How to Non-Profit

July 14th, 2010   |  

The IRS has established a procedure for charitable groups to apply for tax-exemption by incorporating as non-profits, known as 501(c)3 organizations. Doing so enables them to receive donations that are tax-deductible for donors, as well as receive grants from foundations and other funders.

While the procedure for applying for tax-exempt status is not difficult, it is strictly prescribed. In addition, individual states have their own rules regarding incorporation and tax-exempt status, and both levels of government have specific rules and reporting requirements to maintain a group’s status.

In simplest terms, an organization applies to the Federal Government to obtain an Employee Identification Number (regardless of whether they actually have paid employees). The group then incorporates in their home state. In Michigan, this process takes as little as four days and costs only $20.

The group then applies to the IRS for its tax-exempt status, which can take as little as two weeks. The fee for the Feds is based on the group’s expected income for the upcoming fiscal year, either $300 or $750. The basic forms and core documents required by the IRS to determine whether the group will be awarded the status are straightforward: official organization name, mission statement, constitution, bylaws, and a list of initial board of directors with contact information.

Even though the documents required by the IRS are also the basic forms any organization would be wise to create, that step in the formation of the group is key. It is critical that the group answer basic fundamental questions before they write these required documents: What is the group about? What does it plan to do with any monies it collects? Where does it plan to operate? Who does it plan to serve? Will the group be member-directed or board-directed? The IRS will be looking for these answers in the core documents to determine whether the group merits tax-exempt status.

The most successful non-profits are program-driven rather than grant-driven. Sometimes, in order to obtain grant funding, non-profits “tweak” grant applications to appeal to a particular funder, and in the process, “stretch” their mission in order to qualify under the funder’s guidelines. This is not a wise idea for several reasons.

First, non-profits who stray too far from their stated mission run the risk of losing their tax-exempt status; the IRS does check. Second, organizations may lose their philosophical way of chasing funds rather than improving their programs and documenting the good they actually do. Trying to be all things to all people simply doesn’t work, and funders have become savvy about such tactics.

Bottom line: charities should do some serious soul-searching about their purpose before applying for non-profit status, and then carefully craft their mission and bylaws to reflect who they are and what they do.

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