To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must generate a public (as opposed to individual) benefit. It also must further a tax-exempt purpose.
The 501(c)(3) tax-exempt purposes are: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
501(c)(3)s are prohibited from engaging in a substantial amount of lobbying and political activities.
501(c)(4)s are nonprofit organizations that may engage in some lobbying and political activities if those activities coincide with the organization’s social welfare purpose. Expenses and funds used in these political activities, however, may be subject to taxation.
Some examples of 501(c)(4) organizations are homeowner associations, volunteer fire departments, and community service organizations.
501(c)(6) organizations are nonprofit business leagues. A business league is operated to promote a common business interest and to improve business conditions in an industry. These organizations may engage in some lobbying and political activities, but the associated expenses and funds may be subject to taxation.
This document acts like a charter establishing a corporation. The document is filed with the Indiana secretary of state through an online form.
The board of directors is the governing body of a nonprofit. Individuals who sit on the board are responsible for overseeing the organization’s activities.
Board members meet periodically to vote on the affairs of the organization. At a minimum, an annual meeting must occur with all board members present. Additional meetings are likely to take place throughout the year so board members can discuss and make necessary decisions.
Board memberships are not set up to be permanent positions; most organizations have terms for board members, which typically fall between two and five years.
Bylaws are an organization’s internal operating rules. Federal tax law does not require specific language in the bylaws of most organizations. State law may require nonprofit corporations to have bylaws, however, and nonprofit organizations generally find it advisable to have internal operating rules.
An EIN is used to identify a business entity, similar to the way you, as an individual, would be identified by your social security number. Businesses generally are required to have an EIN.
When beginning a business, you must decide what form of business entity to establish.
The most common forms of business are: sole proprietorship, partnership, corporation, S corporation, and limited liability company (LLC).
Legal and tax considerations enter into selecting a business structure. Your form of business determines which income tax return form you have to file.
This term is generally used to describe organizations that are exempt from federal income taxes. Organizations that receive tax-exempt status from the IRS may also apply for exemption from state income and sales tax in Indiana.
Questions to consider before starting a nonprofit
Do you have less than $5,000 per year in gross receipts? Any organization that has gross receipts in each tax year of normally not more than $5,000 are not required to file for tax exemption. For more information on gross receipts exceptions, go to irs.gov/charities-non-profits.
Are you able to maintain formal business records? As a nonprofit, your organization must maintain accurate business records of all activities, revenues, and expenses.
Can you fill your board of directors? Indiana requires a minimum of three board members at all times. When a board member leaves, another must be elected or appointed.
Does your organization have a proper tax-exempt purpose? Those purposes are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Is your organization large enough to justify forming a corporation? If your membership is small and your organization does not handle much revenue every year, you may not be large enough to justify the expense and obligations that go along with forming a nonprofit.
Can your organization afford to form a nonprofit? The cost to file an application for tax-exempt status starts at $275. The cost to file articles of incorporation in Indiana is $93.
Step-by-step instructions for starting a nonprofit
Choose a name for your organization. The name should be unique and should reflect your mission and purpose. It should also include the words “Company,” “Incorporated,” or “Corporation” as part of the name; for example, ABC Company, ABC Incorporated, or ABC Corporation.
Choose a registered agent. This should be someone you trust, who will be at the same address for a significant period of time. The registered agent will receive all official documents. You may change the registered agent but it is easier to not have to amend them each year.
Decide who the initial incorporators will be. These are the people who sign the articles of incorporation. They will stay the same; they can never be changed, even after they are no longer affiliated with the organization.
Decide if you’d like to be a membership organization. Membership organizations do business by vote of the members and can collect dues.
Consider setting up an email address for your organization. An email address allows all email communication to come to one central inbox. If anyone leaves the organization, nothing is lost.
File articles of incorporation with the State of Indiana.Complete Form 4162 and mail it along with the filing fee.
Set aside at least 15 minutes. Once you begin, you must complete the EIN application in one sitting.
Be able to identify yourself. The person completing the application must have a valid taxpayer identification number (such as a social security number or an individual taxpayer identification number).
Keep your EIN in a safe place. You will receive an employer identification number immediately after you complete the application.
Have your EIN ready. You will need your EIN to open a bank account.
Choose who will have access to the account. Bring them with you to the bank. Officers or directors should have access to the account, but limit access to certain trustworthy people.
Go to a bank. Choose a local branch of a bank you know and trust, and try to find a bank account with no yearly fees, such as a free business checking or similar account. If possible, call ahead and make an appointment.
Choose a category that best fits your organization:
Purpose: must be operated for an exclusively religious, charitable, scientific, public safety testing, literary, or educational purpose
Funding: comes primarily from charitable contributions, gifts, and grants
Deductibility of payments: charitable contributions and gifts are tax-deductible by the donor
Political activity: may not endorse a candidate for public office or engage in substantial lobbying activities
Purpose: operated exclusively to promote social welfare (if your organization plans to engage in significant and regular political activity, this may be the right designation for you)
Funding: primarily from donations, which are not tax-deductible
Deductibility: most contributions are not tax-deductible, but some contributions may be tax-deductible as trade or business expense; expenses made for political activities are subject to taxation
Political activity: may engage in unlimited lobbying if it furthers the organization’s social welfare purpose; may engage in other political activities
Purpose: operated to promote a common business interest and to improve business conditions in an industry
Funding: comes primarily from member dues
Deductibility: payments (including member dues) to the organization are tax-deductible as trade or business expenses to the extent that they are not going directly toward lobbying or other political activities; payments are not considered charitable contributions under the tax code
Political activity: may engage in most political activities; must disclose to members what portion of dues is used for lobbying
If your organization is a 501(c)(3), file Form 1023. There are two versions of this form: the long form and the EZ, which is much shorter. Use the checklist starting on page 13 of the instructions to determine if you qualify for the 1023-EZ.
Establish procedures for electing board members, holding meetings, and voting. Remember to update your bylaws regularly.
File a Form 990 with the IRS. The 990 is due every year by the 15th day of the fifth month after the close of your tax year. For example, if your tax year ended on December 31, the form is due May 15 of the following year.
If your organization made less than $50,000 in gross receipts, use the 990-N.
If your organization made less than $200,000 in gross receipts and had total assets less than $500,000 at the end of the year, use 990-EZ.
Start a local chapter of a national nonprofit. Look for a national organization with a purpose similar to your own that is willing to start a local chapter in Bloomington. This option saves your organization the time and expense of starting a nonprofit on your own, but allows you to continue your mission.
Start an informal social club. If your organization makes an insignificant amount of revenue, hosts activities that are local and small, and does not involve a lot of traveling, sports, physical activity, or other events that would expose its members to injuries or other risks, you might consider maintaining an informal social club.