The 5 steps to filing a 501(c)3 nonprofit
In 2018, I stumbled across the idea of starting a nonprofit but didn’t quite understand the process no matter how many resources I tried to find online, which made it all the more daunting. At the time, I was completing my Master’s in Nonprofit Leadership at the University of Pennsylvania and ended up enrolling in a course showing us the best strategies for filing and creating high-impact nonprofit organizations. With this, I realized the process was much more straightforward than I (and the internet) initially made it out to be — and you don’t need a master’s degree to start a nonprofit!
I was sure to document every single step of the process that I personally took to file for my 501(c)3 tax-deductible nonprofit, and compiled the key takeaways and steps into this article in hopes that I can pass it on to others who might be feeling overwhelmed by the process and legal jargon.
A few things you should keep in mind:
There are many types of 501(c)’s
A 501(c)3 is only ONE of the 29 types of 501(c)s. Each one will have a slightly different process.
Findings show that it takes on average 90 hours to complete all paperwork for the filing process.
The amount of time it takes to file depends on how much revenue/funding you have generated to date. If you are a young nonprofit without much or any revenue/funding yet, it is a fairly straightforward 3-page form instead of a 20+ page form.
However, if you are further along in the process, 90 hours is no short amount of time, so remember to be patient and thorough in the process. You will usually also have to wait 2–12 months for the IRS to certify approval of your organization as a 501(c)3 — this is a separate step from incorporating your nonprofit (which will be covered later in this article).
One of my board members highly recommends and swears by this book in case it can be an additional helpful resource!
Just because you just became a nonprofit does not mean you can apply for grants immediately.
Ironically, you cannot successfully apply for grants independently until you have 2-3 consecutive years of auditing. You’re probably wondering, “how else do I get money?”
As a loophole, you can find a fiscal sponsor. Find an older nonprofit doing aligned work. When you work with fiscal partners, they will be DBA (doing business as) your organization. This means, your organization is essentially a “project” that the fiscal sponsor is taking on. Oftentimes, if you seek fiscal sponsorship, fiscal sponsors will likely ask for a commission of ~10–15%.
Another alternative is finding creative ways to earn revenue outside of grants. You can facilitate fundraisers or sell a product or service you offer.
Nonprofit does NOT mean you don’t make money; you just don’t own it
Nonprofits have to make money to survive. “Nonprofit” does not mean there is “no profit” but simply that there are no owners or shareholders like a typical “for-profit” business. Nonprofits are designed to serve a government-approved purpose. Because of this, nonprofits receive special tax treatment.
As the founder, you will not “own” the nonprofit you will be starting. Technically, the nonprofit belongs to the community. You and your board of directors are simply the main individuals facilitating operations to ensure that the nonprofit creates a meaningful impact on the community.
It is worth noting that nonprofit insurance is big here to insure there is this space and legal safeguard should anything happen. I recommend budgeting anywhere from $700 to $900 for this process.
Find ways to prioritize programming costs in your reports
One of the big caveats of the philanthropic world revolves around the allocation towards programming costs vs. operational costs. Dan Palotta’s TED Talk sums this up very well: nonprofits are often challenged by the counterintuitive notion that donations should go to directly funding the programming/cause, but this leaves little capital left for advertising, marketing, and staffing costs, which are essential to sustain operations.
According to Better Business Bureau, at least 65% of a nonprofit budget should be for program direct services, and this includes programmatic staff. This can be a good barometer for new nonprofits as they build a financially healthy and sustainable organization.
Finding ways to integrate advertising, marketing, and staffing costs into the programming budgets you submit will be helpful to get your foot in the door as you embark on your journey to secure grant funding.
Allocate at least $600 for the initial filing process.
The IRS 1023 user fee costs at least $600 regardless of your organization’s projected income. You will make the payment on Pay.gov. Pay.gov is a website that will provide the form you will need to fill out to become a nonprofit.
Further, every year, you will need to file additional paperwork for tax season to maintain your tax-exempt status. This can cost anywhere from $600 to $2,000 depending on whom you work with.
If your organization will work with minors, you must obtain any licenses/permits if working with specific populations.
Usually, you’d have to complete an FBI fingerprinting and background check. Every state has its own requirements, so remember to search the process for your own state.
You MUST file your paperwork every year!
If stop filing for 3 consecutive years, you will lose your 501(c)3 exempt status
How to file for a 501(c)3 nonprofit — step by step
STEP 1: File your EIN on the IRS website (10 minutes)
According to the IRS, an EIN is your Employer Identification Number, also known as a Federal Tax Identification Number.
Your EIN is used to identify your business entity. There are several different ways you can apply for your EIN. With the help of the internet, you can do this online. The IRS offers a free service to help you get your EIN instantly.
All you need to complete your EIN are:
- Your organization’s name
- 1–2 sentences of your organization’s mission statement
- The state you would like to file under
They will also ask you to answer a series of the following questions. If you answer yes to any one of them, you will be eligible to file for an EIN.
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco, and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Estates
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
You will receive your EIN once you complete the series of questions they ask you to complete. Be sure to download and save your EIN confirmation letter, as you will need it for almost everything you apply for down the road.
STEP 2: Complete the paperwork needed for your IRS 1023
To become a nonprofit, you must file Form 1023 from the IRS. The main documents you will need to complete are the following
- Articles of incorporation
- Bylaws
- Your list of board members/directors (Decide on your board of 3+ members and hold a meeting for your board to ensure all bylaws are good to go and agreeable! An ideal number of board members is an ODD number because that makes things easier when it comes down to voting)
- Your Board Policies
- Conflict of Interest
- Code of Conduct
- Fraud Response
- Gift Policy and Gift Statement
- Whistleblower Protection Policy
- Document Retention and Destruction Policy
STEP 3: Open a business bank account
Open a business bank account. Overall, this is a pretty straightforward process that sounds much more overwhelming than it is. I personally recommend doing this before you actually file your 1023 form because you can expense the filing costs under your new business bank account to keep things organized.
1) Decide which bank you would like to open a business bank account under
2) Prepare your documents from nonprofit entity formation. Banks will ask for the following listed in the previous step:
- Articles of incorporation
- Bylaws
- List of board members/directors
3) Open your account with your bank
You can open your account online or in person. Personally, I prefer in-person because bank representatives will often take the time to explain the process and answer any lingering questions you have.
If you go to the bank in person, tell them that you are looking to open a business bank account (as opposed to a personal bank account). They will then redirect you to a representative you can chat with. Depending on the bank, you will sometimes need to schedule an appointment ahead of time. It usually takes about 2 hours for them to complete the process.
4) (Optional but recommended) Make a QuickBooks Online account
Once the bank account is open, find an accounting software to track your expenses. Quickbooks and other accounting software are great tools to help you keep track of your expenses so you won’t be scrambling during tax season. The earlier you open an account and document your expenses, the better!
STEP 4: FIle for Nonprofit tax exemption (the 501(c)3!)
Now that you’ve completed your 1023, you have to file for your eligibility for 501(c)3. In order to do this, your organization must:
- Be organized as a trust, a corporation, or an association.
- Have an exempt purpose
Once you have everything, you must fill out an IRS-1023 EZ form. Organizations must electronically file this form to apply for recognition of 501(c)3 status.
According to the IRS, to submit a 1023 form, you will need to:
- Register for an account on Pay.gov.
- Enter “1023” in the search box and select Form 1023.
You can work with someone if you have the means to but you can also fill it out on your own.
STEP 5 (& Repeat!): Continue filing your annual paperwork!
Based on your annual income, choose between Form 990, 990 EZ, 990 N
- 990 EZ is for organizations to file if they make less than $50,000 per year
- 990 N is for organizations that make over $50,000 per year. This will ask for more information than 990 EZ does.
To file your annual paperwork, you will need to make sure all your expenses are documented correctly. Using accounting software, as mentioned, helps but sometimes you may also hire an accountant to take the load off your plate and help you with the auditing process.
The 990 EZ is much simpler and free if you are a beginning nonprofit. You can do it by yourself online and your IRS letter will let you know if you can do this instead of the whole form. Although, there is a lot of value in having a financial audit, as it is something that many grant providers look for. You should try to budget anywhere from $900 to $3,000 for this.
Once you’re done working with your accountant, you can then find agencies that help with the filing process to help fill out the 990 EZ/990 N form on your behalf.
The IRS usually recommends you work with third providers for this in order for your organization to have better accountability and credibility. Depending on who you’re able to work with, I recommend budgeting anywhere between $750 to $2,000 for the process.
However, if you are looking to learn more about the filing process, I highly recommend reviewing other similar-themed organizations’ 990 forms and cross-referencing them with each other and yours.
Good luck and godspeed!
The content available in this article is for informational purposes only and not for the purpose of providing legal advice
