Starting a non-profit corporation
Many people start charities, known to lawyers as “non profit corporations.” The first thing to know is you can't do it alone. Here are some basics that everyone needs to know.
Step 1: Get three people committed to the cause. These people will initially serve as the “Incorporators” and then, likely your “Provisional Board” or “Interim Board.” The law allows only one person to incorporate, but you will eventually need a Board anyway, so go ahead and get started now. This small group can work together for a common purpose.
Step 2: File your Charter. You can find the form on the Tennessee Secretary of State’s website at https://tnbear.tn.gov/Ecommerce/RegistrationType.aspx. File as a Non-Profit Corporation. In following the prompts you will note that you MUST be organized for a “scientific, educational, religious or other charitable purpose.” Those categories are explained as:
- A “public benefit corporation” – working in the interest of the general public. United Way is an example of a public benefit corporation, and most non-profits are this.
- A “mutual benefit corporation” – working for the interest of only your members. A Homeowner’s Association is an example of this.
- A “private foundation” which is governed by an entirely different part of the code –The East Tennessee Foundation is an example of one of these. More than likely you are not a private foundation. If you think you are, definitely get a lawyer.
- A religious organization. A church or at least an organization where religion is at the heart of what the organization does.
The latest filing fee is $100.
When you get your certificate back from the Secretary of State, you are an official “Non-Profit Organization.” That’s it!
How to Maintain your non-profit
- A process for making decisions must be made. These “Bylaws” are the rules for how you are going to run the organization. If you don’t have bylaws, the State law will impose rules on you that the State assumes you are following. You can read them at T.C.A. 478-51-201. Whether you use Tennessee’s laws or your own bylaws, make sure you know what the law says and if it is unclear to you (which is likely), then hire a lawyer to explain it to you
- You must meet periodically, at least once per year
- You must keep records of what happens at these meeting and any decisions that are made
- You must manage money received by the organization separately. Sound financial records are imperative
Other rules apply depending on your cause
Raising money for your cause
Step 3: Get an Employer ID number from the IRS. Here’s the link to get started: https://app.irs-ein-tax-id.com/nonprofit/contact. Follow the prompts to set up a non-profit organization.
Step 4: When you receive confirmation of your EIN, go get a bank account.
Step 5: Start bringing in the money!
Planning to efficiently and quickly raise money, tax-free, for your cause
Now is the hardest part: you don’t want to pay taxes on your money because you want every dime of the money to go to your good cause, and your donors likely want a tax write-off when they give you money. Even more, if you want to get money from private foundations or the government, you may be required to be an organization that is recognized by 501(c)(3) by the Internal Revenue Code.
Step 6: Do you know any organizations with a similar mission? If so, now is the time to introduce yourself. If they already have a 501(c)(3) designation from the IRS, they may agree to serve as your “fiscal sponsor” until you can get your application approved – or maybe even forever. Your fiscal sponsor can be any organization that does not have to pay taxes – another non-profit or a church. But they have to keep your books separate from theirs and report how you spent your money to the IRS. If they get it wrong, their own tax-free status is at risk. Be prepared to pay a modest fee if you go this route. Churches are an extremely common seed organization for non-profits. If you have a relationship with a church, your first stop likely should be with them.
But why is this not the last stop? It can be, depending on who you want to raise money from. Individual donors get the tax break whether they give money to the church or the fiscal sponsor, or to you directly. It might make sense for you to operate long-term under that umbrella, with their experience, rather than risk making a mistake and losing your status yourself. Furthermore, recent changes in the law forbid government organizations from denying pubic funding just because you are affiliated with a church, so long as the purpose of the funding is to benefit people who are not necessarily church members.
Really, the biggest reason to go get your own 501(c)(3) comes down to if you want to apply for private foundation money. Private foundations are the folks who give money to organizations like National Public Radio or the Humane Society. They include organizations like Ford Foundation, the Gates Foundation, or the Clayton Family Foundation. They are pretty big-time, and you really might not need that kind of fire power right at the beginning. Furthermore, it may make sense, before asking for money from the Big Foundations, to make sure you can manage smaller amounts responsibly. After all, before they cut you a big check, they are going to want to know that you know how to manage those funds. Crawl before you walk.
But if you do want the big money from private foundations and you feel ready to manage it now, then you need to go to Step 7.
Step 7: Get your own IRS 501(c)(3) status. This is what most folks feel is the best long-term route, but be sure to consider Step 6 first. If you do decide to pursue your own 501(c)(3), you’ll need to apply. You should make this decision and apply no later than 2 years after you started, because, if you are successful, the IRS will retro-actively apply your status for up to 27 months before you applied.
To qualify for a designation where you don’t have to pay taxes, you must be organized for a “religious, charitable, scientific or educational purpose. There’s a couple other options, but these are the big ones. It’s good to list that you are organized for one or more of these four purposes in your charter that you filed with the Secretary of State. Examples of qualifying organizations include hospitals, child-care organizations, and churches.
Here’s the link to get started: https://www.irs.gov/charities-non-profits/application-for-recognition-of-exemption
Remember: you can be a non-profit and still be required to pay taxes. You can be a 501(c)(3) according to the IRS without registering with the State of Tennessee as a non-profit. Doing both just makes your life easier, your books cleaner, and makes you less likely to get audited.
Because Held Law Firm is so active in the community, we have formed and represented dozens of non-profit organizations. We view our work as our good cause, and we are eager to know other creative, community-spirited organizers. For that reason, we intentionally devote 10% of our firm’s time to pro bono representation of people whose case can positively impact the lives of others, and to non-profit organizations working in the public interest. If you have a Big Idea, to Save the World, give us a call at 865-637-6550 for a free consultation, to see what we can do to help you make that Idea a Reality.