I want to start a non-profit. Cool, now what?

Who would’ve thought it’d be so complicated to not be for profit? Well, in the United States, the complexity of the process hinges on one thing: taxes. If your operation wants to enjoy a tax exempt status (most commonly as a 501(3)(c) organization) from the IRS, the government is going to be thorough in its review. Very thorough. But fear not, and don’t let a rigorous up-front process discourage you. Filing for and receiving non-profit status is a noble aim and completely doable. For those new to the non-profit game, we’ve simplified some of the steps below (woohoo).

In this article we will be covering non-profit entities seeking the 501(c)(3) tax exempt status. However, such a designation is by no means required. There are far fewer hoops to jump through if you decide to form a non-profit but do not apply for tax exempt status. If you want to continue to pay taxes like the rest of us, you’re more than welcome to stay. We have to admit, though, this particular party is pretty lame.

For entities seeking a tax exempt status along with their non-profit, the process is two-fold (and somewhat more complicated). Thanks to federalism, you will have to register separately with your home state (or wherever the non-profit is going to be headquartered) and the federal government. Every bureaucrat wants in on the action.

Because of the state aspect, the non-profit registration process looks a little different depending on which state you find yourself in. Many of these processes are similar, but no two are exactly the same. Triumph does a good bit of advising in the Virginia-D.C. area, so in this article we will use Virginia as our example. That said, many of these concepts are transferrable, and, if you still have questions, Harbor Compliance has a pretty nifty cheat sheet for other states.

Virginia is for lovers (and taxes)

We’ve boiled the tax-exempt process down to 10 basic steps. Steps 1-8 are all conducted with the state of Virginia, step 9 concerns the federal government, and step 10 is a fun cross-over episode between the two. Some of the steps have their tedious elements (this is the government, after all), but the process is very doable. As usual, if you have any issues along the way, feel free to Ask Triumph.

Steps 1-8: The State Part

Step 1: Choose the initial directors for your corporation

In order to be eligible for IRS tax exempt status, your non-profit will need to choose at least 3 individuals to serve as directors and form the board. This number fluctuates by state, usually between 1 and 3, but Virginia requires a full 3. Keep in mind that these directors cannot be related to each other. Additionally, these directors do not need to have an active job with the non-profit, many times it’s better if they don’t. The board is focused on corporate governance rathe than day-to-day operations The day-to-day will be handled by your officers, which we’ll get to in a minute. Once you have you directors picked out (and you somehow convince them to agree to join), it’s time to think about a registered agent.

Step 2: Appoint a registered agent

The registered agent is essentially your non-profits official point of contact with the government. They'll be authorized to send and receive documents on behalf of the organization, among other responsibilities. You will identify your registered agent when filing step 3 (wow, what a segue).

Step 3: Prepare and file your non-stock articles of incorporation

Your non-profit will officially be recognized by the state after successfully filing articles of incorporation with the Virginia State Corporation Commission (VSCC). In order to aid in the process, the state offers an online portal here:

Articles of Incorporation Template for a Virginia Nonstock, Nonprofit Corporation (SCC819NP) 

In addition to the online portal, Virginia (as well as many other states) offers a free online template to streamline the filing process. The template will help walk you step-by-step through the required paperwork.

While the VA free online template is extremely useful, you will need to add a few extra clauses to also qualify for 501(c)(3) status with the IRS. Weird, we know. Thankfully, these additions are brief and fairly straightforward. The IRS has more information on their website, and they also break down requirements by type of non-profit. The biggest federal addition is a requirement that your non-profit must select another 501(c)(3) organization to receive all of your assets in the event you ever dissolve or close-up shop. Personally, we think that you are going to succeed for ever and ever—but just in case.

Oh, and Virginia also has a filing fee of $75. Gross, we know, but it’s actually less than many other states.

4. Prepare bylaws for your Virginia nonprofit corporation

Since non-profits in Virginia must register as corporations, you will need to create some corporate bylaws (it’s as exciting as it sounds). These usually do not have to be submitted to the state of Virginia, but they are essential for operating procedures and in the event that the IRS wants to take a peak (like we said, they are thorough with the whole tax exempt thing). The nitty-gritty of corporate bylaws is a little more granular than we are looking to get in this article, but, fear not. There is an abundance of websites where you can get bylaws drafted for free or a nominal fee, depending on how much specialization you’re looking for—God bless the internet. We have no real dog in the fight (and as usual, no outside financial incentive), so we are not going to endorse any one platform as the best. However, we do have some experience with FormSwift and can say that they were easy to use and affordable.

5. Hold a meeting of your board of directors

Now that the state officially recognizes you as a non-profit corporation, it’s time for the big show—your first board meeting. In this meeting, you should make sure to approve the aforementioned bylaws, name officers to carry out the day-to-day operations of the organization, and approve a twelve-month tax year.

We recommend naming a secretary to take detailed notes of the meeting for prompt distribution. With big things in the works, you’ll want a record of who is in charge of what.

6. Obtain an EIN (employer identification number)

This should be fairly painless for your non-profit. Some states will issue you an EIN during the corporate filing process. However, if this isn’t the case for you, a sure-fire way to obtain one is via our old pals, the IRS. All the required forms can be filed electronically on the IRS website. For once, there is no filing fee (a miracle, truly).

7. Get your county licenses to solicit donations

Not only does this piece vary from state to state, it will vary county to county within your state. However, there is some method in the madness. Most states have a centralized entity that will help to coordinate all of these different rules. In Virginia, this would be the Virginia Department of Agricultural and Consumer Services (VDACS). You can visit their website to find the details of what—if any—additional licenses you will need.

8. File an annual report

Just like any corporation in VA, nonprofits are required to file their yearly report with the state. As the minutiae is key in these matters, we are just going to quote the statue verbatim:

"Each Virginia corporation is required to file an annual report in the Office of the Clerk by the last day of the 12th month after it was incorporated, and this date in each year thereafter. The annual report can be filed online through SCC eFile or on a form furnished by the Corporation Commission. To obtain a preprinted annual report form to complete and file, provide the requested information on the Electronic Forms Request page." 

Unless you have an accounting degree (in which case, kudos), here is where you may want to consult an expert. We at Triumph wake up every morning thankful that we aren’t tax professionals, but they are quite valuable in a situation like this. Not required, but, especially if this is a brand new adventure, we recommend phoning a friend.

Step 9: The Federal Part

Step 9: File your Form 1023 federal tax exemption application

Finally, we made it to the part where you are actually exempted from taxes. Once you are all set with the state, your non-profit is eligible to file Form-1023 online with IRS. Depending on the size of your organization, this step can range from highly detailed to down-right bonkers. Rather than try and explore the myriad of scenarios this step could entail depending on the nature of your non-profit, we recommend reading his phenomenal article by DonorBox.

Once your Form-1023 is approved, the federal government will regard your non-profit as a tax exempt entity and it will not be subject to federal income taxes. Congratulations, dreams do come true.

Step 10. Obtain your Virginia state tax exemptions

The grand finale that isn’t all that grand. In Virginia, as in many states, nonprofits who receive 501(c)(3) tax-exempt status from the IRS are automatically exempt from Virginia's income tax (yay!).  All you have to do is show the appropriate entity, in this case VDACS, your 501(c)(3) approval letter and they will automatically waive the state income tax.

Congratulations, you had a brilliant non-profit idea and now you’ve turned it into a brilliant non-profit reality. Drinks on you. Or, actually, drinks on your friends—we guess. You know, because of the whole non-profit thing?

As always, feel free to Ask Triumph with any additional questions and consider Supporting the Team.

All views expressed in the article are opinions of the author and should not be misconstrued as professional consulting or legal advice. Users are responsible for verifying all information before taking action, and Triumph Group LLC is not responsible for any outcomes. Pursue subjects at your own risk. Seriously, man. It’s your life.