The Legal Steps to Starting a Nonprofit Organization

Starting a nonprofit organization is a rewarding way to make a difference in your community or on a larger scale. However, the process involves several legal steps to ensure your organization operates in compliance with federal, state, and local regulations. Understanding the legal requirements is essential to avoid potential issues down the road and to establish a solid foundation for your nonprofit. In this blog post, we’ll walk you through the key legal steps involved in starting a nonprofit organization.

1. Determine the Type of Nonprofit You Want to Form

Before taking legal steps, it's important to understand the type of nonprofit organization you want to create. Nonprofits can serve a variety of purposes, including charitable, educational, religious, scientific, or social causes. Your organization's mission and goals will help define the structure and legal requirements it must meet.

Most nonprofits fall under the 501(c)(3) tax-exempt status, which includes charities, educational organizations, and religious groups. This status allows the organization to be exempt from federal income taxes and makes donations to the nonprofit tax-deductible for donors. However, other types of nonprofits may qualify for different tax statuses, such as 501(c)(4) for social welfare organizations or 501(c)(6) for trade associations.

2. Choose a Name for Your Nonprofit

Your nonprofit organization will need a unique name that reflects its mission and complies with your state's naming rules. The name should not be misleading, and it must be distinguishable from any existing organizations registered in your state.

Before finalizing your name, check for the following:

• State registration: Ensure the name is available by checking with your state’s business registration office.
• Domain availability: If you plan to create a website, check that the domain name is available.
• Trademark search: Conduct a trademark search with the U.S. Patent and Trademark Office (USPTO) to ensure the name isn't already trademarked by another organization.

3. Appoint a Board of Directors

Most states require nonprofit organizations to have a board of directors to govern the organization. A board typically consists of at least three members who oversee the nonprofit’s operations, finances, and compliance with laws.

The board members must:

• Act in the best interests of the nonprofit and avoid conflicts of interest.
• Be responsible for key decisions, such as hiring executive staff, setting policies, and managing funds.
• Keep accurate records and oversee audits if necessary.

Ensure that your board members are familiar with their responsibilities and are dedicated to the nonprofit’s mission. Having a strong and committed board is critical to the success and legal standing of the organization.

4. Draft Your Nonprofit’s Bylaws

Bylaws are the governing rules for your nonprofit organization and outline the structure of the board of directors, membership requirements (if applicable), and the overall operations of the organization. They must comply with state laws and help guide decision-making processes, such as:

• How board members are elected or removed.
• How often meetings will be held.
• Procedures for financial audits and record-keeping.
• How to handle conflicts of interest.

Bylaws are an essential legal document and should be carefully drafted. It’s often helpful to consult an attorney to ensure they comply with local and state laws.

5. Incorporate Your Nonprofit

To formally establish your nonprofit, you must incorporate the organization with your state. Incorporating provides legal protection for your board members, directors, and employees by separating personal and business liabilities.

To incorporate, file Articles of Incorporation with your state’s business filing office. This document includes:

• The nonprofit’s name, address, and purpose.
• A statement indicating that the organization will not engage in political campaigning or lobbying activities (required for 501(c)(3) status).
• A provision outlining the distribution of assets in case the organization dissolves (typically, assets must go to another 501(c)(3) organization).

Pay the required filing fees, and ensure that your organization complies with state-specific rules for nonprofit incorporation.

6. Apply for Federal Tax-Exempt Status (501(c)(3) or Other)

After incorporating, the next step is to apply for federal tax-exempt status through the IRS. If you want your nonprofit to be tax-exempt under Section 501(c)(3) of the Internal Revenue Code, you must submit Form 1023 (Application for Recognition of Exemption). This form is detailed and requires information about your nonprofit’s structure, mission, programs, and finances.

The IRS may take several months to process your application. If your nonprofit qualifies, it will receive a determination letter confirming its tax-exempt status, which will allow it to:

• Avoid paying federal income tax.
• Receive tax-deductible donations.
• Apply for state and local tax exemptions.

If your organization doesn’t qualify for 501(c)(3) status, there are other types of tax-exempt designations under 501(c) that might apply, such as 501(c)(4) or 501(c)(6).

7. Apply for State and Local Tax Exemptions

In addition to federal tax-exempt status, you may need to apply for state and local tax exemptions, such as state sales tax exemptions or property tax exemptions. These rules vary by state, so it’s essential to check with your state’s department of revenue or equivalent agency to ensure compliance.

Some states may automatically grant tax exemptions to organizations with 501(c)(3) status, while others require separate applications for exemptions. Be sure to file all necessary paperwork to take full advantage of your nonprofit's tax-exempt status.

8. Obtain Necessary Licenses and Permits

Depending on your nonprofit’s activities and location, you may need various licenses or permits to operate legally. These can include:

• Fundraising licenses: If you plan to raise money from the public, many states require nonprofits to register as charitable organizations before soliciting donations.
• Business licenses: If your nonprofit will be conducting business activities, such as selling goods or services, you may need a general business license.
• Employee identification number (EIN): If your nonprofit has employees or plans to open a bank account, you must obtain an EIN from the IRS. This number is necessary for tax reporting and employee-related purposes.

9. Comply with Ongoing Reporting and Compliance Requirements

Once your nonprofit is up and running, there are ongoing compliance requirements to maintain its status. These typically include:

• Annual filings with the IRS: Nonprofits are required to file annual returns, such as Form 990, to provide transparency and accountability about their finances and operations.
• State filings: Some states require annual or biennial reports to keep your nonprofit’s status active.
• Financial audits: Depending on your nonprofit’s size and revenue, you may be required to undergo regular audits or submit financial statements.

Conclusion

Starting a nonprofit organization involves careful planning, legal filings, and ongoing compliance efforts. By following these legal steps—choosing your nonprofit type, drafting bylaws, incorporating, applying for tax-exempt status, and maintaining good governance—you’ll establish a solid foundation for your organization’s success. Whether you're working toward social change, education, or health-related causes, understanding and navigating the legal requirements is critical to running a compliant and effective nonprofit.