How do you start a nonprofit organization?
Minneapolis nonprofit attorney Sarah Duniway explains that you need to file articles of incorporation with the secretary of state, prepare bylaw, appoint board or directors, and seek tax-exempt status through the IRS.
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So, starting a nonprofit organization involves a couple of steps. Of course, the person needs to have an idea about what they want their organization to do, a general kind of business plan around how are we going to raise money, who’s going to support this, what kinds of people do we want to have on the board of directors? Those are really important parts of starting a nonprofit organization, but the legal steps are relatively straightforward.
We file articles of incorporation with the Secretary of State’s office here in Minnesota. That’s the act that forms the organization as a corporate entity. Then we would usually prepare bylaws and appoint a first board of directors. Then there’s a second set of steps, which is to get tax exempt status for the organization. Again, typically people are looking at 501(c)3 status, although there are some other forms of tax exempt status. That’s a process where you need to apply to the IRS and tell them what you are planning on doing, and we have the burden of proving that it qualifies to be a charitable organization. It’s important to note that it’s a charitable organization within the IRS definition, not just what people think. So often, for us, part of the analysis of working with an organization on the front end is doing the analysis to figure out whether it would qualify, even if they’re trying to do something good for the world. That’s not always charitable and so there’s a level of analysis about whether it will qualify. Then we do this extensive application to the IRS that really provides a lot of details about the plans of the organization, what its activities are going to be, where it’s going to get its financial support, what kind of people are going to be on the board of directors, what its business activities will be. Then we wait for the IRS to review that application. They often have questions and there’s frequently some back and forth with them, and then ultimately they issue, or should issue, a determination letter recognizing the organization as a 501(c)3.
That whole process can take several months, even up to a year, and so it’s important for people to know at the front end that the legal formation process can actually take quite a bit of time. The organization can get started and start doing some activities in the interim while it’s waiting for the IRS, but there is this delay in getting its (c)3 status, which can have a real impact on how quickly it can get going with its programs and activities.