Step-by-step guidance on the legal requirements for establishing and maintaining a nonprofit organization.

Starting a nonprofit organization is a rewarding way to make a difference, but requires careful navigation of legal requirements. This guide covers the essential legal steps to establish a nonprofit entity that can qualify for tax-exempt status and operate in compliance with state and federal laws.

Understanding Nonprofit Organizations

Nonprofit organizations operate differently from for-profit businesses in several key ways:

• They exist to serve a mission rather than to generate profits for owners
• Any revenue must be reinvested in the organization's activities
• They may qualify for tax exemptions and other benefits if they meet certain criteria
• They are governed by boards that have fiduciary responsibilities

The most common type of nonprofit is the 501(c)(3) public charity or private foundation, named after the section of the tax code that grants tax-exempt status. Other nonprofit designations exist for various purposes, such as 501(c)(4) social welfare organizations and 501(c)(6) business leagues.

Step 1: Conduct Research and Planning

Before filing any paperwork, complete these preliminary steps:

• Define your mission - Clearly articulate what your nonprofit aims to accomplish
• Research existing organizations - Identify similar nonprofits to avoid duplication and consider partnerships
• Develop a business plan - Create a detailed plan for operations, funding, and governance
• Assemble a founding board - Recruit initial directors with relevant skills and commitment to the mission

Step 2: Choose a Business Structure

Most nonprofits are incorporated as nonprofit corporations, which provides several advantages:

• Limited liability protection for directors, officers, and members
• Perpetual existence independent of founders
• Eligibility for grants and tax-exempt status
• Enhanced credibility with donors and partners

Alternative structures include unincorporated associations and trusts, but these typically offer fewer protections and benefits.

Step 3: Form a Nonprofit Corporation

To incorporate your nonprofit, you'll need to:

1. Select a name - Choose a unique name that complies with state naming requirements and isn't confusingly similar to existing organizations
2. Appoint a registered agent - Designate someone to receive legal documents for your organization
3. File articles of incorporation - Submit formation documents to your state's secretary of state or corporations division
4. Pay filing fees - Fees typically range from $25 to $300 depending on your state

Your articles of incorporation must include specific language required for 501(c)(3) status, including purpose clauses that limit activities to exempt purposes and dissolution clauses that ensure assets will be distributed to other tax-exempt organizations if the nonprofit dissolves.

Step 4: Draft Bylaws

Bylaws serve as your organization's internal operating manual and should include:

• Board structure, selection process, and term limits
• Officer positions and responsibilities
• Meeting frequency and voting procedures
• Conflict of interest policies
• Amendment procedures
• Membership provisions (if applicable)

Step 5: Hold an Initial Board Meeting

At your first board meeting, you should:

• Adopt the bylaws
• Elect officers
• Authorize opening a bank account
• Approve applying for tax-exempt status
• Document these actions in meeting minutes

Step 6: Apply for an EIN

An Employer Identification Number (EIN) is required for tax filings, opening bank accounts, and applying for tax-exempt status. Apply online through the IRS website at no cost.

Step 7: Apply for 501(c)(3) Tax-Exempt Status

To obtain federal tax exemption, submit Form 1023 (or Form 1023-EZ for smaller organizations) to the IRS. This application requires:

• Detailed descriptions of your organization's activities
• Financial projections for three years
• Governance policies and procedures
• Compensation information for officers and directors
• Filing fee ($275 for Form 1023-EZ or $600 for Form 1023)

The IRS review process typically takes 3-12 months, and you may need to respond to additional questions before receiving a determination letter.

Step 8: Obtain State Tax Exemptions

After receiving federal exemption, apply for state tax exemptions. Requirements vary by state but may include:

• Income/franchise tax exemption
• Sales tax exemption
• Property tax exemption

Step 9: Register for Charitable Solicitation

Most states require nonprofits to register before soliciting donations. These registrations typically include:

• Filing an initial registration
• Paying a registration fee
• Submitting annual reports
• Disclosing fundraising activities

Step 10: Comply with Ongoing Requirements

Maintaining your nonprofit status requires ongoing compliance:

• Annual filings - Submit Form 990 to the IRS annually
• State reports - File annual reports with your state
• Board governance - Maintain required board meetings and documentation
• Fundraising regulations - Comply with state-specific fundraising requirements
• Employment laws - Follow applicable employment and volunteer management laws

Starting a nonprofit requires significant legal preparation, but proper attention to these requirements creates a solid foundation for your organization's mission-driven work. Consider consulting with an attorney experienced in nonprofit law to navigate the specific requirements in your state and for your organization's unique circumstances.