Written by Alana Rudder  &

Rob Watts

Something I am working on for the youths of our community…A Comprehensive Path to Youth Wellness & Health.

Starting a nonprofit offers several benefits. They include the ability to solicit funds from people who want their donations to be tax-exempt, apply for grants and keep from having to spend valuable donations on corporate taxes. However, there are some drawbacks. Nonprofits must maintain their tax-exempt status continually by undergoing IRS financial scrutiny, looping profits back into the organization, conducting board meetings and keeping detailed records.

Is a Nonprofit Right for You?

Starting a nonprofit offers several benefits. They include the ability to solicit funds from people who want their donations to be tax-exempt, apply for grants and keep from having to spend valuable donations on corporate taxes. However, there are some drawbacks. Nonprofits must maintain their tax-exempt status continually by undergoing IRS financial scrutiny, looping profits back into the organization, conducting board meetings and keeping detailed records.

If these drawbacks keep you from meeting your goals as the founder of an organization, consider these alternative guides:

• How To Set Up An LLC In 7 Steps
• How To Start A Business In 8 Steps
• Starting An S-Corp: Everything You Need To Know

Common Types of Nonprofits

While there are many 501(c) designations for nonprofits, three common types of nonprofitsinclude 501(c)(3), 501(c)(4) and 501(c)(7) organizations. Each type has benefits and restrictions and, so, is best for specific types of organizations, including charitable, political or lobbying and social or recreational clubs, respectively. Here is a closer look at these types of 501(c) nonprofits.

501(c)(3): Best for Charitable Nonprofits

501(c)(3) organizations are the most common type of nonprofit. They raise money by soliciting donors and grants. Examples of 501(c)(3)s are those that address global concerns, such as the need for education, religious support and medical research. Private foundations are also 501(c)(3) organizations. Instead of running charitable programs, these foundations fund other 501(c)(3) organizations through grants.

501(c)(3)s have some restrictions surrounding the types of public services in which they can be involved. Namely, they cannot participate in political or lobbying activities. 501(c)(3) organizations can participate in some lobbying activities but they must limit the funding of such activities to 10% of their operational budget. Those that exceed this threshold run the risk of losing their 501(c)(3) tax-exempt status.

501(c)(4): Best for Political or Lobbying Nonprofits

Organizations with 501(c)(4) tax-exempt status are social welfare organizations. Their purpose should be to promote the public good. In contrast to 501(c)(3) organizations, 501(c)(4) nonprofits have free reign to participate in political and lobbying activities. They can, for example, endorse political candidates and promote legislation. For this reason, organizations that aim to take a political stand would do well to apply for their 501(c)(4) status.

Unlike in 501(c)(3) nonprofits, when donors donate to a 501(c)(4) organization, their donations are not tax-deductible. In most cases, these nonprofits must disclose to solicited donors that their contributions are not tax-deductible. However, these organizations are tax-exempt in that, like a 501(c)(3), they do not have to pay federal income tax.

501(c)(7): Best for Social or Recreational Clubs

501(c)(7) status is designated for nonprofit organizations that run social or recreational clubs. They are primarily membership organizations that are funded by members in the form of fees and dues. Examples of 501(c)(7) organizations include country, dinner, hobby, community association and amateur sports clubs.

501(c)(7) nonprofits must receive at least 50% of their funding from members. However, 35% of donations can come from nonmember donations and 15% of their funds can be raised through public use of the social club’s facilities or services. While membership contributions are not tax-deductible, most 501(c)(7)s do not have to pay federal income tax on membership contributions. However, they may be taxed on contributions that are not from members.

Other Nonprofit Designations

While most nonprofit organizations are 501(c)(3)s, there are 28 other 501(c) designations. As such, it is important to do your own research to find out which type of 501(c) designation would best help you meet your goals and make your desired impact. To begin this research, the IRS offers an updated list of 501(c) organizations and their definitions.

5 Steps To Start a Nonprofit

1. Research Feasibility and Need

Before committing to starting a nonprofit, it is essential to research whether you can start a nonprofit and if your desired mission will serve an actual need in the community. Starting a nonprofit when it is not feasible or needed can mean the rapid failure of your mission.

To assess the feasibility of your nonprofit, answer the following questions:

• Do I have the financial resources to start a nonprofit? Starting a nonprofit costs between $2,500 and $5,000. These costs go into legal, registration and business startup costs.

• Do I have enough people to start a nonprofit? Starting a nonprofit necessitates selecting a board of directors and enough volunteers or staff to put together and run your programs. Make a list of the people you have in mind to help you start your nonprofit, including their skills. Make a note of any skill gaps to ensure you fill them through further brainstorming.

• Are people excited to support my cause? If your community is not enthusiastic about your mission, it is unlikely they will donate to keep your programs running.

• Will the economy support a nonprofit startup? If people in your community are struggling to feed their families, they are unlikely to be able to financially support your cause.

• Do you have the ability to commit to your nonprofit? Nonprofit organizations, like any business, require time and effort to start and run. They are rarely a part-time effort for a founder. Look at your current responsibilities and decide whether you can take on a large initiative.

• What strengths, weaknesses, threats and opportunities will my nonprofit face? Consider internal factors that could impact the success of your organization. In doing so, at minimum, think about skill gaps within your team, potential partnerships or large donors, the organization’s ability to handle dips in donations, your experience, your unique ability to meet beneficiary needs and how you compare to your competitors.

To assess the need for your nonprofit, answer the following questions:

• Is my organization meeting a truly unmet need? There is a difference between needs and wants. Consider whether your mission fills a recognized need in your community. If it does not, donor dollars may go to an organization that is fulfilling a need before going to your cause.

• What competitors are currently working on meeting the need? Use a nonprofit locator tool to assess what other organizations are fulfilling exact or similar needs in the community you will serve. If another organization is fulfilling your mission in your target service area, the redundancy of services will mean you will have to compete for donor and grant dollars.

• How is my service offering different from the offerings of my competitors?If you discover that another organization is already fulfilling your target mission, consider adjusting your mission to fulfill a need they are not already meeting.

Now that you have assessed the feasibility and need of starting your nonprofit and fulfilling its mission, decide whether you want to move on to step two, which would require investing resources. If you find that your nonprofit initiative is not feasible or needed, it’s best to stop now and consider an alternative means of supporting your cause. Alternative options could include, for example, donating funds raised to another nonprofit.

2. Build a Strong Foundation

Some basic foundation-building steps to take include selecting your organization’s name, recruiting your board of directors and writing your values, mission and purpose statements. The following section offers some guidance on how to complete each of these foundation-building steps to start your nonprofit.

Write Your Values Statement

Your values statement focuses on the principles your organization will follow at all stages of organizational development and in every decision made by your staff, executives, board members and volunteers. As you write, first list the behaviors you consider most important to fulfill your mission successfully and ethically. Then, delineate how those behaviors will be implemented in the day-to-day operation performed by all members of your nonprofit.

Write Your Mission Statement

A mission statement motivates your internal team to stay focused and determined. It should tell what you do, how you do it and why you do it. To write your statement, in one sentence, answer what services you provide, then incorporate the values your organization holds dear and the desired result of your mission. Incorporate the point of passion that led you to begin your nonprofit. For best results, write concisely and at an eighth-grade reading level.

Write Your Purpose Statement

Your purpose statement tells why your nonprofit is necessary, despite any competitors’ already existing work. In doing so, it tells donors and partners why they should support you instead of or in addition to your competitors.

Describe what your nonprofit does in 50 words or less. First, state what category of service your organization provides (educational or humanitarian, for example). Then, elaborate on your service offerings. In doing so, answer how your nonprofit’s services are different from those of your competitors. Be specific enough to paint a compelling picture while also allowing room to grow your service offerings as your organization grows.

Choose Your Nonprofit’s Name

The name of your nonprofit should be chosen to align with the feelings evoked by your values, purpose and mission statements. To brainstorm your name, consider the category of services your organization provides―humanitarian, for example―and descriptive words that represent your purpose, mission and/or values. Be sure your chosen name is short enough to fit in domain names and social media handles and that it is easy to write, say and remember.

Once you have chosen a name, check to ensure it is not already taken. To do so, search to ensure your domain isn’t already in use using a tool like GoDaddy’s Domain search tool. Also, check with your state’s business filing agency to ensure your company name isn’t already in use in your state. Finally, to ensure your organization’s name isn’t trademarked, consider taking advantage of Legal Zoom’s trademark Check services.

Select Your Board of Directors

Make a list of the skills and expertise that you need to successfully fulfill your mission. Most nonprofits need financial, marketing, legal and industry-specific skills and expertise to fulfill a mission. Next, create a list of people with these qualifications and that share an interest in your cause. Finally, contact those people to discuss involvement with your nonprofit. To assess them for board positions, ask them to volunteer before committing to a board role.

3. File Articles of Incorporation

When you file articles of incorporation, you are requesting to be recognized as a business by your state. Once approved, your initiative is legally a business. However, your business is not yet tax-exempt. To file your articles of incorporation, you must first find out what office in your state is the state’s business filing office. The name of this office is different in each state as are the steps and documentation needed to complete this filing.

For example, in Florida, you must file your articles of incorporation with the Florida Department of State’s Division of Corporations. You must also register with the Florida Department of Revenue. To find out what forms you need to fill out and any additional required steps or documentation, you can visit the State of Florida website. Access the IRS’s webpage of State Links of Exempt Organizations to research the process in your state.

To legally conduct business in your state, you must also apply for a federal employer identification number (EIN). You can apply for your EIN easily online using EIN Assistant. Be sure to download Adobe Acrobat before filing so you can receive your confirmation letter online instead of waiting for it by mail.

4. File for Tax-exempt Status

The process for filing for tax-exempt status varies depending on the type of 501(c) organization that you seek to form. To file for 501(c)(4) tax-exempt status, for example, you must first register your 501(c)(4) by filing Form 8976 using the Form 8976 Electronic Notice Registration System. Then, you must file Form 1024-A to request tax-exempt status. In contrast, to apply for 501(c)(3) tax-exempt status, you must file Form 1023 or Form 1023-EZ.

The most common type of 501(c) tax-exempt nonprofit is the 501(c)(3). To learn more about forming this type of nonprofit, including the required steps for requesting federal and state tax-exempt status, read how to file a 501(c)(3) application online.

5. Maintain Your Tax-exempt Status

Maintaining your tax-exempt status is an ongoing process. Your bylaws, records and state and federal filing laws are the keys to doing so. Here is a short checklist you should consider when putting together your long-term tax-exempt status maintenance plan:

• Adhere to your bylaws: Your bylaws offer a plan for running your nonprofit in a legal, ethical and impactful manner. They include details about when your board should meet, how to avoid conflicts of interest and how donor dollars should be spent. Follow your bylaws carefully and use them for all decision-making to keep your nonprofit healthy and, so, tax-exempt.

• Keep detailed records: Records should be kept all year regarding your nonprofit’s activities. Specifically, to keep your tax-exempt status, it is imperative to keep careful financial records, including all organizational expenses, revenue, grants given and received, bank statements and canceled checks. Proving your organization is using funds solely for donors’ intended purpose is key to keeping your tax-exempt status.

• File federal tax forms annually: On an annual basis, file at minimum a 990 Form (or 990-EZ form if your annual revenue is less than $50,000). This form shows how your nonprofit handles raised funds and avoids conflicts of interest. It is also made available to potential donors. Not only does it help you keep your tax-exempt status, but it helps you to attract new donors by proving your credibility and ethical use of funds.

• File state tax forms annually: Many states require nonprofits to file a request on the state level to solicit donor funds from state residents. Others, such as Texas and California, require you to file for corporate tax exemption. File this paperwork annually with your 990 Form attached if required in your state. Doing so will allow you to keep your tax-exempt status on a state level and solicit the funds to keep your nonprofit running.

Bottom Line

Forming a tax-exempt 501(c) nonprofit offers advantages that help 501(c) organizations use donor dollars more effectively and, so, make a more positive impact. These benefits include attracting more donors and grants and cutting down on owed taxes. However, the nonprofit formation process can be challenging—requiring time, effort and even legal expertise. For this reason, we recommend you contact an experienced nonprofit lawyer to help you succeed.

Frequently Asked Questions

Can I start a nonprofit by myself?

A sole-member nonprofit offers the ability to retain full control over appointing and removing board members. Despite this, board members are still required for running the nonprofit. This means the nonprofit cannot be run by just one person. But if your goal in starting a nonprofit by yourself is retaining long-term control over the direction of the nonprofit, this model will work to meet that goal.

How can I start a nonprofit with no money?

You can start a nonprofit with no money by tapping into a fiscal sponsorship. In a Grant Model fiscal sponsorship, the fiscal sponsor is financially liable for the nonprofit initiative but the organization being sponsored retains its own tax liability. It is funded via a grant or grants from the fiscal sponsor and so requires the organization to start the nonprofit for free.

Can the founder of a nonprofit receive a salary?

Best practices dictate that the founder of a nonprofit organization should only be paid if he or she is hired as the executive director of the organization and does not sit on the board as a voting member. However, being a nonvoting member or having no seat on the board means these founders have less control over the direction of the nonprofit.

How do I file my nonprofit organization’s articles of incorporation?

Typically, articles of incorporation are filed with the secretary of state in the state in which the organization is being founded. Each state’s rules for articles of incorporation vary but most require the organization’s name and location, type of corporate structure, and type and number of authorized shares to be distributed to members.

How do nonprofits prepare financial statements?

Document incoming funding (donations and fundraised money) throughout the year. Break received funding down by month. Also track outgoing funds such as salaries, wages and other business expenses, and break them down by month. Offer an annual total of both. Subtract the sum of all expenses from the sum of incoming funding. Finally, write an explanation addressing how surplus (profits) will be reinvested into the nonprofit.

501(c)(3) Application: How To Obtain Nonprofit Status

Kimberlee Leonard,  

Jane Haskins, J.D.,  

Cassie Bottorff 

Small Business Expert Writer,  Contributor,  Editor 

Rob Watts

Managing Editor, SMB

Reviewed

Updated: Feb 11, 2024, 4:30pm

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

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A 501(c)(3) is a corporation that receives tax-exempt status from the IRS. To get the 501(c)(3) status, a corporation must file for a Recognition of Exemption. While there are services that will do this for you for an inflated fee, there is only a $600 fee when filing the application directly to the IRS. Here’s what you need to know about the 501(c)(3) application process, including instructions on how to complete the necessary forms.

What Does 501(c)(3) Status Mean?

The 501(c)(3) status means that the corporation is exempt from paying federal taxes on revenues and income generated in the organization. It does not exempt the organization from filing tax returns. You must still file Form 990 with the IRS to account for the income that comes into the organization.

How a 501(c)(3) Nonprofit Works

A 501(c)(3) works like most other C corporations. The main difference is that the financial data of a 501(c)(3) is subject to public review, whereas a private organization is able to maintain its books without this type of potential scrutiny.

It’s important to remember that the nonprofit is fundamentally a corporation, trust, LLC or unincorporated association and must follow the organizational rules of the underlying business entity. For example, with a corporation, you’ll have articles of incorporation with bylaws that dictate how you run your organization. A board of directors is elected to oversee the company’s operations. The nonprofit can hire people and pay them a salary and benefits from revenues generated. Where the scrutiny comes is how much of the incoming revenue is paid toward fulfilling the mission of the organization.

While the IRS says that 501(c)(3) nonprofit organizations can pay employees a “reasonable salary,” it doesn’t give a definitive set of parameters. But if the IRS, in reviewing the annual tax filing, feels that the status is just a tax shelter for a profit organization paying inflated salaries, it could revoke the status.

What Is Required To Maintain Status

The primary thing that an organization needs to do to maintain its 501(c)(3) nonprofit status is to do the annual filing. This is done with Form 990 and any subsequent schedules accompanying the form. IRS Form 990 has four parts to the summary section. The first reviews details about the organization’s mission and volunteer base, the second summarizes revenues, the third summarizes expenses and the fourth summarizes net assets.

Aside from filing the annual tax forms, the organization should avoid engaging in activities that could jeopardize the tax-exempt status. Activities that should be avoided include:

• Participating in political campaigns at any level
• Lobbying as a substantial part of its regular activities
• Operating in a way unrelated to its exempt mission
• Violating public policy with activities
• Not filing a return for three consecutive years
• Not operating for the benefit of public interest

Additionally, a nonprofit is only allowed minimum levels of unrelated business activities. These are activities that generate revenues but aren’t directly related to fundraising efforts and include things like renting out office space or selling merchandise.

Advantages and Disadvantages of Nonprofit Status

As with anything, there are pros and cons to becoming a 501(c)(3) nonprofit.

The advantages of becoming a nonprofit include:

• Tax advantage: The tax exemption status allows nonprofits to put more money into the fulfillment of their goals.
• Grant eligibility: Many public and private grants won’t consider organizations that aren’t a registered 501(c)(3).
• Formal structure: Being a formal structure keeps founders and volunteers separate from the organization. This helps limit the liabilities of the organization away from founders, board of directors and volunteers unless someone used the organization to shield illegal or irresponsible actions.

The disadvantages of becoming a nonprofit include:

• Administrative work: Nonprofits require detailed records that must be kept along with annual filings to the IRS.
• Shared control: Most states require a 501(c)(3) nonprofit to have several members on the board who are responsible for electing officers who determine organizational policy.
• Public scrutiny: Because a nonprofit is dedicated to the public interest, it is subject to having its records and accounts reviewed by the public upon request. This includes salaries and expenditures.

How To Apply for 501(c)(3) Status

Before applying for 501(c)(3) status, an organization must complete organizational paperwork with the state, whether that is articles of incorporation, a trust or other organizational entity. The organization must then apply for an Employer Identification Number (EIN) with the IRS by completing Form SS-4.

Applications for nonprofit status must be submitted online to the IRS. If an organization is eligible to apply for nonprofit status with Form 1023-EZ, the process can take as little as four weeks. For those who must file Form 1023, the process could take up to six months or longer.

You may be eligible to file Form 1023-EZ if you meet the following requirements:

• Gross income under $50,000 for three prior years
• Estimate gross income under $50,000 for next three years
• Have less than $250,000 in fair market assets
• Formed in the U.S. with a domestic mailing address
• Organized as a corporation, unincorporated association or trust
• Cannot be a successor to a for-profit entity

Required Documentation and Infrastructure

With Form 1023, you’ll need to include other paperwork items. Failure to provide one or more of the items will lead to delays in processing your application or denial of 501(c)(3) status. It’s best to follow the checklist carefully.

The documentation you’ll send to the IRS includes:

• Form 1023 Checklist
• Application (Form 1023 with applicable Schedules A–H)
• Articles of Incorporation or other organizing documents
• Any amendments to organizing documents (in order of changes)
• Organization bylaws
• Other attachments, including financial data, printed materials and explanations
• Check for $600 fee made payable to the Department of the Treasury

Be sure that each document has the organization name and EIN on it.

The IRS will send requests for information if it needs it. This will delay processing time, so it’s best to make sure the application is complete when first submitting. Once approved, the IRS sends a determination letter, which should be kept with the organization’s bylaws.

Submitting Your Completed Application

Once you have gathered all of the above documentation, you can create an account to submit your completed Form 1023 online at www.pay.gov and mail the supporting information to:

Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192

If you’re in a rush you can use express mail or delivery service to send details to this address:

Internal Revenue Service
Mail Stop 31A: Team 105
7940 Kentucky Drive
Florence, KY 41042

Frequently Asked Questions

How do I check the status of my 501(c)(3) application?

Confirm receipt of application and status by calling the IRS at 877-829-5500. You’ll need to have the organization’s legal name and EIN. With that, the agent will be able to determine the status.

How Long Does It Take for a 501(c)(3) To Be Approved?

Once you submit an IRS Form 1023 or a Form 1023-EZ for federal tax exemption recognition, the IRS often takes weeks to months to send you a determination letter. However, if you have a compelling reason to request expedited processing and you filed IRS Form 1023, the IRS will often work with organizations for a quicker determination.

How long does a 501(c)(3) status last?

There is no expiration on your nonprofit status. As long as you continue to file the annual tax returns and don’t engage in activities to jeopardize your status, the 501(c)(3) designation remains indefinitely.

How much does it cost to set up a 501(c)(3)?

If you go through an attorney or CPA, it can cost several thousand dollars to establish your nonprofit. Most organizations are simple enough to set up the organization directly with the IRS for the $600 Form 1023 user fee.

What type of businesses qualify as 501(c)3 organizations?

According to the IRS, the exempt purposes outlined in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals. This includes operations like day care centers, food banks, theater groups, colleges, low-income housing organizations and museums.

Are there other types of nonprofit organizations that are tax-exempt?

There are several types of nonprofit organizations that are tax-exempt. Some examples of these include 501(c)(4), which is for civic leagues and social welfare organizations; 501(c)(5), which is for labor, agricultural and horticultural organizations; 501(c)(7), which is for social and recreational clubs; 501(c)(14), which is for credit unions and other mutual financial organizations; and 501(c)(19), which is for veterans’ organizations

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