So, you have a great idea for a nonprofit organization. The process for registering and setting up a nonprofit organization isn’t difficult, but it does take time to complete all the necessary steps. It’s important to register the nonprofit correctly, so that you can obtain tax-exempt status and use the most funds possible to support your charity or invest in your nonprofit organization.
Every state has an agency that manages nonprofit organizations. In most states, it’s the department of the Secretary of State. Nonprofits are registered under section 501(c)(3) of the IRS statute. Nonprofits can register under the categories of education, science, religion or charity.
Benefits of Setting Up a Nonprofit Organization
In addition to the benefit of not having to pay income taxes, nonprofit organizations enjoy several other types of benefits. These include:
Establishing a nonprofit organization offers some liability protection for board members. Properly registering as a nonprofit organization keeps a director’s personal assets separate from the nonprofit’s liabilities. Directors and officers aren’t personally responsible for any debts or liabilities that belong to the organization.
Even if a director leaves the business or passes away, the nonprofit organization continues to exist unless the remaining directors choose to dissolve it.
Eligibility for Grants
Nonprofit organizations may be eligible for certain private or public grants. The application process is often quite competitive.
Potential donors may be more inclined to give to an organization that has an official nonprofit status and a named board of directors. Donors also have other expectations, including the requirement for all board directors to make annual personal donations.
Tax-Deductible Donations for Donors
Those who donate to registered charities can deduct their donations up to a certain amount. Nonprofits may point out this advantage in fundraising campaigns.
Property Tax Exemptions
Depending on the circumstances, some nonprofit organizations in some states may be exempt from certain property taxes.
Reduced Postage Rates
Nonprofit organizations are allowed to get a reduced rate for some periodicals and USPS marketing mailing envelopes. The organization must first be authorized as eligible by the local post office. The nonprofit must make sure that the materials they mail comply with the strict requirements for nonprofit pricing.
Registering a Nonprofit Organization
While nonprofits must abide by different state laws than for-profit enterprises, the process of registering them is quite similar to that of other types of corporations. Like a for-profit corporation, nonprofits must file their Articles of Incorporation and bylaws with the state where they wish to incorporate. Nonprofit organizations must also conduct a simple search to make sure that no other corporation has a duplicate name.
The designated agency determines which copies of documents they need and how many copies of each. States customarily charge a nominal fee for filing the paperwork. Founding members may also need to submit a certificate of disclosure and proof of the corporate name. Generally, you must publish your Articles of Incorporation in a local newspaper one or more times, and include your proof of publication with your application.
Nonprofits must also file for federal and state tax exemption statuses. The form to apply for federal tax-exempt status is Form 1023. In many states, nonprofits that qualify for federal tax-exempt status are automatically exempt from state taxes, but not always. In some states, nonprofit organizations must also register with the state’s Attorney General.
Creating a Board of Directors
A group of individuals may have worked on the Articles of Incorporation, bylaws and other necessary paperwork to get the nonprofit organization registered. Once the paperwork gets filed and all fees are paid, it’s time to set up the very first board of directors.
State laws determine the minimum number of board directors. The IRS recommends a minimum of three board directors for nonprofit organizations and that number matches that of best practices for corporate governance. The founding board sets the minimum and maximum number of board directors. It’s best to keep the number of board directors at an odd number to avoid tie votes, although the board chair can cast the tie-breaker vote, if needed.
The best candidates for board members are people who have a passion for the organization’s mission or who have personal experience with the reason the nonprofit came into existence. Having a strong connection to the mission means that they will have a vested interest in soliciting donations and be an active part of helping the organization grow.
It’s important to note that the IRS doesn’t allow nonprofit organizations to appoint board directors who are mostly family members. Neither do they allow nonprofit board directors to be mostly business associates. It’s best if the board has a composition that represents a variety of perspectives and can bring forth opinions on all sides of an issue.
New boards will need to assign the length of terms for all board directors. Usually, boards stagger terms, with some terms ending in one year, some in two years, and some in three or four years. It benefits boards to do this so that the entire board doesn’t turn over at the same time.
Founding boards will also need to set the minimum number of meetings they will require. All nonprofit boards must hold at least one annual meeting. Even when there is a minimum number of meetings, boards may add as many extra meetings as they need to keep the nonprofit sustainable.
Writing Descriptions of Board Director Duties and Responsibilities
It may not seem like there is very much to do in the beginning, but it’s very important for boards to write a job description and a description of the duties, responsibilities and expectations for board members. Descriptions should make it clear that board directors are responsible for planning, oversight and fundraising. They also need to be clear on how these expectations differ from the duties and responsibilities of current or potential staff or Executive Directors.
Once board recruits express interest in serving on the board and know what is expected of them, invite them onto the board. Boards will also need to decide which officer positions their board will have and hold an election to vote for President, Vice President (if needed), Secretary and Treasurer.