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Formalizing Your Nonprofit

A nonprofit is a corporation that’s formed to serve the public good. Nonprofits are tax exempt only if they are organized and operated for purposes defined as exempt by the IRS.

“The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

IRS Code Section 501(c)(3)

As you set up your nonprofit, you will first establish a corporation and then apply to the IRS for nonprofit status. Each state may have different processes and requirements, so be sure to abide by your local regulations. The IRS and your state government should be your primary source of guidance, and many nonprofit founders work with a legal advisor on this process.

Necessary steps to formalize your nonprofit:

  1. Decide on a name for your nonprofit
  2. Recruit a Board of Directors
  3. Draft Bylaws
  4. File Articles of Incorporation with your state
  5. Secure an EIN (Employer Identification Number)
  6. Apply with the IRS for 501(c)(3) status
  7. Register to solicit donations in your state

It’s a good idea to document each step of the process, and to provide regular updates to your board of directors. Nonprofits are legally required to keep records. Familiarize yourself with IRS regulations as well as federal and state laws so you know which financial statements, employment documents, and board/program documents you should be keeping.


Test your knowledge

What should be one of your first steps in formalizing your nonprofit?