To start a nonprofit organization, you take the same steps as starting a for-profit corporation: You file articles of incorporation and appoint a registered agent in your formation state. If you want to apply for tax-exempt status, you must include a public purpose provision and provide that any distributions go only to exempt organizations.
A nonprofit organization has all the formalities and protections of a corporation, except it does not have shareholders and it cannot operate to make a profit for its organizers, officers or directors. Like a regular corporation, a nonprofit is formed under state law and offers asset protection for the directors, trustees, officers or members. However, quite unlike a regular corporation, a nonprofit exists for charitable purposes or to serve the public good—it does not exist to make a profit for its owners. (In fact, no part of the organization’s income can go to benefit its members, directors or officers.)
A nonprofit can be a church or church organization, school, charity, medical provider, legal aid society, volunteer service organization, professional association, research institute, museum, or sports organization.
CT tip: A nonprofit organization does not automatically have tax-exempt status. Nonprofits must apply for tax-exempt status with the IRS, and sometimes at the state level as well. For more information on becoming a tax-exempt organization, see our article "[Obtaining Tax-Exempt Status for Your Organization]."
Articles of Incorporation must contain specific language
A nonprofit corporation is created when articles of incorporation are filed with, and accepted by, the formation state. In this regard, forming a nonprofit is like forming a for-profit corporation. And, as part of the initial filing process, the nonprofit also must appoint—and continuously maintain—a registered agent in the formation state.
However, there are some critical differences between forming a for-profit and a nonprofit corporation. Unlike a regular corporation, nonprofit corporation does not issue stock. There are no stockholders or shareholders, although the corporation may have members who may be entitled to vote on governance issues. Plus, the articles of incorporation must include certain clauses if the organization wants to apply for tax-exempt status.
To be eligible for tax-exempt status, the articles must specifically reference a public purpose and must provide that any distributions will not go to the organizers or members of the corporation. If this language is not included in the original articles of incorporation, the IRS will require that you amend the articles before applying for tax-exempt status.
Purpose Clause. While a for-profit corporation often uses a general purpose clause, such as “conduct any business not prohibited under the laws of the state,” a nonprofit must specifically state that it is organized exclusively for a charitable, religious, educational, or scientific purpose.
CT tip: If you are not sure you want the organization to be organized exclusively for one of these tax-exempt purposes, you may want to investigate forming a [benefit corporation]. A benefit corporation allows the stockholder to enjoy profits while the corporation actively benefits a public good.
Distribution Clause. In order to be a tax-exempt organization (and most nonprofits seek tax-exempt status), founders, members, directors, and officers can’t receive any benefits from the corporation other than reasonable compensation for services that they perform. This “no private benefit rule” applies not only while the corporation is operating, it continues to apply when the organization terminates. Upon termination, distributions can be made only to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code or to the federal government. This means that the articles of incorporation must indicate that the assets of the corporation will not be distributed to private individuals or for-profit businesses.
In addition to having specific language in its articles of incorporation, a nonprofit may need approvals from specific state departments or agencies before filing the articles of incorporation. In New York, for example, several state agencies must approve of the business purpose of the nonprofit. This requires additional time and fees.
Nonprofits must comply with post-formation formalities
Because the nonprofit is a corporation, it must comply with all the usual corporate formalities, except issuing shares of stock. These include holding annual meetings of directors and members, adopting bylaws, and recording meeting minutes. It also needs to get a [federal tax ID number] from the IRS. Some states also require a state tax identification number, so it is important to check with local taxing authorities.
Remember, tax-exempt status is not automatic. You must apply for [tax-exempt status] with the IRS. This can be a complicated and lengthy process, so you may wish to work with a tax professional. In addition, some states also require paperwork to be filed in order to receive tax-exempt status. Many states also require charities to register before conducting any business. Check with local authorities to make sure you've complied with all state requirements.