501(c)(3) nonprofits do the world a great service.
These organizations fall into three categories: public charities, private foundations, and private operating foundations.
In spite of the economic drivers of for-profit businesses, nonprofits work without the desire to drive revenue, instead choosing to focus their energies in complete service to the public good: economic development, the arts, cultural awareness, spirituality, and virtually every sector of society.
Not only have they contributed more than 10.7 million jobs in 2010 (10% of total U.S. employment that year), but they have contributed $887.3 billion dollars to the nation’s GDP in 2012.
And that’s a big deal to the U.S. government.
As a result, 501(c)(3) nonprofits are awarded a special distinction among business and organization types and given two unique perks:
- Exemption from federal taxes
- Eligibility for government grants
However, if you’re interested in operating for the public good, and you’re considering creating your own 501(c)(3) nonprofit, it’s important to know that these business formations are highly scrutinized (see: no taxes).
And if you’re unfamiliar with a nonprofit formation, the process can be time-consuming and extensive—but it doesn’t have to be.
Here’s how to form a 501(C)(3) in 3 Easy Steps.
Step #1 – Determine your filing classification
Although 501(c)(3)s are the most popular form of nonprofit classification, there are more than 27 other variations ranging from 501(c)(1)s to 501(c)(27) as well as several 501(c)-lettered formats.
For example, a daycare nonprofit will be a 501(k), a chamber of commerce organization may be a 501(c)(6), and a credit union might be a 501(c)(1).
Knowing what kind of organization you want to form will help you in determining which 501(c) classification your business falls under.
Here’s a quick breakdown of each:
501(c)(1) – Federal Credit Unions
These nonprofits are exempt from having to file annual tax returns. Tax-exempt contributions are allowed if they are made for exclusively public purposes.
501(c)(2) – Holding Corporations
These are holding corporations for exempt organizations allowing them to hold the property titles of exempt groups. They can apply for nonprofit status using IRS form 1024 and are required to file IRS form 990 or 990EZ annually.
501(c)(3) – Religious, Educational, Charitable, Scientific, and Literary organizations
These organizations must file the IRS form 1023 to create this type of nonprofit, as well as file IRS form 990, 990EZ, or 990-PF.
501(c)(4) – Civic Leagues, Social Welfare Organizations, and Local Associations
These types of nonprofits are often confused with the 501(c)(3). But they are very different, especially regarding permissible political activity. They apply using IRS Form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(5) – Labor, agricultural, and horticultural organizations
These groups are educational or instructive in nature, with the goal of improving work conditions, products, and efficiency. They apply by using IRS Form 1024 and must file the form 990 or 990EZ annually.
501(c)(6) – Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
These organizations seek to improve business conditions. They apply using IRS form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(7) – Social and Recreation Clubs
These groups promote pleasure, recreation, and social activities. They apply using IRS form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(8) – Fraternal Beneficiary Societies and Associations
They provide for the payment of life, sickness, accident, or other benefits to members. They apply using IRS form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(9) – Voluntary Employees’ Beneficiary Associations
These groups provide for the payment of life, sickness, accident, or other benefits to members. They apply using IRS form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(10) – Domestic Fraternal Societies and Associations
These organizations are lodges that devote their net earnings to charitable, fraternal, and other specified purposes. They apply using IRS form 1024 and must file IRS form 990 or 990EZ annually.
501(c)(11) – Teacher’s Retirement Fund Associations
These organizations are associations for the payment of retirement benefits. They apply using IRS form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(13) – Cemetery Companies
These organizations use the form 1024 for their application and must file the 990 or 990EZ annually.
501(c)(14) – State Chartered Credit Unions, Mutual Reserve Funds
These nonprofits give loans to members. Although there is no application form, these groups file the IRS form 990 or 990EZ annually.
501(c)(15) – Mutual Insurance Companies of Association
These groups provide insurance to members, mostly at cost. They apply using IRS Form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(16) – Cooperative Organization to Finance Crop Operations
These groups finance crop operations in conjunction with the activities of a marketing or purchasing association. There is no form to apply and the form 990 or 990EZ must be filed annually.
501(c)(17) – Supplemental Unemployment Benefit Trusts
These nonprofits provide the payment of supplemental unemployment compensation benefits. They apply using IRS Form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(18) – Employee Funded Pension Trust
These nonprofits oversee the payment of benefits under a pension plan funded by employees. They apply using IRS Form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(19) – Post or Organization of Past or Present Members of the Armed Forces
These are organizations that are dependent on the nature of the organization. They apply using IRS Form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(20) – Group Legal Services Plan Organizations
These organizations are currently tax-exempt but may request it.
501(c)(21) – Black Lung Benefit Trusts
Funded by coal mine operators to satisfy their liability for disability or death due to black lung diseases. There is no form, however, these organizations must report using tax form 990-BL.
501(c)(22) – Withdrawal Liability Payment Fund
These organizations provide funds to meet the liability of employers withdrawing from a multi-employer pension fund. There is no form to apply and the form 990 or 990EZ must be filed annually.
501(c)(23) – Veterans Organization
These organizations provide insurance and other benefits to veterans. There is no form to apply and the form 990 or 990EZ must be filed annually.
501(c)(25) – Title Holding Corporations or Trusts with Multiple Parents
These organizations hold titles and pay income from properties to 35 or fewer parents or beneficiaries. They apply using IRS Form 1024 and must file the IRS form 990 or 990EZ annually.
501(c)(26) – State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
These organizations provide health care coverage to high-risk individuals. There is no form to apply and the form 990 or 990EZ must be filed annually.
501(c)(27) – State-Sponsored Workers’ Compensation Reinsurance Organization
These nonprofits reimburse members for losses under workers’ compensation acts. There is no form to apply and the form 990 or 990EZ must be filed annually.
501(d) – Religious and Apostolic Associations
These organizations perform regular business activities as communal religious communities. There is no form to apply and the form 1065 must be filed annually.
501(e) – Cooperative Hospital Service Organizations
These nonprofits perform cooperative services for hospitals, use the form 1023 to apply, and file tax forms 990 or 990EZ annually.
501(f) – Cooperative Service Organizations of Operating Educational Organizations
These groups perform collective investment services for educational organizations, apply using form 1023, and file tax forms 990 or 990EZ annually.
501(k) – Child Care Organizations
These nonprofits provide care for children and require the application of form 1023 and file tax forms 990 or 990EZ annually.
501(n) – Charitable Risk Pools
These nonprofits pool certain insurance risks of 501(c)(3), use the form 1023 to apply, and file tax forms 990 or 990EZ annually.
521(a) – Farmers’ Cooperative Associations
These are groups that use cooperative marketing and purchasing for agricultural producers. They apply using Form 1028 and gain tax-exemption status with the form 990 which must be filed annually.
Although these are just quick snippets of the various nonprofit forms, for a more detailed look at how these organizations are filed and put together, you can read more here.
Step #2 – Gather all necessary paperwork
The application to form a recognized 501(c) organization is 28 pages and organized into 11 parts and multiple sections.
Although the information requested ranges from the name of the organization, personal details of the applicant, financial and organizational records, etc., here’s a quick checklist of everything you’ll need when you’re ready for formation.
Assemble these items:
- Form 1023 Checklist
- Form 2848, Power of Attorney and Declaration of Representative (if filing)
- Form 8821, Tax Information Authorization (if filing)
- Expedite request (if requesting)
- Application (Form 1023 and Schedules A through H, as required)
- Articles of organization
- Amendments to articles of organization in chronological order
- Bylaws or other rules of operation and amendments
- Documentation of nondiscriminatory policy for schools, as required by Schedule B
- Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation (if filing)
- All other attachments, including explanations, financial data, and printed materials or publications.
In this process, you’ll also want to label each page with your nonprofit’s name and EIN.
Place your user fee payment in an envelope on top of the checklist but DO NOT STAPLE or attach your check or money order to your application. Instead, just place it in the envelope.
- Employer Identification Number (EIN)
- Completed Parts I through XI of the application, including any requested information and any required Schedules A through H.
- You must provide specific details about your past, present, and planned activities.
- Generalizations or failure to answer questions in the Form 1023 application will prevent us from recognizing you as tax exempt.
- Describe your purposes and proposed activities in specific easily understood terms.
- Financial information should correspond with proposed activities.
- You’ll also need to review the list of schedules (yes or no qualifying questions that may require more information from you) and determine if there’s any supplemental information you’ll need to submit.
- An exact copy of your complete articles of organization (creating document). The absence of the proper purpose and dissolution clauses is the number one reason for delays in the issuance of determination letters.
- Location of Purpose Clause from Part III, line 1 (Page, Article and Paragraph Number)
- Location of Dissolution Clause from Part III, line 2b or 2c (Page, Article and Paragraph Number) or by operation of state law
- Signature of an officer, director, trustee, or another official who is authorized to sign the application.
- Signature at Part XI of Form 1023.
- Your name on the application must be the same as your legal name as it appears in your articles of organization.
Now that you’ve assembled your necessary documents, now it’s time to ship it off.
Step #3 – Submitting the IRS form 1023
When creating a nonprofit, there are a few basic steps you’ll need to follow on your path to incorporation:
- Choose a name
- File your article of incorporation with the state filing office
- Apply for tax-exemption (501(c)(3) with the 1023 form, which may or may not also require you to file the IRS Form 990.
- Check to see if your federal tax exemption applies to the state level
- Create bylaws for your organization
- Appoint directors
- Hold a meeting of the board
- Get all the proper licenses and permits (check with state laws)
After you’ve established your nonprofit and you’re ready to file with the IRS, follow these next steps…
When to File For 501(c)(3) Status
Within 27 months of filing your nonprofit articles of incorporation.
Where to File
Once you’re ready for submission, send your completed Form 1023, user fee payment, and all other required information, to:
Internal Revenue Service
Attention: EO Determination Letters
P.O. Box 12192
Covington, KY 41012-0192
If you are using express mail or a delivery service, send Form 1023, user fee payment, and attachments to:
Internal Revenue Service
Attention: EO Determination Letters
201 West Rivercenter Boulevard
Covington, KY 41011
However, if you’re eligible to file the IRS form 1023-EZ (you can find out here), you can do so by following these directions:
- Register for an account on Pay.gov.
- Enter “1023-EZ” in the search box.
- Complete the form.
And, that’s it!
Creating a 501(c)(3) can be a noble endeavor, giving you the opportunity to provide crucial services to the public without an incentive for profit.
However, as these organizations enjoy a specially recognized status from the federal government making them eligible for tax-exemption and grants, the formation of a nonprofit can be more involved than you think.
As a result, it helps to have a few CliffsNotes to get you in and out of the process, and on the street operating for the sake of those in need.
If you’re ready to form your own 501(c)(3) and need help filing the IRS form 990
Click here to contact us directly.