Man looking over papers


Steven E. Springer Nov. 18, 2013

Forming a non-profit organization is similar to starting any other business entity. It requires forethought, research, organization and a clear business plan. The difference is that all proceeds are used for charitable purposes and the charity will have tax-exempt status with the IRS.

A non-profit organization must fall within one of three categories to receive tax-exempt status: religious, public benefit or mutual benefit. A religious NPO must be structured to provide religious services as its main and exclusive objective. A public benefit NPO is a charitable organization, a social welfare program or a civic league. Any NPO created for purposes other than religious, charitable, social welfare or civic league programs, and planning to obtain tax-exempt status under provisions other than the state of California tax code or not planning to be tax exempt at all, is a NPO for mutual benefit.

Once the decision has been made as to what type of NPO you are establishing, the next step is to choose a name and file the necessary paperwork with the California Secretary of State. In order to qualify for tax exempt status, your charitable entity must be organized “as a corporation (including a limited liability company), trust, or unincorporated association,” according to IRS eligibility requirements. The organizational papers you file with the Secretary of State should include a statement limiting the organization’s purpose to something that qualifies for exempt status. Bylaws, which govern the internal workings of the organization, are also beneficial to draft at this stage, but is not necessary for some entities.

Once you have submitted your Articles of Incorporation to the Secretary of State, they have been approved and you have received a copy of the filing, you can apply for state and federal tax exemptions. At this stage a proposed tax exempt organization must file Form 1023 with the IRS. If the IRS accepts the organization as meeting its requirements, it will issue a letter stating the organization has met the requirements to obtain 501(c)(3) status (i.e. is officially tax exempt). This letter is important, as it assures potential and existing donors that their contributions will be tax deductible.

To receive tax exemption at the state level in California, you must submit California Form 3500, Exemption Application, or Form 3500A, Submission of Exemption Request, once your federal tax exemption has been approved.

The paperwork needed to establish federal and state tax-exempt status can be complicated. If you are ready to create a charitable organization for a beneficial cause, contact an experienced business formation attorney and an appropriate tax professional to discuss the appropriate entity type for your organization and whether it may be able to qualify as tax-exempt.