Dirk was eager to start his 501(c)(3) organization. He just didn’t know how. He found many offers online but wasn’t sure if he needed their help or, if he did, which offer to choose. Dirk had done his own research, even finding helpful state and IRS instructions and forms. But he didn’t want to make a mistake, waste time and money, and have to start over. Where should he start? And should he try it alone or get help? Dirk just didn’t know, and not knowing kept him from starting.

Assistance

Whether you need help forming your 501(c)(3) organization depends on several things. One of those things is your own education, sophistication, and procedural and administrative skill. If you are a complete neophyte at administrative matters, then you may well need help. If, on the other hand, you’ve done business, government, financial, or other administrative work before, then you may be able to muddle your own way through. Following this guide closely can obviously help. I’ve helped a hundred or two hundred clients form 501(c)(3) organizations, some with just a few tips and forms, others while having to hold their hand tightly and do much of the work for them all the way through. My recommendation is that you keep reading this guide and taking its steps until you hit a wall or feel out of your league, and then get help. On the other hand, if you have little time for mistakes and frustrations, and you have the extra cash or a good network of professionals willing to step in, then by all means, get help.

Options

You may have several good options for help forming your 501(c)(3). Lawyers in niche and general practices don’t generally know 501(c)(3) laws, forms, and procedures. Some lawyers, though, can be quick and willing to learn. If you have a lawyer friend or acquaintance, then ask them about it. They may have some 501(c)(3) knowledge and experience, although that’s unlikely, or they may be willing to quickly learn the ropes. Or they may know another lawyer who can help. But beware. I’ve helped clients who went to a general practice lawyer unqualified to help with a 501(c)(3), only to have the lawyer screw it up. You may alternatively find a law school clinic or other free community resource for 501(c)(3) help, although they are few and far between. You may instead find another public charity leader who knows how to get started and is willing to help. An experienced leader’s help can be a good option, although they may not have the technical knowledge, and without a law license, they shouldn’t be outright representing you before the IRS or state as if they were a lawyer. You may also find accountants, bookkeepers, tax preparers, or similar administrative professionals willing to help, although again, if they’re not licensed lawyers, they may not have the authority, education, and experience to be effective or license to help. 

Online

Hesitate to enlist online services offering 501(c)(3) startup help. Some of those services may provide accurate, convenient, and efficient service. But my pro bono work with dozens and dozens of clients, starting 501(c)(3) organizations, taught me that the clients, their charitable dreams, and their circumstances are sufficiently peculiar and unique that trying to offer a one-size-fits-all service, of the type commonly available online, isn’t particularly helpful. I’ve had clients come to me having failed to gain 501(c)(3) public charity status, after paying and relying on online services, when they just needed a little different help than standard procedures tend to offer. Or they just lacked the technology and administrative skills to see it through to 501(c)(3) recognition with only online assistance. Sure, research online, especially on the IRS website, and by using other resources like this guide. Learn as much as you can. And go as far as you’re comfortable, on your own. Then consider finding skilled and experienced individuals, particularly licensed lawyers, who can help.

Organization

After developing a sound plan for your 501(c)(3) public charity, including a clear and inspiring purpose, your first practical step toward forming your 501(c)(3) organization is to prepare articles of nonprofit incorporation. As indicated in a prior chapter, a state nonprofit corporation is the favored form for a 501(c)(3) public charity. You have other options, but they tend to introduce further complexity.  A nonprofit corporation is the preferred form. States have nonprofit corporation acts authorizing individual incorporators to form nonprofit corporations. State agencies generally offer handy articles of incorporation forms, to simplify the incorporator’s preparation and filing of those articles with the state agency. See the example nonprofit corporation form at the back of this guide. You don’t have to choose your own state in which to incorporate but probably should do so, for convenience and the applicable law. Read your state’s articles form and accompanying instructions. If you are able, complete the form using the instructions and the general information in this chapter. Then, if you are confident that you have the articles right, file them with your state corporations bureau, paying the modest fee. You will then have formed your nonprofit corporation.

Incorporator

As just mentioned, your 501(c)(3) organization requires someone, likely you, to prepare, sign, and file articles of nonprofit corporation, as the organization’s incorporator. The organization’s founding visionary is typically the incorporator, although the founder may request an attorney or other trustworthy person with greater administrative skill to act as the incorporator. States may permit two or more incorporators, so that if you and another person or group of persons are all founders of your planned 501(c)(3) organization, you may choose to act as co-incorporators. Once the incorporator prepares, signs, and files the organization’s articles of nonprofit incorporation, the incorporator’s only remaining significant act in the usual case is to appoint the organization’s first board of directors. Once the organization has a governing board in place, the incorporator’s role is over.

Test

How you form or organize your 501(c)(3) organization is critical to your ability to qualify the organization as tax exempt. The IRS applies an organizational test to determine whether to recognize an organization’s application for tax-exempt status. To apply the organizational test, IRS examiners read your organization’s articles of nonprofit incorporation closely. The IRS also requires you to answer specific questions showing how your articles of nonprofit incorporation satisfy the organizational test. If you fail to prepare your articles correctly, you won’t be able to answer the IRS’s questions correctly, and the IRS will reject your application for 501(c)(3) status, although the IRS may offer you an opportunity to make corrections. Amending your articles to meet the IRS’s organizational test can take time, trouble, and expense. Try to do it right the first time. Follow this guide closely, and get other qualified help if you have remaining questions. The time that the IRS gives you to make corrections is usually limited, sometimes not enough time to fix the initial errors.

Name

Your organization’s articles of nonprofit incorporation will require that you choose a name for your organization. The name you choose must not contradict or cause public confusion over your organization’s charitable purpose. You should generally not, for instance, include Inc., Corp., Co., Company, or similar identifiers connected with for-profit corporations. Your state’s nonprofit corporation act may even prohibit you from doing so. Ideally, your organization’s name should instead help the public identify your organization’s charitable nature and purpose, like Save the Children, Save the Chimps, or Feeding America. Words like Services, Center, League, Network, Project, Organization, Council, Mission, and Ministries may help, as in Catholic Social Services or Guiding Light Ministries. Specific charitable fields, like environmental causes, can have other signifying words, like Nature, Club, Conservancy, Defense, or Defenders. Your organization name may also benefit from a geographic identifier like of Western New York or of South Florida. Distinct names like CureSearch and CancerCare can also help. Give your organization’s name considerable good thought. A good name can contribute a lot to an organization’s charitable purpose.

Purpose

Your articles of nonprofit incorporation must include your organization’s charitable purpose. The state form you use to complete your articles, if you choose to use the form, should have a place for you to type in the purpose clause. To qualify for 501(c)(3) tax-exempt status, your articles must state a charitable purpose. As the above chapter on your organization’s purpose suggests, focus on the population you intend to help and the unmet need or disadvantage, when describing your organization’s purpose. An example would be, “to help impoverished unwed mothers safely navigate pregnancy and delivery” or “to offer developmental opportunities for inner-city youth.” Make your description specific enough to be meaningful to donors and others but general enough to allow your organization to expand its charitable ministry. Consider including two or three related purposes and appending “and related purposes” to your description. Otherwise, you may have to amend your articles later, if your organization expands or modifies its charitable activities. Organizations must operate within their declared purposes or can face governance, regulatory, and liability issues.

Limitation

To qualify for 501(c)(3) tax-exempt status, your organization’s articles of nonprofit incorporation must expressly limit the organization’s purposes to those activities that qualify the organization for tax exemption. The IRS has specific limiting language it expects 501(c)(3) organizations to include in their articles of nonprofit incorporation. A later chapter explains those limitations. Include the IRS limiting language, reproduced below, in your purpose description. If the form does not allow you room to do so, include the limiting language as an additional article at the form’s end, and add to your purpose clause the wording, “as limited by the additional Article [#] below.” The IRS limiting language, in concise form, is as follows:

The Corporation is organized and operated exclusively as a nonprofit corporation for charitable purposes for tax exemption purposes under IRC Section 501(c)(3) and any future federal tax code. No individual has any private interest in the corporate property or earnings, no part of which shall inure to the benefit of any individual other than reasonable compensation for services. The Corporation will not influence legislation or participate in any political campaign for public office. On dissolution, the Corporation will distribute its property to another 501(c)(3) organization.

Nonstock

The nonprofit corporation act in your state may permit a nonprofit corporation to issue stock shares to sell or give to shareholders. Shareholders own the corporation, electing directors to govern it. To qualify for 501(c)(3) tax exemption, though, your corporation must generally not have shareholders. To the extent that anyone owns a 501(c)(3) organization, the owner is the public. That is, 501(c)(3) organizations are basically public trusts, carrying out their missions on behalf of the public, using assets devoted to public benefit that the organization holds in trust. Thus, choose non-stock rather than stock on your state form, if it gives you that option. 

Control

Without shareholder owners, you may then wonder who controls your 501(c)(3) organization. Your state nonprofit corporation act likely gives you two options: (1) a board of directors, re-electing directors or electing new directors on an annual basis; or (2) a group of members who elect directors at an annual meeting. You must choose one of those options, typically clearly reflected as options on your state form. To satisfy your state nonprofit corporation act and the IRS’s organizational test, you must have responsible individuals serving as directors, elected in a rational manner, continually governing your organization. Whether you should choose a directorship or membership depends on several factors, discussed below.

Directorship

A directorship organization depends on its board of directors to govern the organization. It has no members. The directors elect or reelect directors. The board is thus accountable only to the organization’s articles of incorporation and the wisdom of its own directors, as to the makeup and control of the board. As indicated above, the nonprofit corporation’s incorporator typically appoints the first board of directors. Once having done so, the incorporator effectively loses control over the organization, although the incorporator may appoint himself or herself as a director, giving the incorporator continuing influence over the board, no greater, though, than the influence of other directors. 

Decisions

Take care in your choice of directors whom you appoint as your organization’s first board. Generally, you want to choose directors who have knowledge, skill, insight, wisdom, and experience to contribute to the board. The board governs your organization, meaning that it decides major matters affecting the organization’s course and direction. The board, for instance, may choose the organization’s first paid executive director or manager. It may annually evaluate that executive director or manager, guide, discipline, or remove them, and set and adjust their compensation. The board may also approve annual budgets and new programs, sunset old programs, approve major purchases of facilities or equipment, determine whether to borrow funds to do so, and conduct periodic retreats to adopt new strategic plans. For those and other governance functions to be effective, you need wise people who understand the organization’s mission and get along well with one another.

Influence

Also take care in the directors whom you initially appoint as your organization’s first board, lest you lose all influence over the organization. You presumably aren’t forming a 501(c)(3) organization, only to see someone else hijack it for their own dream or vision. Yet depending on the first board members whom you appoint, you could quickly lose any influence over the organization. Even if you appoint yourself as one of the initial directors, the other directors may ignore your voice, outvote you, and even at the next directors election vote you off the board, effectively ousting you from the organization you formed. Consider choosing board members whom you trust, with whom you have a longstanding relationship, and who you believe will remain accountable to your founding vision and the purpose clause you drafted for the organization. If, on the other hand, they kick you off the board, don’t despair. Go form another 501(c)(3) organization, next time choosing more loyal and trustworthy board members.

Conflicts

You may choose family members to join you on your new organization’s board. Family members won’t be so likely to quickly oust you from your own new organization. But for 501(c)(3) recognition, you must disclose to the IRS board-member family relationships, while certifying that non-related board members outnumber and can thus outvote related board members. Thus, if you put your spouse on the board along with you, your board must have at least three other non-related board members who could, if necessary and appropriate, outvote the two of you. If you put your spouse and adult child along with you, then you’ll need four other non-related board members to outvote the three of you. As you develop your plan for your charitable organization, keep your potential directors in mind. You won’t likely succeed if you can’t choose responsible and helpful directors, and instead choose unqualified, contentious, and untrustworthy directors.

Size

The number of directors whom you appoint to your first board is also important for the same reasons given above. Your organization would benefit from wise directors with diverse skills and experience. Find an accountant and an attorney to join the board, if you can, for instance. Find a philanthropist to join the board who might thus be willing to make donations. Find other board members who have insight and experience related to your charitable mission. Make your board large enough to recruit wisdom. Yet keep your board small enough to act efficiently and with relative agreement or even unanimity. Small, new charitable organizations often begin with just three, five, or seven board members. Larger, older organizations may expand their boards to nine, eleven, or a greater number of members. Odd numbers help avoid tie votes. Your organization’s bylaws, not the articles of nonprofit incorporation, will address these details. 

Membership

A membership organization is the other option, next to a directorship, you have for control over your organization. Membership organizations work well where there is a larger body or community of individuals deeply interested in the organization’s activities. Private schools are an example, where the school’s articles of nonprofit incorporation may name the parents of children attending the school as the organization’s members. A church is another good example, where the congregation’s members would make an appropriate membership to vote annually for the church’s governing board. Literary societies and scientific or professional associations with members are likewise good candidates to choose membership control over directorship control. Membership organizations add a layer of complexity and uncertainty, defining, counting, giving notice to, and meeting and dealing with members. But membership control may keep the organization accountable to those individuals whom the organization serves. Choose wisely between a directorship and membership.

Financing

Your state articles of incorporation form may require your organization’s articles to reflect your plan for financing the organization. The IRS organizational test for 501(c)(3) status requires IRS examiners to ensure that the financing plan you state in your organization’s articles of nonprofit incorporation can satisfy the public-support test for public-charity status. A later chapter addresses financing and the public-support test in much greater detail. But in your organization’s articles of incorporation, your financing plan should include language like “public support in the form of contributions, donations, and gifts,” whether or not you also include government and foundation grants, and receipts from the sale of goods and services. If your organization’s articles of incorporation do not include financing language meeting the public-support test, the IRS may deny your organization’s 501(c)(3) application for failing to meet the organizational test.

Agent

Your state nonprofit incorporation form will also likely require you to name the organization’s resident agent including the agent’s street address. A resident agent is the corporate representative whom you designate to receive service of process. If someone wishes to sue your organization, they must serve a summons and complaint on an appropriate representative. That representative is the organization’s named resident agent. You, the organization’s founder and incorporator, can and perhaps should be your organization’s resident agent. If, however, you travel frequently, don’t have a consistent home location, and already have someone else more responsible than you connected with your organization, then name them, with their permission of course. You can also pay a company to act as your organization’s resident agent, to forward service of process on to you. You may change your organization’s resident agent later, as necessary.

Filing

Once you have completed and signed the articles of nonprofit incorporation, you must file them with your state’s corporations bureau. See the bureau’s instructions. The bureau may permit electronic filing if you prefer that option over mail or delivery. The bureau will likely require a modest fee. If the articles you submit do not meet the bureau’s requirements, they may send them back to you with the deficiencies noted for your correction and resubmission. If the state form asks for the preparer’s telephone number, be sure to include it. A bureau official may call the preparer to notify of a technical deficiency, offering to correct the deficiency with telephone permission. Otherwise, if the form is complete and correct, the bureau will file the articles, assign the organization a state identification number, and return the articles to you with the number and indicia of filing stamped on the articles. Retain the original file-stamped articles in your organization’s records, and share copies of the articles with the IRS and others as appropriate and necessary. The filed articles are publicly available, typically viewable online with a simple search. And congratulations. You’ve formed your charitable organization. 

Key Points

• Reasonable skills may enable you to form your own organization.

• Follow this guide, state and IRS information, and other resources.

• Get help from lawyers, accountants, and nonprofit leaders if necessary.

• Use state nonprofit incorporation forms if available.

• You are likely your organization’s proper incorporator. 

• Prepare nonprofit articles of incorporation to meet the IRS test.

• Choose a sound name identified with your charitable purpose.

• Describe the charitable purpose accurately, without suggesting profit.

• Include the IRS limiting language with your charitable purpose.

• Choose the non-stock form, not the stock form, of corporation.

• Your appointed board controls the organization. Choose it carefully.

• Choose a membership organization only if serving members.

• Include public support in donation form as your financing plan.

• Name yourself or another responsible person as resident agent. 

• File the articles with the state corporations bureau.

• Share file-stamped copies of the articles with the IRS and others.

Read Chapter 7.