If you’ve ever considered starting a nonprofit organization, then you’ve probably taken a look at the IRS’ Application for Recognition of Tax-Exempt Status. IRS Form 1023 is a daunting application to say the least. At one point, the IRS estimated that for the average person to properly complete and submit the form would take more than 100 hours. It is the equivalent of getting audited before your organization even gets started. And after putting in all of that work, nearly 15% of applications never get approved.
What are some of the common mistakes that could hinder or delay your application, effectively destroying your mission-driven project before it even gets off the ground?
It’s not unusual for nonprofit organizations to partner or collaborate with other organizations to accomplish a mutual purpose. Often, our nonprofit clients prefer to document these relationships with an MOU or Memorandum of Understanding. But just what is an MOU, and how is it different from a contract?
A nonprofit’s bylaws serve as the governing document for the organization. This important document dictates how decisions are made within the organization. We frequently get questions from both newer nonprofit organizations (How do I put together the bylaws?) as well as more established nonprofits (I’m not sure we’re following the bylaws. How do we update or fix our bylaws?)
Running a nonprofit organization can be quite different from running a for profit business. Instead of a single owner(s) who can largely do whatever they like, you have a board of directors to answer to, extensive oversight from the IRS and Ohio Attorney General, not to mention keeping both donors and grant funders happy. And this wide array of stakeholders means your nonprofit needs good governance policies in place to prevent problems before the organization’s tax-exempt status is threatened.
The IRS has special procedures in place for recognizing a group of organizations as tax-exempt if they are affiliated with a central organization. A group exemption can reduce the administrative burden on multiple related organizations, but it can also be difficult to navigate if there is a breakdown in communications or the relationship between the central organization and one of the subordinate entities.
So just how does the group exemption work? And how can organizations avoid pitfalls in navigating this complex relationship?
Practice Note: The IRS has proposed new rules governing group exemptions. Until the new rules are finalized, the IRS is not currently accepting new group exemption letters.
Previously, we looked at the difference between issue advocacy (which is permissible for non-profit organizations) and lobbying (which becomes problematic for a 501(c)(3) if it is “substantial”). So what is your non-profit organization to do if it decides that the best way to advance the mission is to influence legislation? This is where other types of tax-exempt status come into play.
As a non-profit organization, you may have heard that you are not allowed to engage in lobbying. However, this generalization greatly oversimplifies the matter. And because of that oversimplification, some non-profits wrongly assume that they cannot even take a stand on issues, whether current social issues or simply issues that are relevant to the organization’s mission and purpose.
In Part 1, we covered how to set up your non-profit organization as a legal entity, and in Part 2, we looked at applying for tax-exempt status with IRS Form 1023-EZ. But chances are that if your organization qualifies for the EZ application for tax-exempt status, then you might want to consider fiscal sponsorship.
Just what is fiscal sponsorship, and how can it help your new non-profit organization or project?
In Part 1, we went over the steps to establish a non-profit organization as a legal entity. But that step alone will not grant the organization tax-exempt status. Only the IRS can recognize an organization as a tax-exempt entity. So once your legal entity is formed, how do you apply for tax-exempt status?
This week we’ll take a look at Form 1023 versus 1023-EZ and dive into the requirements for using the EZ version of the form. In future posts, we’ll cover Form 1023 in more detail and look at fiscal sponsorship as an alternative to applying for recognition as a tax-exempt organization.
These days there are so many charitable organizations seeking our time, our services, and our financial support that it might feel like there is already an organization out there for every cause. But many people still have a strong desire to start their own nonprofit organization. Often, I’ll hear from individuals who are looking for ways to fund a passion project and who realize that it’s really difficult to raise more than trivial amounts of money without being a recognized tax-exempt organization. (In a future post, we’ll discuss fiscal sponsorship as an alternative to forming a new entity.) Other people I talk to have an idea for a mission-driven project that could potentially be a for-profit business, a nonprofit organization, or a hybrid social enterprise, but they’re just not sure what all goes into establishing and maintaining a nonprofit entity.
Forming a nonprofit and then gaining (and keeping) the organization’s tax-exempt status is definitely more complicated than starting an LLC or other for-profit business. So what do need to know if you’re considering this path?