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Seliger’s Quick Guide to Setting Up a Nonprofit Corporation and Getting a 501(c)(3) letter (I Hope You’re Not in a Hurry)

We get a couple of calls a week from folks saying, “I’m in the process of setting up a nonprofit to help _______.” We always say the same thing: “Do you have your IRS 501(c)(3) letter of determination of tax-exempt status, and, if not, have you applied to the IRS?” Too often the response is “No” and “No,” or even-more troubling, “Huh?”, which means the caller doesn’t even understand what she’s doing.

We’ve never had anywhere useful to send these callers, but we’d like to—so here’s Seliger’s Quick Guide to setting up a nonprofit:*

  • Spend some time learning about nonprofits, including the IRS tax-exemption rules, as well as the rules in your state. Presumably one goal of a new nonprofit is to secure grant funds. Most funders expect your nonprofit to be incorporated in the state in which most services will be provided. So, if you want to help cyclopses being emancipated from the foster care system in Owatonna, Minnesota, don’t randomly incorporate in Florida. This step usually takes a few weeks.
  • Apply for a nonprofit corporate charter in your state, following the state rules, as well as the national IRS rules, with respect to board membership, composition, interested parties and so on. To do this, you’ll need appropriate articles of incorporation, but you might as well draft bylaws at the same time, as these will be needed shortly anyway for your state (probably) and your federal tax-exemption applications. This step will likely take a few weeks to a month.
  • If your state has a corporate income tax, apply for state tax-exempt status. This step can take a few weeks to several months—think “several months” in a state like California, which has a very complex application process; Pennsylvania, by contrast, has a simple, quick process.
    At the end of the above steps, you’ll have a conformed copy of your formation documents. “Conformed” is just a fancy way of saying a signed, state-approval stamped copy. You’re going nowhere with the IRS without conformed documents. This is a key point.
  • Apply for a federal Employee Identification Number (EIN). This is the only part of the process that is almost instantaneous.
  • If you haven’t given up or died of old age, you’re finally read to complete your Form 1023, which is the actual IRS application for determination of 501(c)(3) status. You need the letter of determination, because without it, your new organization is not exempt from paying taxes and, even more importantly, donations to it are not deductible by the donor.

Most foundations won’t consider a proposal from nonprofits that lack a letter of determination. You can always try to find a fiscal agent while you’re waiting for the IRS to respond to your application, but that carries its own problems, as we discuss at the link.

Wait you will: it can take the IRS anywhere from three months to several years to approve your 1023. Along the way, you’re likely to get a series of interrogatories from the IRS that are designed to make you crazy, discourage you from continuing, or are genuinely aimed at ferreting out phony applicants, depending on your point of view.

If you do the math, you’ll see the completing the nonprofit formation process typically takes about nine months to two years. This news usually comes as a shock to the hopeful but frequently hapless callers I mentioned at the top of the post. We generally advise such callers to contact an attorney or accountant in their area that works with nonprofits and can help them with the paperwork.

I incorporated my first nonprofit over 40 years ago, when I was a young and starry-eyed intern, but the process is much more complex now. Trying to to this yourself or using one of the $99 Internet incorporation outfits is penny wise and pound foolish. You have been warned; as Robbie the Robot said, “Danger Will Robinson!

There is one way of forming a nonprofit more quickly (and it is not the “expedited review” offered by the IRS for an additional fee, which I don’t think actually speeds anything up). Instead, you wait for a giant disaster and try drafting behind it like cyclists behind a big rig.

After events like 9/11 or Hurricane Katrina, state tax officials and the IRS will often quickly approve new nonprofits because of obvious need, even if the proposed nonprofits have no apparent connection to the disaster. Most of the time the IRS and state tax officials are as motivated as any kind of government bureaucrat. Only the possibility of widespread political heat and anger motivate them to act with the kind of haste one otherwise associates with

If you have a plausible charitable purpose, don’t be discouraged by the process. Thousands of nonprofits get incorporated and receive their 501(c)(3) status every year. Even the NFL is nominally a “nonprofit,” albeit a 501(c)(6) and it made almost $10 billion last year. Stay the course. Don’t lose heart. And while you’re waiting around for a disaster, you might as well start down the IRS Yellow Brick Road.

* The various state and federal fees are going to run around $800. They’re not refundable.

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One, Two, Three* Easy Steps to Start-Up a Nonprofit Upstart

My recent post, “Grant Writing from Recession to Recession: This is a Great Time to Start a New Nonprofit,” featured a phone call I received from a “Mrs. Smith” who inquired about using our services to fund her new nonprofit. A few days ago, we received this comment from another real world Mrs. Smith, in this case, one Rev. Loring Pasmore, who asked:

I’m a Mrs. Smith with my ducks in a row and no money to jump start my programs. How do I get started?

To the good Reverend and all the other Mrs. Smiths out there, here are the three action steps to start-up a nonprofit upstart:

Step 1: Resign yourself to the reality that, like for-profit start-ups, your nonprofit will need some working capital to get going between, say, $10,000 and $100,000, depending on the project and how frisky you are. Where does one find the initial capital? Since banks will not lend to an unproven nonprofit and there is no equivalent of the SBA in the nonprofit world, start-up capital is likely going to come from the following sources: a loan from the founder (this is the most common and easiest path), fund raisers (see Step 2 before you do this), and/or a loan from the nonprofit version of an “angel investor,” although he or she is not really an investor, since nonprofits obviously don’t generate profits. Typically this angel will be either someone with money who loves you and/or someone with money who loves your project idea.

Step 2: If you haven’t done so already, obtain a nonprofit corporation charter in your state and apply for a 501(c)3 Letter of Determination of tax exempt status from the IRS. This is the critical path, as the IRS can take a year or more to issue your letter and, until the letter is issued, donations are not federally tax-exempt. It’ll be a lot easier to find an angel and hold successful fundraisers if you have a Letter of Determination, rather than a story about how you plan to get one. This letter will also help separate you from flakey people who merely have an idea with no ability to execute said idea.

Step 3: While you’re waiting around for the 501(c)3 letter to appear, get the word out about your new organization, gather data, scrounge for low cost office space and castoff office equipment, and, unless you already know how to conduct grant source research and write proposals, find a grant writer. See Step 1, because few, if any, qualified grant writers will work free or on the come—there is no free grant writing lunch. Essentially, you need enough money to hire a grant writer to seek funds so that you can repay any initial loans and cover initial start-up and operating costs.

That’s it. Once again, the secret of most aspects of grant writing is that there are no secrets.

Good luck to Mrs. Smith, Rev. Pasmore and everyone else who is trying to do something positive in these tough times. I noted Friday that the official US unemployment jumped to 9.8% in November; there is an ongoing need for spirited people to start new nonprofits to help their communities.

* One of my favorite forgotten movies is Billy Wilder’s impeccable One, Two, Three, or Eins, Zwei, Drei, auf Deutsch. Stoic and bewildered Horst Buchholz of Magnificent Seven-fame is hilarious playing opposite the always impressive James Cagney. Check it out for a Cold War blast.