As an independent consultant and founder of The Philantrepreneur Foundation we constantly get questions such as:
- How do you set up a charity?
- What is required to be a nonprofit?
- What do I need to start a 501c3?
These are variations of the same question and the answer covers a legal process, and an approval process. In our experience we see that it is not fully understood that there are two separate processes, and BOTH are required to be an official 501c3 designated organization. There is the state legal process and the IRS approval process.
State
States issue ‘articles of incorporation’ (AoI). This is a legal document that registers an entity as an official business in that state. Legally you can’t do business if not registered with the state. And yes, I meant business – you are a for-purpose business. This process differs from state to state but basically you are registering the name of the business, an address, name of person(s) that manage it, and what you do.
Internal Revenue Service
The IRS issues ‘determination letters’ that approves the entity the right to operate and claim benefits under several sections of Internal Revenue Code (IRC). The 3 sections include 1/ 501(c)(3) meets qualifications of a public charity, 2/ 170 allows donors to claim tax deductions, and 3/ 2055, 2106, or 2522 allows the entity to receive tax deductible bequest, devises, transfers, or gifts. The determination letter will state which classification was approved
Alignment
There are no shortcuts, but the process can be simplified. Many state’s (most) qualifications to obtain a Nonprofit AoI do not require alignment with the IRS federal guidelines to obtain 501c3 approval. When I work with a client, to simplify the process we know the goal is to receive IRS approval therefore we ensure that state documents align with IRS requirements from the beginning, especially how the purpose statement is written. IRS will look at the state Articles of Incorporation and will note if they do not meet their requirements which complicates their application process.
Within the IRS application there is a question which asks if the organization has adopted formation documents – they mean Bylaws. IRS requires certain clauses (articles) written using specific language to be included in the Bylaws. Therefore, as a part of our development we create the bylaws ensuring all the details are correct.
Side Note: Some types of organizations are qualified by the nature of their purpose such as churches, houses of worship, or fraternal entities. They don’t have to officially apply to the IRS – but, and this is a big but… if they want all the benefits that 501c3 status provide they need to apply. For example, it makes them eligible for the Google Adword Nonprofit grant.
Want to learn more?
