How to Start a Nonprofit Charity Organization

Earn the trust of your donors through knowing and following the law.

Competition is increasing for the donated dollar. As with any new business, it is always good practice to research your community's needs and consider whether there is room for a new player. Affiliation with an established charity might make sense. If you do decide to create a new organization, plan on articulating to your potential donors why their money is in deserving hands. Good volunteers can make you stand out, so start by involving the best people you can find.

Things You'll Need

• Volunteers
• Filing fees
• Legal form templates
• IRS Form 1023 and Instructions

Instructions

Establish Your Corporation

1. Form a steering committee. Define your charity's purpose and methods; e.g., the purpose of XYZ charity is to operate a food pantry to alleviate hunger.

2. 

   States differ in their regulations overseeing charities.

   Run a business name search through your state's corporation department to make sure your chosen name is available. These bureaus are normally reachable through your state government website.

3. 

   Whether for profit or for charity, a corporation must file formation papers.

   Form a nonprofit corporation by drafting articles of incorporation and bylaws and filing them with the state office. Filing usually requires a fee, the amount of which will differ by state.

4. Meet with board members, tax or legal professionals for direction. You may legally begin business activity once your state has approved you as a registered charity; however, it may be advisable to wait for the next step.

Establish Your Federal Identity

1. 

   Next stop: the federal government.

   Obtain an Employer ID Number (EIN) from the Internal Revenue Service. You need this ID regardless of whether you have employees. It is the means used by the IRS to identify you and track your paperwork. The EIN can be obtained quickly on line and will help you get a bank account or business license if you need one.

2. Check the filing procedures needed to apply for IRS tax-exempt status prior to filing the form. The IRS plans to activate an online system called "Cyber Assistant" sometime in 2011. Once it goes live, your application will be bar coded through the online system. When the system is in place, everyone using it will pay $200, but not using it will mean a fee of $850. Whether it's bar coded or not, you must always file a hard copy of Form 1023. Currently, fees are either $400 or $800 depending on your size. Organizations with average annual receipts of over $10,000 pay the higher amount.

3. 

   If you have no donations yet, estimate future income.

   Prepare a forecast of revenue and expenses for the current year and the next two years. Fill out IRS Form 1023 and use this financial information to complete the relevant part of the form. You will be asked to complete a balance sheet, also located inside the form data. If you are seeking exemption retroactive to your date of incorporation, you must file within 27 months of that date.

4. Enclose exact copies of your articles of incorporation and bylaws. An officer or other authorized person should sign Form 1023. Enclose the filing fee and mail to the address listed on the form.

5. 

   Recognize and thank your volunteers often.

   Wait for an IRS response within 60 days. They may approve your exemption temporarily for five years, or they may require further information.

Tips & Warnings

• Don't overthink your documents. Keep it simple. Focus on avoiding questions from the authorities.

• Tax liability can result if you operate a business, unless you show how the income is related to your charitable purpose.

• Donors are not able to claim a federal income tax deduction for donations unless IRS tax exempt status is obtained.

References

• Chronicle of Philanthropy: Number of Charities and Foundations Passes 1.2 Million
• Internal Revenue Service: Applying for Tax-Exempt Status
• Internal Revenue Service: Charitable Organizations Information
• Internal Revenue Service: Obtaining An Employer ID (EIN) Number

Resources

• Charity Lawyer: Daily Dose of Nonprofit Law
• John Haydon: Social Media and Inbound Marketing for Nonprofits
• The Chronicle of Philanthropy