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CHECKLIST: Steps to Forming a 501(c)(3) Nonprofit Organization
This checklist outlines 19 key steps that apply to most new organizations to form a nonprofit corporation, apply for 501(c)(3) status, and stay in compliance with the rules governing tax-exempt organizations. The steps covered include drafting governing Articles of Incorporation, Bylaws, and basic corporate policies; obtaining a tax ID number, submitting the Form 1023 or Form 1023-EZ; and more.
VIDEO: Understanding the Public Support Test under § 170(b)(1)(A)(vi) | 5-Minute Lessons 4 Nonprofits
SE4N's Benjamin Takis provides a short lesson for 501(c)(3) nonprofit organizations on how to understand the calculation of "public support" under Internal Revenue Code sections 170(b)(1)(A)(vi) and 509(a)(1).
The Wrong Way to Add a Charitable Arm to a For-Profit Business
I often receive inquiries from entrepreneurs who are looking to add a philanthropic component to an existing for-profit business, such as by forming a nonprofit as a charitable arm or subsidiary of their business or starting a corporate foundation. These ideas are usually well-intentioned. However, mixing business and charitable activities too closely can make IRS approval of 501(c)(3) status an uphill battle.
Q&A #118 – What happens if an organization misses the 27-month deadline to submit the Form 1023?
The IRS generally will not approve retroactive 501(c)(3) status back to the date of the organization’s formation if the organization fails to file the Form 1023 (or Form 1023-EZ) within 27 months from the end of the month in which it was organized. In most cases, filing late means that 501(c)(3) status, if approved, will apply as of the date the application was submitted to the IRS. However, there are some important nuances in these rules to keep in mind.
Q&A #117 – How does a nonprofit transfer a program to another nonprofit?
Transferring a program from one nonprofit to another can be unexpectedly complicated, and the details will vary depending on the specific circumstances. In effect, the process is similar to a merger or acquisition, and requires extensive due diligence, identifying the assets associated with the program, executing a written agreement with the appropriate terms and conditions, and obtaining the necessary approvals by the respective Boards of Directors (and sometimes voting members, if applicable).
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Enhanced Management Strategies for Indirect Costs [SUBSCRIBERS-ONLY]
There are many aspects to consider when it comes to managing a nonprofit organization’s indirect costs. We often think first about compliance rules, which are naturally complicated and can vary by funding source and an organization’s own internal accounting policies and procedures. One aspect we tend not to emphasize enough is staff and their propensity to be disinterested and disconnected when it comes to considering and managing indirect costs.
Q&A #116 – Do restricted funds need to be kept in a separate bank account?
No, it is almost never required nor advisable for a nonprofit organization to keep restricted funds in one or more separate bank accounts, and this is not an accepted best practice. The reason is that using separate bank accounts for restricted funds makes managing these funds more difficult and does not enhance safeguards or strengthen internal accounting control systems. The opposite often results. Having unnecessary bank accounts can lead to operational inefficiencies and increased chances for errors.
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Three Steps to Be Better Prepared for Public Disclosure Requests [SUBSCRIBERS-ONLY]
How a nonprofit organization responds to public disclosure requests provides a clear window to its commitment to accountability and transparency. However, many organizations are insufficiently prepared to respond to requests for documents. This can lead to compliance failures and/or inadvertently sharing sensitive information that was not required to be disclosed.
Q&A #115 – Are nonprofit Board members required to be U.S. residents?
There is no requirement under the federal tax laws governing United States 501(c)(3) and other tax-exempt organizations that Board members be U.S. residents or U.S. citizens. Similarly, I am not aware of any state nonprofit corporation statute that imposes such a requirement. However, since the organization will be based in the U.S., it would be prudent to have at least some Board members and officers who maintain a permanent residence in the U.S. to deal with operational and compliance matters.
The Importance of Your First Year of Board Service
Serving on a nonprofit organization’s Board can be a rewarding and often life-changing experience. The first year of Board service will set the stage for the remainder of your time on the Board and directly affect opportunities for engagement, impact, visibility, quality of experience, and advancement. Our 4-part New Board Member Planning and Preparation Series aims to help new Board members set basic goals and develop realistic expectations for success during this critical early stage of their Board tenure.
Q&A #114 – What happens if a nonprofit fails to hold regular Board meetings?
Failure to hold regular Board meetings as required in the organization’s Bylaws is a problem but usually does not trigger immediate consequences by itself. However, this is often a sign of deeper neglect or compliance failures inside the organization and will not reflect well on the Board members in the event of an internal dispute, lawsuit, government investigation, or financial statement audit.
Q&A #113 – What happens when a nonprofit Board vote is tied?
Unless an organization’s Articles of Incorporation or Bylaws provide otherwise, a tie or deadlocked vote simply means that the proposed motion failed to reach the required level of approval to pass. Some organizations provide a mechanism in their Bylaws to resolve matters that are deadlocked (such as designating one or more persons to break the tie), but this is unusual. Thus, the result of a tie is generally no different than if a majority voted against the motion.
With Your First Year of Board Service Complete, What’s Next?
As your first year of nonprofit Board service winds down, it is time to pause and reflect on the past year and start setting goals for year two. Your first year of Board service is all about learning and observing. Learning about the organization’s strategic plans and culture while observing engagement of fellow Board members. For the second year, your emphasis should shift to purposeful commitment based on what you learned in year one.
Q&A #112 – Can a chairperson unilaterally suspend a nonprofit organization’s Bylaws?
As discussed in Q&A #49, a nonprofit organization’s Bylaws generally cannot be “suspended,” but rather must follow the formal process for “amendment” set forth in the Bylaws themselves, the organization’s Articles of Incorporation, and the applicable state nonprofit corporation statute. It is possible, but extremely unlikely, that state law and your organization’s governing documents would permit the Bylaws to be amended unilaterally by the chairperson.
Planning for Your First Year of Board Service
With your first nonprofit organization Board meeting completed there is a tendency to relax, as the natural concerns and hesitancies that come with taking on a new role with new experiences start to dissipate. Avoid taking your foot off the gas. Now is the time to turn your thoughts to the year ahead and how you can make the most of your first year of Board service.