At the Forrest Firm, we often work with faith-based organizations, certified B Corporations, and mission-driven businesses. The largest segment of these types of businesses are those in the nonprofit and tax-exempt sector, which require multiple layers of state and federal compliance. As a result, nonprofit and tax-exempt organizations often receive much higher levels of scrutiny, both from regulatory agencies and their stakeholders, to ensure they are operating with an eye to both compliance and transparency, in addition to mission.
In this quick guide to creating a North Carolina tax-exempt organization, we take a look at how to get your organization started on the right foot with regard to immediate and future federal and state regulations.
Note: to narrow our discussion for an appropriate length on this blog, we are focusing exclusively on organizations exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code, which include public charities and private foundations.
Starting a 501(c)(3) Organization in North Carolina
If you want to start a tax-exempt organization in North Carolina to meet a need in your community, there are a few big steps to take at the beginning:
Incorporate: The first step is to incorporate as a nonprofit corporation with the North Carolina Secretary of State (NCSOS). As part of the incorporation, you will appoint a registered agent (often your business attorney), a person who is in charge of handling legal affairs for the organization with the NCSOS. The online filing fee is currently $127. While the NCSOS’s office tries to make the process simple, many organizations choose to hire a business attorney to insure their organizational documents include language and provisions required by the IRS: you don’t want to clear the hurdle of properly forming a nonprofit at the state level, only to see your application for tax exempt status rejected at federal level.
Get Your Employer Identification Number: After you receive confirmation that the NCSOS has received and registered your nonprofit corporation, you may request a federal tax identification number known as an EIN (employer identification number) from the IRS. You will need the EIN in order to file annual information returns with the IRS, file employment tax returns with North Carolina and the IRS, open a bank account, and for various other reasons. The requirement here is straightforward—you, the filer, need to have a Social Security number in order to obtain the EIN for the nonprofit corporation. As long as there are no other duplicate names in the business and nonprofit directories at the IRS, the IRS will issue your EIN instantly.
Prep Your Governance Docs: This is another reason that nonprofits routinely hire business attorneys to marshal the formation process.Formation documents, including articles of incorporation, by-laws, initial consents to action, and basic policies and procedures, will govern the organization’s activities. Again, as with other documents, many of these governance documents must include certain language and provisions to comply with state and federal laws and rules.
Obtain Your Federal Tax Exemption: Filing either a Form1023 or a Form 1023EZ (depending, most often, on your gross receipts and assets) is the long form that you can file only after incorporating, obtaining your EIN, and having your governance documents in place. The filing fee is currently $600 for the Form 1023 and $275 for the Form 1023EZ. Keep in mind that becoming exempt from income taxes at the Federal level automatically makes the organization exempt from income taxes in North Carolina.
Get Your NC Charitable Solicitation License: This one is unexpected for a lot of nonprofit founders and executive teams. Once the IRS issues the nonprofit corporation its determination letter confirming that the organization is tax exempt under Internal Revenue Code Section 501(c)(3), the organization is exempt from paying federal and state income tax—that’s the whole point. It is not, however, allowed to solicit any funds until it registers with the Charities Division of the NCSOS. The registration fee ranges from $0-202. The state is strict on this requirement and will impose related penalties. In addition, if the organization plans to solicit funds in other states, or does solicit funds in other states, it must register to do so with those states, if those state have a registration requirement.
If you have questions about starting a nonprofit or tax-exempt organization in North Carolina, please contact us to begin a conversation. From our offices around the state, we take great pride in seeing that our nonprofit and tax-exempt clients operate healthy, growing, and compliant organizations without having to worry about legal headaches.
Stay tuned—coming soon, we’ll have a follow-up article on effectively maintaining a compliant NC nonprofit year after year.