Chip Potts is INN’s director of finance and operations and oversees our fiscal sponsorship program and business services for members. He offers this advice based on his more than 30 years of accounting experience:
Nonprofit founders must deal with the reality that they will have to pay some professional expenses and filing fees to gain legal status to solicit charitable donations. Before you can apply for nonprofit status from the IRS, you should consult with a lawyer or a very good accountant who is familiar with nonprofit incorporation in your jurisdiction.
Laws vary by state (or province, country, etc., but the material below applies mainly to the United States). Some jurisdictions, such as Delaware, provide favorable regulations that attract for-profit business incorporations, but these tax benefits don’t affect nonprofits. Incorporating where you live and work will most likely save you an extra layer of complications.
What do you need to begin?
You must name your entity, keeping in mind that changing the name later would entail refiling with the state and IRS. The name will apply to the corporate parent of whatever publications or websites you will be doing business as (DBA) — should this apply.
Depending on your state requirements, you may incorporate with as few as one person, known as the incorporator (most probably the founder). Remember, nonprofits have no owners or shareholders. The incorporator(s) file the Articles of Incorporation with the state along with the appropriate filing fees. Once incorporated, the incorporator(s) appoint an initial board of directors, as defined by state law.
The first act of the board should be to approve a set of bylaws by which the corporation will operate. The board should also approve a mission statement that will ensure your entity is clearly defined to support your educational purpose to qualify for tax-exempt status.
What happens next?
Your next order of business is to obtain an Employer Identification Number (EIN) with the IRS and to file any other licenses or permits you will need to operate in your state and local jurisdictions. Your accountant or lawyer should advise you on what next filings/steps you should undertake. An EIN can be filed online with the IRS by you or your accountant or lawyer. You’ll need that federal tax number to establish a checking account.
A new nonprofit corporation can start accepting donations immediately, but if it does not receive fiscal sponsorship or its 501(c)(3) application is not approved by the IRS, it would either have to return the money to the donors or those donors would lose any tax deductions from those donations. Depending upon your available resources, you can go one of two routes toward gaining tax-exempt status:
You can file IRS Form 1023, and any applicable state forms, to seek recognition as a tax-exempt corporation, under section 501(c)(3) of the Internal Revenue Code (IRC). This application process can become complicated and expensive. Additionally, 41 states and the District of Columbia require nonprofits to register if soliciting charitable donations from residents of their state. Registration fees and procedures vary from state to state and could be a drain on resources for a new organization.
Alternatively, startups can seek fiscal sponsorship, meaning they embark on their fundraising under the wing of an established 501(c)(3) organization. INN’s program of fiscal sponsorship for members is explained here. INN is registered to accept donations in all jurisdictions (states and D.C.) that require registration, which in turn covers organizations accepted into INN’s fiscal sponsorship program.
It is possible for startup founders to get fiscal sponsorship without incorporating first. Some members started as programs or projects of local foundations, for example. Some nonprofit organizations specialize in assisting freelancers with raising money for educational projects, such as Film Independent for documentary producers. While most INN members start as nonprofit corporations, some for-profit news organizations have launched projects that would qualify for INN fiscal sponsorship at least for a set period of time.
New nonprofit corporations can start the process of seeking 501(c)(3) status while under fiscal sponsorship. A good rule of thumb is that once yearly revenue reaches $500,000, a nonprofit can afford the various expenses of maintaining tax-exempt status — state registrations, audits and other professional fees. Even with a fiscal sponsor, you will have reporting requirements, confirming your information online annually or biennially and filing tax forms showing where your revenue came from and went to.
Less common situations
INN often gets questions from members who have some unusual situation that affects their incorporation. Because laws vary so widely in different jurisdictions, we generally must refer you to local authorities for those questions.
The INN member website has information about legal services.
The next chapter covers how to get tax-exempt status.