Looking to Start a Not-For-Profit Organization and obtain Tax-Exempt Status? (Here is What you Need to Know)
July 23rd, 2021
At Waugh PLLC, we frequently receive inquiries and questions from individuals and organizations about steps involved to form a not-for-profit organization (an “NPO”) and obtain tax-exempt status. Both undertakings can be overwhelming as there are state and federal requirements to consider in order to obtain the desired status sought by the organizer of an NPO. Below is a primer on forming an NPO and obtaining tax-exempt status.
How to Form an NPO (in Florida):
In Florida, Chapter 617 of the Florida Statutes (the “Statutes”) provides requirements for forming an NPO. This is a first and critical step to later obtaining tax-exempt status for the organization.
Below contains some key items when filing paperwork to obtain NPO status:
- At a minimum, an NPO must have at least three unrelated directors.
- A registered agent must be appointed.
- File articles of incorporation (the “Articles”) with the Florida Secretary of State. In addition to naming the registered agent, the following items must be included in the Articles:
- Name and address of the NPO
- The specific purpose of the NPO (not the general-purpose statement)
- Process for electing and appointing directors
- Name, address, and title of each officer and director
- Name and address of the registered agent
- Name and address of the incorporator
- The effective date of the Articles
IMPORTANT NOTE: To obtain tax-exempt status, an NPO must include a dissolution clause in the Articles that upon dissolution of the NPO it shall dedicate its assets to another NPO or government entity or provide that said assets will be distributed to one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.
- Bylaws prepared for an NPO in Florida must comply with the Statutes and contain provisions for electing officers and directors, holding meetings, and handling corporate matters.
- Hold a first board meeting. This is a critical step oftentimes overlooked by newly-formed NPOs. During the first board meeting, topics to be discussed should include approval of the Bylaws, appointing officers, programs, and management of the NPO.
- Upon incorporation, an NPO should obtain a federal employer identification number (EIN) through an online application on the IRS website.
How to Obtain 501(c)(3) Tax-exempt Status:
There is a common misconception that because an entity is an NPO it automatically has tax-exempt status. Obtaining NPO status establishes an organization as a legal entity (if incorporated in Florida, or whatever state the NPO was incorporated for that matter). To obtain tax-exempt status, an NPO must apply with the Internal Revenue Service by completing and filing Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” (“Form 1023”). Organizations that are eligible to obtain tax exempt status are, religious and charitable, scientific, literary or educational, national or international amateur sports and those created to prevent cruelty to children and animals.
Smaller NPOs seeking tax exempt status should consider filing Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” (“Form 1023-EZ”). This application is shorter and ideal for organizations with less than $50,000 in annual receipts and $250,000 in assets. Filing either Forms 1023 or 1023-EZ should be done before the end of the 27th month after the Articles of an NPO have been filed. If so, then the NPO will be retroactively deemed as being tax-exempt from the filing date of its Articles. Conversely, if said application is filed after the 27th month period, then the NPO will be recognized as being tax-exempt on the date that its application to obtain tax exempt status was filed.
Forms 1023 and 1023-EZ can be both lengthy and complex. There are several requirements, attachments, schedules, and information regarding an NPO that need to be submitted with its application that can span upwards of 100+ pages. From an alternative viewpoint, Form 1023 can be considered as an IRS examination - it examines the structure and purpose of an NPO applicant to ensure that it was formed to comply with those requirements under Section 501(c)(3) of the Internal Revenue Code and to fulfill the purposes stated therein. While reviewing an application for tax-exempt status, the IRS also examines potential conflicts within an organization and possible opportunities for private benefit of directors and officers.
Benefits of Obtaining 501(c)(3) Tax-exempt Status:
Below are just a few of the many benefits available to an organization that obtains tax-exempt status:
- Exemption from federal income tax
- Donors of a tax-exempt entity receive tax-deductions for their donations
- Access to grants and other government benefits not widely available to non-tax exempt entities
- Opportunities for reduced postal rates
Forming an NPO and obtaining tax-exempt status can be a stressful and onerous process. If you or your organization seek to undertake this process or are have issues to complete the process, feel free to contact our firm for a consultation with our experienced attorneys by emailing us at email@example.com