By Jeff Wolfe

IRS-Form-1023-501c3In celebration of the Forrest Firm’s fifth anniversary, we are highlighting the communities we serve. A key ingredient to any thriving community is the presence of non-profits, organizations specifically purposed for the public good.

Many of our clients at the Forrest Firm are non-profits, and we are often approached by our clients and friends that have great ideas that they’d like to pursue in the non-profit space, whether they are charitable endeavors, religious ministries, or other altruistic purposes. The most common question (and usually the first) is how to go about setting up a non-profit.

So, how can you start a non-profit?  Basically, there are two main steps.

Corporate Formation in North Carolina

First, you need to actually form a legal entity, which is governed by state law. You can achieve corporate formation of a non-profit in North Carolina by filing Articles of Incorporation with the office of the Secretary of State. There is a $60 filing fee for the non-profit formation with the North Carolina Secretary of State (and an additional $2 fee for filing electronically).

Along with Articles of Incorporation, it’s recommended that you create other supporting corporate records, such as bylaws and written consent actions, which we recommend be drafted by an attorney.  Some important decisions that need to be made when preparing the formation documents include selecting a board of directors, deciding on a North Carolina address that would function as the company’s headquarters (if applicable), and, to state the obvious, picking a name for the entity.

After incorporating the nonprofit, you’ll need to get an employer identification number EIN number (free and available instantly online).  This will allow you to open a bank account, which everyone is usually in a hurry to do in order to be able to receive donations.  However, before you start soliciting and accepting donations, you need to review step two below.

Achieving Tax-exempt Status

The second step to starting a non-profit is to obtain tax-exempt status, which is governed by federal law and the Internal Revenue Service.  Tax-exempt status is important become it allows non-profits to avoid paying income taxes but also makes it eligible to receive tax-deductible contributions.

Depending on what type of tax-exempt status you want to qualify for, you’ll complete Form 1023 or Form 1024.  Form 1023 covers 501(c)(3) tax-exempt status for charitable, religious, and educational organizations.  Form 1024 covers other non-profit organizations, such as civic leagues, business leagues, and social clubs.

To qualify as a 501(c)(3) organization, which is the most common exemption we handle, the organization must be organized and operated exclusively for exempt purposes and not for the benefit of private interests (e.g., net earnings may not be distributed to a shareholder or specific individual).  501(c)(3) organizations are also restricted on how much they can participate in lobbying activities.

Both Form 1023 and Form 1024 are fact-intensive, requiring descriptions of the organization’s operations and adherence to its stated purpose.  There is an application fee of $850 for organizations whose actual or anticipated gross receipts exceed a four-year average of $10,000.  If the actual or anticipated gross receipts are less than $10,000 over the applicable four-year period, the application fee is $400.

One of the biggest surprises for individuals that form a non-profit is the time it takes the IRS to review a tax-exempt application.  Approval times vary widely, but it will probably take a few months or even a year before the IRS grants tax-exempt status.  However, in 2014, the IRS created Form 1023-EZ, which is a streamlined application (i.e., easier to complete and quicker turn-around time for the IRS) for 501(c)(3) organizations that have assets of $250,000 or less and annual gross receipts (actual or expected) of $50,000 or less.  The application fee for an organization that qualifies for Form 1023-EZ is $400 (even if it exceeds the $10,000 threshold referenced above).

For more information on starting a non-profit, the attorneys of the Forrest Firm are here to assist you. We believe that successful non-profits are an important part of the fabric of any vibrant community.  This year, in honor of our fifth anniversary and the many clients that have helped us to build a successful firm, we are putting ourselves in the service of social entrepreneurs in a very special way.

Between now and April 15, 2016, we are accepting submissions for the Forrest Firm Non-profit Challenge. After reviewing entry ideas from social entrepreneurs to benefit the people of North Carolina, we will provide pro bono startup legal services and promotion via Forrest Firm to five winners that we’ll announce on May 1, 2016.  We encourage all interested candidates to apply!