How Do Nonprofit Laws Vary by State?
When it comes to nonprofit and charitable organizations, state laws don’t vary substantially, but they do vary somewhat. Nonprofit board members need to know what the state statutes are, when to submit initial and periodic registrations, and which state agency or authority to send them to. There are three main areas for boards to pay attention to, including:
- Initial filings
- Annual or other periodic filings
- Employment taxes
Nonprofit boards must also be aware of any changes that new state laws bring regarding nonprofit registrations and filings. Nonprofit board directors are responsible for following all state and federal rules and may be held responsible whether mistakes are intentional or not.
Initial Registrations for Nonprofit Organizations
There are six basic steps in most states for initiating a nonprofit organization. The steps include:
- Draft a set of bylaws and Articles of Incorporation
- Compose a board of directors and decide how they’ll be chosen in the future
- Choose in which state to incorporate as a nonprofit corporation
- File for tax-exempt status from the IRS and the filing state
- Apply for sales and use tax exemption if the state doesn’t automatically exempt it
- Register with the Attorney General (in most states)
Most states require filing a set of the Articles of Incorporation, along with one or more copies, with the Secretary of State’s office, or some other state agency that manages nonprofits. Most states also charge initial and re-registration filing fees.
The proper form to file to obtain 501(c) status is IRS Form 1023 or 1024, which goes to the IRS. Nonprofits must also send the IRS the appropriate fee.
In addition to meeting the formal legal requirements for starting a nonprofit, new boards also need to discuss how they’ll manage record-keeping, risk management, liability insurance, directors and officers insurance, and contracts and relationships with third parties.
Annual or Periodic Registrations
All states require nonprofits to register at least annually. The IRS requires nonprofits to file using the proper IRS Form 990. This form confirms and updates things like mailing address, names of responsible parties and the registered agent. They may also have to register annually or more often with the Attorney General and/or the Secretary of State or other state authority. The state may have its own forms for this and nonprofit boards need to be aware of the deadlines for state filings.
Nonprofits must identify a registered agent who lives or works in the state and can provide a physical address that the nonprofit can use for government purposes. This address cannot be a P.O. Box.
Nonprofits that change the physical addresses must notify the state reporting agency and the IRS, so they will be sure to get all proper notices from state and federal governments.
Some states also require nonprofits to submit annual financial returns at their annual re-registration.
Many states require nonprofits to send in a copy of their Form 990 or a similar state form at the annual registration time. It’s vital that boards know the requirements in their state and submit all of the proper forms.
Income Tax Exemptions
Most states automatically exempt nonprofits from income taxes along with their 501(c)s. States that don’t automatically exempt nonprofits from income tax may need to file an additional form with the state.
Nonprofits With Employees
Most states require nonprofits with employees to file initial and periodic forms with the state Department of Labor. This is to make sure that only the proper taxes are taken out of earnings and to ensure the employment rights of nonprofit workers.
Sales, Use or Property Taxes
Charitable nonprofits in some states have to apply for sales, use or property tax exemptions in addition to other registrations.
Requirements for Fundraising Filings
In the majority of states, charitable nonprofits that solicit contributions must submit an annual form to the state that describes the purpose of the organization and the types of charitable activities that the nonprofit engages in or provides. Such activities must be directly connected to and support the type of 501(c) that the organization submitted under during the initial filing.
State laws may also apply separately to professional paid fundraisers that work on behalf of a nonprofit charitable organization, and they may be required to register with the state as well.
Charitable organizations that solicit funds must be careful to wait until their nonprofit registration has been approved before they solicit or accept funds from any donor, either verbally or in writing. They aren’t considered a nonprofit tax-exempt organization until the initial filings are approved and finalized.
Nonprofit charitable organizations that plan to solicit donations from one or more states may be required to register in multiple states.
Penalties for Not Registering or Not Following Regulations Properly
The reason that it’s so critical for nonprofit organizations to know and follow all state and federal laws is because the consequences for failing to abide by them can be severe. In the best-case scenario, boards may have to pay late fees or lose good standing. These aren’t minor issues considering that they can have a strong, negative impact on a nonprofit’s reputation.
The fallout for a nonprofit that loses good standing may prohibit the organization from being able to make major changes such as amend its Articles of Incorporation, change its name, change its registered agent, merge with another nonprofit organization or dissolve itself.
In the worst-case scenario, failure to register may result in civil or criminal penalties for board members.
Getting Help for Properly Setting Up and Maintaining Nonprofits in Your State
Most communities are happy to have new nonprofits join their ranks. For this reason, budding nonprofits don’t usually have to look too far to find help in setting up their organizations.
Nonprofits that want to get started accepting donations right away may find help from a fiscal agent, which is an established nonprofit. A fiscal agent may also be helpful in assisting a new nonprofit to write their articles and bylaws and to file the initial forms for incorporation.
Corporate attorneys are another resource that often help nonprofits get up and running appropriately. Start-ups that don’t have funds for attorneys may find help through a local small business association or chamber of commerce.
Perhaps one of the best investments that start-ups can make is to begin using a board portal from BoardEffect. A board portal is a secure software solution where new nonprofits can store copies of the legal requirements for registrations and filings, as well as copies of documents. A board portal helps boards set up their meeting cycle, annual cycle and development cycle so that they are well-organized starting on the first day. A board portal alleviates worries about allegations of noncompliance. Board portals are efficient and cost-effective and support all of the components of good governance.