)(3) status. One crucial requirement is that the purpose of the nonprofit fall under one of the exempt options:
- Testing for public safety
- Fostering national or international amateur sports competition
- Preventing cruelty to children or animals
No operating for private benefit
Another thing the IRS is quite clear about: The nonprofit can not be organized or operated in order to benefit anyone directly involved. To become a 501(c)(3) organization, the mission can not be about helping yourself, your family or loved ones, shareholders or anyone else connected to the organization.
You’ll need to do your homework
As part of the process for seeking 501(c)(3) status, you generally need to submit an application known as Form 1023. This form is nearly 30 pages long and asks for detailed information about the nonprofit that will require additional documents and information.
For example, you will need to know what methods you might use to fundraise, provide a conflict of interest policy that abides by the IRS’ requirements and list your most highly compensated employees and independent contractors. That’s just a small sampling of what the IRS asks for.
Get your structure and legal status lined up
The IRS does not give tax-exempt status to hastily arranged organizations. In order to qualify, the nonprofit must be properly set up as a corporation, limited liability company, unincorporated association or trust. Depending on your nonprofit’s structure, you may need to have named officers, directors, board members, partners or other key roles, and provide the IRS bylaws that have been officially adopted by the organization.
This is often the trickiest step for many new nonprofits. Not only is it a lot of work, there are a number of legal issues that can cause problems if not addressed. It’s vital you ensure your nonprofit is legally sound before filing for 501(c)(3) status.
No partisan activities
The IRS expressly forbids nonprofits from directly or indirectly participating in, intervening in, or campaigning for (or against) political candidates. That includes making contributions to campaigns or performing educational activities that promote one candidate over another. You can, however, hold nonpartisan events or activities meant to educate voters or encourage them to participate in the process.