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Not-for-Profit & IRS 501(c)(3) Tax Exempt Entities


Did you know a nonprofit corporation must be formed just like any other corporation? There is no difference in the actual formation process, except that there are IRS applications and the description of your business purpose must be carefully and adequately noted. Look carefully at our section devoted to Formation Services before moving on. In most states, what distinguishes a nonprofit corporation from any other corporation, and allows the tax-exempt status is its request that the IRS treat it as a corporation with tax-exempt status. The formation process is discussed below.

What's in a Name?

Most states require that the corporate name include an identifier, such as “Corporation,” “Company,” “Incorporated,” or “Limited.” You can also use an abbreviation of those terms (Corp., Co., Inc., Ltd). Next, do a bit of research to make sure your chosen name is not already registered.. Most states require some distinguishing between existing business names and your proposed company name.

What is the Nature of Your Business?

The first thing you need to do is establish the purpose and mission statement for the organization. This is the most important aspect to your formation process because it will be carefully scrutinized by the IRS to make sure that your stated purpose is in line with the IRS Code for tax-exempt status. Every purpose and mission of every nonprofit organization must include a statement that the earnings of the nonprofit are for the sole purposes supported by the Articles of Incorporation and that these purposes are within the provisions of the IRS Code, Section 501(c)(3). This is especially important if you want tax-exempt status. Basically, whatever the purpose, it can not be to make a profit and that purpose must be a benevolent one.

While there are nonprofits formed under 501(c)(4) through 501(c)(27) organizations, a nonprofit formed under IRS Code, Section 501(c)(3) is either a public charity or private foundation for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children.

So How do You Want to Operate?

Generally, 501(c)(3) organizations fall into one of two classes, commonly referred to as “public charities” and “private foundations.” Public charities usually include churches, educational organizations that normally maintain a regular faculty and curriculum, hospitals and medical research organizations – the type of organizations that receive substantial support from a governmental unit or from the general public.

A private foundation is a nonprofit organization which is usually created via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors. Private foundations - charitable organization that, while serving a good cause, do not qualify as a public charity by government standards - fall into two classes, “private operating foundations” and “private non-operating foundations.” Private operating foundations are private foundations that use the bulk of their resources to provide charitable services or run charitable programs of their own. Private operating foundations generally do not raise funds from the public. By contrast, private non-operating foundations merely disburse funds to other charitable organizations.

So How is Your Not-for-Profit Like any Other Corporation?

They all need to designate a Registered Agent, a person who is responsible for receipt of legal documents for the nonprofit. This person must have a physical address (P.O. boxes are not acceptable) in the state of incorporation. If you reside in the state in which you incorporate, you can serve as your company’s registered agent. The registered agent must be available during normal business hours and is responsible to receive legal documents on behalf of the nonprofit. If you do not live in the state of incorporation we can either direct you to our preferred registered agent or order those services on your behalf.

All corporations, including non-profits, need an Incorporator, an individual (usually your attorney) who prepares, signs and files the documents with the secretary of state.
All corporations require directors - the individuals responsible for major decision-making and the general direction of the nonprofit. Director elect company officers who oversee the day-to-day activities of the organization. Generally, a president, vice president, secretary and treasurer will be included in the list of company officers.

Because the creation of a not for profit company requires a traditional formation of a company, please review our entity Formation Services page for more on company formation and incorporation.

Once you have properly formed your corporation on the state level, you will want to request nonprofit status on the federal level. Merely filing your Articles of Incorporation with the state, even with a stated charitable purpose, does not automatically grant your company tax-exempt status. The next step is actually to apply for tax-exempt status. It is essential that you apply for tax-exempt status with the IRS within 15 months of the Articles of Incorporation filing date to obtain a retro-active tax exemption. The IRS exempt-status application (User) fee is $300 for a non-profit that expects gross receipts averaging not more than $10,000 per year for the first four years. The application fee is bumped up to $750 for organizations that anticipated gross receipts in excess of that number. The IRS likely will take at least four months to process all of your paperwork and issue your tax exempt status if you qualify for such status. So plan carefully and make sure your paperwork is accurate and in order to minimize delays in the application process.