USA Nonprofit Formation

The two stages

• Incorporate as a nonprofit corporation with the Secretary of State of the chosen state
• Adopt bylaws and appoint an initial board of directors
• Obtain an Employer Identification Number
• Apply to the Internal Revenue Service for recognition of exemption
• Register with the state charity regulator, where the state requires it before soliciting donations

The exemption application

Recognition under section 501(c)(3) is sought on Form 1023, or on the shorter Form 1023-EZ for smaller organisations meeting the eligibility conditions.

The application requires the organisational documents to contain specific language — a purpose clause limited to exempt purposes and a dissolution clause dedicating assets to another exempt organisation. Articles filed without that language must be amended before exemption is granted, which is a common and avoidable delay.

Governance is scrutinised

• A board with a majority of unrelated directors is expected
• Conflict of interest policy adopted and followed
• Compensation of officers must be reasonable and independently approved
• No part of net earnings may benefit any private individual
• Political campaign activity is prohibited, and lobbying is limited

Ongoing federal filing

Exempt organisations file an annual return in the Form 990 series, with the version depending on size. Failure to file for three consecutive years results in automatic revocation of exempt status.

That automatic revocation is not discretionary and reinstatement requires a fresh application. It is the most common way a small nonprofit loses its status.

How we handle it

1. 1 Structuring the purpose The charitable purpose is framed to fall within an exempt category, since this determines whether recognition is available at all.
2. 2 Incorporation The nonprofit corporation is formed with articles containing the purpose and dissolution language the exemption application requires.
3. 3 Governance documents Bylaws, the conflict of interest policy and the initial board appointments are put in place.
4. 4 Tax identification The Employer Identification Number is obtained.
5. 5 Exemption application Form 1023 or 1023-EZ is prepared with the narrative and budget, and filed with the Internal Revenue Service.
6. 6 State registration Charity registration is completed in states where solicitation requires it.

Frequently asked questions