A few years ago I served two terms as President on the Board of Directors of a nonprofit organization. I live in a state where our public education funding is lacking. This has been an issue for over 20 years which resulted in the formation of a nonprofit 501(c)3 organization at my children’s elementary school. The organization’s intent is to raise private donations exclusively to retain quality educational programs and teaching assistants that would otherwise be cut from our schools.
This is just one example for creating a 501(c)3. You may have a different interest such as a charity, research, religious or political cause for non-commercial purposes. There are different legal statuses for nonprofits, and a 501(c)3 is just one of them (for examples of other types see the IRS link here).
The steps toward creating a 501(c)3 are as follows:
Develop a concise and accurate mission statement. It is crucial to have a clear and concise mission statement to explain the intent and purpose of your nonprofit. This is important in order to determine the type of organization you will create and it will be a defining factor in recruiting your Board of Directors. If you are working with a team of people to build a nonprofit, together you can “white board” a list of mission statements until you have at least 2 or 3 top picks. Then you can refine and blend them into one statement.
Once you understand your mission the next step is to analyze your organization’s primary objective. A 501(c)3 is exempt from income and usually from property tax. A key aspect to a nonprofit is the organization is able to receive tax-deductible donations. Therefore any donor who writes a check specifically under the name of your 501(c)3 will be able to claim that amount on their taxes under charitable donations in the year the check was written. In many cases a lawyer should be consulted to assist in the formation and ensure all proceedings are handled legally. In our case a parent volunteer who is an attorney assisted at no charge. By consulting books from the library and researching information such as this article on the internet, and under the appropriate Secretary of State website you can find the forms and information to get started.
Nominate and select a Board of Directors. In most states you need to have a minimum of 3 people serving on the board annually. In the case of the Education Fund I served on, we had a President, Treasurer and Secretary. Depending on what your organization will set out to do will determine the number of accomplished board members you should recruit. These board members are crucial to the success of your mission through their extensive network and know-how.
Submittal of Articles of Incorporation. This step entails the submission of forms to the appropriate state agency where your nonprofit will be located. These forms are called Articles of Incorporation and record the creation of your nonprofit. These articles are crucial to protecting the board and members from liability incurred. These articles recognize that the organization and not the members hold the debts and liabilities. It’s best to consult with a lawyer who can insure the proper submittal and incorporation. Don’t forget to seek experience from within your own network that might be able to donate their services to your nonprofit.
Creation of Bylaws. In order to administer and oversee the nonprofit a set of bylaws or rules is essential. In most states these are not required to be filed for nonprofit status but they play an important part in how well your organization is run. Your Board should help assemble these bylaws and file them with the Articles of Incorporation.
Develop monetary goals. The role of the board is to determine your annual budget. This will provide the structure for what your organization is able to provide. In the case of the Education Fund I presided over, we had an annual dollar figure to support 10 classroom assistants as well as funding for educational equipment. At the beginning of each school year we sent out marketing information and requested a private donation per family. In this tight economy we were always relieved to collect the necessary funds to continue our wonderful programs and teaching assistants. We relied heavily on our treasurer to maintain clean records and file our taxes on time.
Develop a written record system. The role of the secretary is to develop a system of keeping track of minutes, all Board documents and financial statements. It is required by law to save all of these records for a minimum of 3 years. Contact your state agency to understand each record of information that you are required to maintain. We also ran a transparent organization and published this information on line for the school parents to view as needed.
Treasurer reports. The role of the treasurer should include devising an accounting system for keeping track of all incoming and outgoing funds. In most cases the role of the treasurer should go to someone with a financial or accounting background. In our case we were fortunate to have a tax lawyer who was able to provide legal expertise and keep track of our accounting. If you do not have a board member with that background you may need to hire outside help and budget for their services. All records should be made public so that donors and other granting bodies are able to review your records as needed. Long range planning should be part of system.
Obtain a FEIN (Federal Employer Identification Number). You can apply online and instantly obtain a FEIN whether you have employees or not. This is similar to a Social Security number but for a corporation or organization to uniquely identify it for tax purposes. Forms are available from the IRS website, or you can go online and obtain one instantly by following the directions available at this link where I wrote about the process. If you happen to have a previous FEIN number to incorporate you will need to obtain a new one under your organizations name.
Applying for your 501(c). Link to the IRS website and locate form 1023 and the instructions for filling it out. Filing fees vary on the size of the nonprofit’s budget. This is one of the most important legal documents for your organization so be sure you are submitting it accurately and with proper legal assistance. Fees often have to be paid annually or biannually. Be sure the Secretary is aware of all dates to renew licenses.
Determine local and state tax exemptions. Contact your appropriate state and local agencies to apply for tax exemption from income, property and sales taxes. For instance in the state of California we contacted our State Board of Equalization (BOE) to determine our filing status. Each state will have an equivalent for you to submit your appropriate status.
Each year the President in office provides these documents and transitions to the new President-elect. Oftentimes the Board may elect new officers and a general election is not necessary. Our school nonprofit has been a successful organization raising millions of dollars over the course of its existence. Because of the school programs it has sustained our students have benefitted making the formation of a nonprofit one of the best decisions for our school. It was definitely worth the effort to create a nonprofit.
More from this contributor:
LLC vs. General Partnership vs. Sole Proprietorship
How to Instantly Obtain your FEIN
Choosing a Name for your Company