Chapter 6 —
Becoming a Nonprofit Organization
If your group decides to provide more extensive services to your community, you will most likely need to find more sources of revenue. A group that incorporates and obtains tax-exempt status in the United Statesunder section 501(c)(3) of the Internal Revenue Codecan apply for grants from foundations and accept tax-deductible donations from individuals and organizations. (See information for how to become a nonprofit organization in Canada at the end of this page.)
The benefits of incorporating and obtaining federal tax-exempt status are:
- Donors to groups that have 501(c)(3) status can claim tax deductions on their gifts, which encourages them to make those contributions.
- The organization can apply for foundation grants.
- The organization is often taken more seriously by foundations, donors, and others.
- The organization can obtain nonprofit mailing privileges.
- Depending on the state, there may be exemptions from certain state taxes or sales taxes.
- Incorporating decreases the liability of individual members and officers.
- Incorporated groups can purchase insurance for members and officers.
Making the Decision
There is no right or wrong answer to the question of whether your group should become a nonprofit organization; it depends solely on the group's goals. If your group wishes to keep it simpleremaining a place where members talk out problems and help each other with parenting concernsyou may not need the benefits that nonprofit status offers. On the other hand, if your group is ready and eager to offer classes, set up a web site, publish a newsletter, or host a conference, you will most likely want to secure more revenue. Incorporating and obtaining 501(c)(3) status will open doors for greater funding to accomplish these goals.
Are you ready to become a nonprofit?
- We are ready to offer services that will require initial fundraising.
- We are ready to do fundraising or apply for grants.
- We have enough group structure to identify officers and write bylaws and articles of incorporation.
- We have financial management procedures in place.
- Someone in our group is willing to manage all of the paperwork for the application process.
Groups should decide whether or not they wantto hire a lawyer to complete all the paperwork for incorporation and 501(c)(3) status. Some groups have a lawyer as a member who can help them, and some groups find a lawyer who is willing to do the work pro bono (for free). After looking at their limited budgets, many group leaders decide to prepare the paperwork themselves. It can be donemany leaders have successfully completed the process without assistance from a lawyer.
If you choose not to seek legal help but want more information, the following suggestions should help get you started:
- Go to your local law library (located at the county court house or in a law school) and ask the law librarian to help you find the state statute that governs the incorporation process.
- Call the general information number for your state government to determine which agency handles incorporation. In Minnesota, for example, it is the Secretary of State. Clerks can tell you where to get blank forms and possibly samples of completed documents.
- If you have access to the Internet you can also go to your state department's web site to find information on incorporation and bylaws. You can also get the federal guidelines at www.irs.gov and see examples of finished documents. Similar information is available at www.nonprofitlaw.com and from NACAC.
If you have questions during the process, don't hesitate to ask another group leader who has been through the process or contact NACAC.
Three Steps to Becoming a Nonprofit
- Write, then file your group's articles of incorporation to become incorporated in your state. (Incorporating will formalize your group but will not enable it to receive tax-deductible donations. Donations won't be tax-deductible until you obtain 501(c)(3) status.)
- Write your group's bylaws.
- Complete and file IRS Form 1023 along with your group's articles of incorporation, bylaws, and the filing fee. This step should be completed within 15 months of becoming incorporated in your state.
To get started, your group will need to gather and create the following information:
- group name
- mission statement
- officerspresident, vice president, secretary, treasurer
- board of directors
- group goals: a plan of the activities or programs your group wants to do and a written narrative describing that plan
- financial information from the current year and the three preceding years; if the group has only been in existence for the past yearthe current year plus projected finances for the next two years
Taking time to clarify who you are as a group, what your goals are, and how you want to accomplish those goals will help prepare your group for the paperwork required by your state and the Internal Revenue Service (IRS). When your group completes the six points listed above, you will have brought together the information you need for the articles of incorporation and bylaws, as well as information you will later use to file for 501(c)(3) status.
Name and Mission Statement
You will need to name your group and create a mission statement if you haven't done so already. If you already have a name and mission statement, this is a good time to revisit both to make sure they reflect who you are and what you want to become.Make sure your name reflects your missionIf you chose a name like Park Avenue Parent Group in the past, and now your group wants to serve the area beyond Park Avenue, you need to think of a name that has a broader scope and is not restricted geographically. Maybe a name like Midwest Adoptive Parent Association is better suited to your group. If you started out as an adoption group and call yourself Adoptive Families United, but now include foster parents as members, you should think about changing your name. If you have any doubts about your name, now is the time to change it.
After your group agrees on its name you will need to call the agency in charge of incorporating to make sure that no other organization has the name you are considering. When you call, the clerk will only let you investigate a few names at a time, but you can have other group members call if you need to check multiple names.
Make sure your mission reflects who you have become. If you wrote a mission statement a few years ago and your group's services have changed or some of your values have changed, you will want to revisit your mission statement and change it to reflect your group now. For example, if your focus has shifted from serving parents to serving children or entire families, you may want to include that in your mission statement. Think this through carefully and make sure your mission statement does not describe who you used to be, but rather represents who you are presently, and who you want to be into the future.
Activities and Services
Now is the time to generate a list of the group's current goals: the programs, training, and services the group now wants to provide. (See chapter 4 for more information on the planning process.) Maybe you want to write a newsletter or provide post-adoption training and workshops in your area. Think of the content of the workshops and the audience you want to reach or how often you might publish a newsletter and how many pages it will be. Note that there are some restrictions on the activities that a nonprofit tax-exempt organization may engage in, such as lobbying, as outlined by the IRS. (See box below.)
Lobbying as a Nonprofit Activity
There are restrictions on the amount of time and money a nonprofit organization can spend on lobbying. According to the IRS, an organization seeking 501(c)(3) status "may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates." Legally a nonprofit organization can advocate for causes and educate the public without restriction. At the same time, nonprofits can only be involved in a minimal amount of lobbying (to influence the voting of legislators) and can only use a small percentage of the group's budget for lobbying. The law, however, is vague about exactly what constitutes a small percentage.
If lobbying is one of your group's goals and you want to avoid the vagueness of the law, or spend more time and money on lobbying, you can elect to come under the provisions of the 1976 lobby law and file IRS form 5768Election/Revocation of Election by an Eligible 501(c)(3) Organization to Make Expenditures to Influence Legislation, at the same time the group files for 501(c)(3) status. Your group will be subject to tax on your lobbying activities.
If you have further questions about lobbying, you can read about lobbying issues for tax-exempt charitable organization at www.irs.gov or seek the advice of a lawyer.
When you submit your application to the IRS, you will be required to provide a narrative describing the activities and the programs your group wants to provide with a brief analysis of how those activities fit the qualifications for tax-exemption. It is important to be as specific as possible.
When you formalize your group, you will need to list the officers who will carry out the duties necessary to run your organization on your application form. Decide who will be the co-leaders or the president and vice president. You will also need someone to do the duties of a secretary and a treasurer. A president or vice president needs strong leadership qualities, while a successful secretary has good organizational and communication skills. The ideal treasurer is adept at setting up a system for recording financial transactions and tracking income and expenditures.
Board of Directors
Your group will need to select board members to oversee the operation of your group when it becomes a nonprofit organization. According to the Minnesota Council of Nonprofits, it is "the board's responsibility to ensure the organization's effectiveness, manage resources, and assess its own performance." Determine the number of board members you will need (you should have a minimum of 5; always use an odd number to prevent ties), the election process, the number of board meetings per year, the length of a term (the IRS says no more than 10 years), and the number of terms allowed.
Officers are usually included as board members. When you begin to generate names of other possible board candidates, think of people from your community who have an interest in your mission, have talents to offer, and would be willing to donate their time. Clearly spell out to candidates the roles and responsibilities of serving on the board when you ask them to join.
You may hear the word budget and think, "What budget? We don't have a budget." Look back over the past three years and think of the activities your group has done. Almost anything a group does costs some amount of money, even providing treats or child care for a meeting. Determine what your expenditures were and where the money came from to pay those bills. Gather this financial data and be ready to show your receipts for expenses. If members currently pay the bulk of your bills, this money is still considered part of the group's income. Include donations made by friends or family. Membership dues are often another source of income for the group.
If your group has only been in existence for one year, then identify expenditures for that year and project financial information for the next two years. See chapter 7, Financial Management and Fundraising, for more information on making a budget.
Taking Your Group to the Next Level
Several years ago, a parent group in Ohio had great group attendance and families celebrated triumphs and helped each other work through problems. At the same time, something was missing for this group. In addition to helping its members, this group wanted to do more for their community, and the leaders realized any future services would take money.
The group incorporated, and then went through the process of obtaining nonprofit status. Since the group became a nonprofit organization, it has raised enough money to offer a regional conference on the African American family, host several adoption fairs, and provide workshops on transracial adoption and other topics. It has earned statewide respect and the group's leaders are often asked by Ohio's media and community to give their opinion on issues about adoption and African American children. Having formal nonprofit status really changed this group's services and position in the community.
Writing Articles of Incorporation
When you have completed the above-mentioned steps, you will be ready to write the articles of incorporation and file them with your state. The legal requirements and specific information that should be included in the articles varies from state to state. Fees can vary as well (about $25 to $100).
The following information is usually found in articles of incorporation:
- name of the organization
- purpose for becoming a nonprofitthe group's goals, programs, training, services, and the demographics of who will be served
- name of the principal agent and others willing to be incorporatorssuch as president, vice president, secretary, or treasurer
- address, county, and state where the president resides
- number of board members, including names and addresses
- dated signature of the principal or registered agent
When drafting your articles of incorporation you want to be sure to include the legal language that meets both state and federal requirements if your group is also going to apply for 501(c)(3) status. (Download a PDF of sample articles of incorporation.)
Bylaws serve as a formal set of rules that regulate the affairs of an organization. When writing the bylaws your group can incorporate its own information into a template with the necessary legal language. Bylaws are filed with the IRS as a part of the 501(c)(3) application process and include:
- Membership: Describe the composition of your membership.
- Meeting requirements: Include when and how meetings occur, notice required for meetings, process for calling special meetings, quorum, or voting.
- Board of directors: Include how many members are on the board of directors, the election process, number of meetings per year, length of term, number of terms allowed, vacancies, voting procedures, officers, resignation, termination, and standing committees.
- Fiscal management: State when the fiscal year ends, name the officer or committee responsible for fiscal management, and policies governing the use of funds.
- Amendments: List your group's guidelines for amending the bylaws.
Check with your state to determine its specific rules related to bylaws. (Download a PDF of sample bylaws.)
Filing for Tax-Exempt Status
This final stepcompleting the IRS forms for tax-exempt statusis probably the most difficult part of the process. There are many questions to answer in the application form and it can seem overwhelming. Keep in mind that the IRS will understand that, as a new organization, some of what you write will be your best guess, especially information related to funding and budget.
To file for tax-exempt status you will need the following items from the IRS:
- Publication 557Tax-Exempt Status for Your Organization explains rulings, regulations, and how to apply for 501(c)(3) status. This booklet helps you with application form 1023.
- Form 1023Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code is the actual application form. The form is 29 pages, but you will need to complete only 9 pages.
- Form 872-CConsent Fixing Period of Limitation Upon Assessment of Tax Under Section 4940 of the Internal Revenue Code. This form needs to be filled out in duplicate, signed, and sent in with Form 1023. It allows the IRS to give new groups five years to prove they will be publicly supported. Two copies of this form are contained within the 1023 application booklet, immediately following page 9.
- Form 8718User Fee for Exempt Organization Determination Letter Request is a one-page form that determines your filing fee and provides space to attach your check. If your group's annual gross receipts are less than $10,000, your fee is $150, and if these receipts are more than $10,000, your fee is $500. This form should also be sent to the IRS along with Forms 1023 and 872-C.
- Form SS-4Application for Employer Identification Number can be filed as soon as your group is incorporated. The Employee Identification Number (EIN) is a nine-digit number that the IRS assigns to your organization. Information you provide on the form establishes your business tax account. If you haven't previously applied for the number, write "applying for" in line 2 of Part I of Form 1023, and the IRS will assign your group a number and send you the form. Do not apply for an EIN more than once. Processing an EIN takes about 10 days. Banks require this number before an organizational account can be opened.
You can get Form 1023, along with hints for how to fill out each section of the application, at www.nonprofitlaw.com, www.irs.gov, or from NACAC.
The above forms should be filed within 15 months of incorporation if you want the tax-exempt status to apply back to the date of incorporation. (Double check the exact number of months for your state because this can vary.) The average processing time for Form 1023 is 100 days. Applicants who state in their description of activities that they publish a newsletter or brochures might be asked to send examples. To avoid any processing delay, it would be easier to include samples with your application.
Before you submit your completed application:
- Use the checklist provided with the application to make sure all required information is included.
- Make photocopies of the completed forms. (The IRS will not return your originals.)
- Make sure you have attached the appropriate fee to your application or it will be considered incomplete and returned to you without being processed.
- Attach your state-approved articles of incorporation and bylaws.
- Have your principal or registered agent sign page one of Form 1023.
After you have sent in the federal forms and you have your EIN, there are some additional things you can do. Depending on your state, some may apply to you and others may not.
- Find out if you can apply for a sales tax exemption in your state (some states don't offer this). Start by calling your state's Department of Revenue.
- Before you do any individual solicitation of funds, check to see if you need to register as a charity in your state (some states require it) and how it might benefit your group. Check to see if there is a "charities division" in your state Attorney General's Office or look for the state office that oversees charities in your state. If you find you need to register as a charity, you may have to pay a registration fee and complete an application form.
- If your group will have paid employees, your organization can file for workers' compensation insurance and unemployment insurance. Check with the economic security or labor department in your state for information on how to apply.
- You may also want to call the US Postal Service in your state for information on how to apply for a bulk mail permit.
- All 501(c)(3) organizations must annually file Federal Form 990, Return of Organization Exempt from Income Tax, with the IRS and the state Attorney General's Office five and a half months after the end of the organization's fiscal year.
Nonprofit Status in Canada
Parent groups in Canada can incorporate at the provincial or federal level. Although most groups incorporate provincially, groups that serve all of Canada incorporate federally. The advantages of incorporating are:
- structure to guide internal decision-making
- ability to enter into contracts
- protection of individual members from liability
- potential access to more funding
- access to loans through use of corporation's assets
- bylaws set guidelines to help keep membership active and effective
Total fees for incorporating, whether you incorporate provincially or federally, usually do not exceed $300.
Parent groups need to decide whether registering for charitable status will be beneficial to them. The benefits are:
- exemption from paying income tax
- the right to issue official donation receipts to donors
- greater ability to obtain grants from private foundations, the government, and others
To apply for charitable status under the Income Tax Act, groups must register with Revenue Canada. There are four categories the courts have defined as charitable purposes:
- relief of poverty
- advancement of religion
- advancement of education
- of a charitable nature (similar to above categories but beneficial to the community as a whole)
Advocacy groups in support of controversial issues are not considered charitable by law.
An organization can apply to become a charity whether it is incorporated or not. If the organization is not incorporated, it must operate under theguidelines of a constitution that explains its structure and purpose.
Some organizations are considered a charity under provincial law, even if they are not registered with Revenue Canada. These organizations are subject to the provincial laws governing their activities, and are entitled to certain legal and tax privileges. These provincial laws also impose certain filing requirements and record-keeping obligations. Check to see if your group would be considered a charity under the laws of your province.
For information on how to incorporate provincially:
For information on how to register as a charity federally go to:
For further information on non-profits and registering as a charity go to: http://www.law-nonprofit.org/