How to Start a 501(c)(3) Nonprofit: The Complete Guide

Ready to start a 501(c)(3) nonprofit but not sure where to begin? 

We get it—after all, turning your ideas into a nonprofit can be a powerful move toward achieving your goals. Once you do, you can use your 501(c)(3) status to make the world a better place, help others, or promote your favorite causes—and you don’t even have to pay income tax. Not to mention, you can partner with Classy to raise even more money toward your goals.

So how to start a nonprofit organization, you may ask? And what does it mean when we say “501(c)(3) tax-exempt organization?” Here, we’ll walk you through everything you need to know about starting a 501(c)(3) tax-exempt nonprofit for 2023.

The Complete Guide to Registering a 501(c)(3) Nonprofit

In this guide, you’ll learn all about starting a 501(c)(3) nonprofit, from selecting your operating structure and filing for tax exemption to finding resources and building your charitable contributions.

And when you do follow the exact steps we share in this post, you’ll lay the foundation for a nonprofit organization that’s a force for good in the world. So keep reading, and we’ll show you how.

What Is a 501(c)(3)?

If you’re wondering what it means to be a 501(c)(3) or you’ve asked yourself, “How do I apply for a 501(c)(3) status?” then you’ve come to the right place.

A 501(c)(3) status refers to a section of the Internal Revenue Code—the tax law for the United States administered by the US Treasury through the Internal Revenue Service (IRS)—that allows organizations to operate as tax exempt.

As a tax-exempt organization, 501(c)(3) organizations can receive donations and grants. Such designation allows these entities to apply for government funding, corporate funding, individual donations, foundation grants, and more.

Additionally, 501(c)(3) organizations don’t receive money for services rendered, such as fundraising or administrative expenses. Instead, these organizations must raise all funds through private contributions.

By establishing a 501(c)(3), it allows individuals or businesses to give money to the nonprofit without having it count against personal income taxes. And because these charitable contributions are tax deductible, donors can write them off as a donation when filing taxes.

However, 501(c)(3) organizations must have an IRS-recognized charitable purpose and operate accordingly to qualify as a charity under federal law. So if you want to start a nonprofit, you’ll need to register your organization with the IRS first. 

Once registered, the IRS allows nonprofits to deduct certain noncash charitable giving, such as volunteer hours, goods donated, and equipment used.

So in addition to raising money for a particular cause, as long as the organization has a recognized charitable purpose, it may be eligible for some tax benefits. For example, a local animal shelter that might use donations to help pay for food, medical care, and other necessities for homeless animals, may be able to deduct volunteer hours and medical goods donated. 

3 Types of 501(c)(3) Organizations

There are three types of 501(c)(3) organizations. They are:

• Public charities, which are organizations that “serve a public purpose and exist to benefit the community as a whole”
• Private foundations, which are charitable organizations that own more than half of their assets and make grants for public purposes (like hospitals or universities)
• Social welfare organizations, which focus on serving one or more of five broad categories: 

(1) Helping people deal with poverty-related problems

(2) Assisting disadvantaged individuals in finding employment

(3) Preserving or restoring opportunities for low-income people  (4) Improving conditions in low-income neighborhoods 

(5) Helping individuals improve their lives by providing them with services (daycare centers or homeless shelters)

The IRS recognizes more than 30 types of nonprofit organizations, but only those that qualify for 501(c)(3) status can claim tax-deductible donations.

To be considered a charitable organization by the IRS, a group must operate exclusively for one of these purposes: 

• Charity
• Religion
• Education
• Science
• Literacy
• Testing for public safety
• Fostering national or international amateur sports competition
• Preventing cruelty to children or animals

Additionally, the IRS defines “charitable” activities as: 

• Relief of the poor, the distressed, or the underprivileged
• Advancement of religion
• Advancement of education or science
• Erecting or maintaining public buildings, monuments, or works
• Lessening the burdens of government
• Lessening neighborhood tensions
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law
• Combating community deterioration and juvenile delinquency

Organizations that qualify for tax exemption under section 501(c)(3) must not serve any private interests, including those of the creator, the creator’s family, shareholders, other designated individuals, or others controlled by private interests. Additionally, an organization’s net earnings cannot benefit private shareholders or individuals, meaning the earnings must be solely for charitable purposes.

Nonprofit vs. Tax Exempt Organizations

You may have heard the term tax-exempt organization, which is a type of nonprofit organization. However, just because an organization is a nonprofit doesn’t mean it’s also tax exempt.

A nonprofit organization is an entity whose purpose is charitable or educational. It doesn’t have to be tax exempt, but if it is, it can deduct donations from individuals and corporations. As mentioned earlier, only the IRS can grant tax-exempt status, which includes different types of nonprofits with different requirements. Some require 501(c)(3) status, and others don’t. 

Additionally, in general, any organization that qualifies as a charity under the law may apply for exemption from federal income tax (and some state income tax), but only certain nonprofits qualify for this treatment. These include churches, social welfare groups, schools, universities, hospitals, scientific research institutions, etc.

4 Steps to Starting a 501(c)(3) (2023 Guide)

Now, let’s take a look at the four steps to get started with a 501(c)(3). 

1. Decide what type of nonprofit you want to establish.
2. File for 501(c)(3) tax exemption.
3. Prepare and file your incorporation paperwork.
4. Write up your bylaws.

1. Decide What Type of Nonprofit You Want to Establish

Before you can establish your 501(c)(3) nonprofit, you’ll need to decide what type of nonprofit organization you want. Among the numerous types of nonprofit organizations, the most common are: 

• 501(c)(3), which are charities
• 501(c)(4), which are civic leagues
• 501(c)(6), which are trade associations

The IRS provides a chart detailing each organization’s purpose and rules for establishing each type.

2. File for 501(c)(3) Tax Exemption

The second step in starting a nonprofit is filing for 501(c)(3) tax exemption with the IRS. To obtain 501(c)(3) tax exempt status, you must file Form 1023 and Form 990 with the IRS.

Form 1023 is used as an application for tax exemption, and every new 501(c)(3) organization (as well as any existing ones that wish to make an organizational change) must complete one. If you’re unsure whether or not your entity qualifies as a nonprofit under section 501(c)(3), consult with a tax attorney before proceeding with this step.

The IRS website provides detailed instructions on filling out Form 1023 and submitting it online through its electronic system called Exempt Organizations Select Check. You can also mail in hard copies of both forms instead of submitting them electronically. However, this may delay your application processing time by several weeks due to postal mail delivery times.

If you have any questions or concerns while filling out either form (or after submitting them), the IRS has resources, including guidelines for when you can expect to hear from them.(1) But keep in mind, the IRS receives more than 95,000 applications for tax-exempt status each year.

3. Prepare and File Your Incorporation Paperwork

Before you can incorporate your nonprofit, you’ll need to prepare and file paperwork with the state where you plan to incorporate. This includes:

• Articles of incorporation: The articles of incorporation are the formal paperwork you’ll file to form your nonprofit corporation. These include any licenses and permits required by your state’s nonprofit corporation laws.(2) You’ll also pay a small filing fee.
• A board of directors: The board of directors is usually volunteers or paid employees of the organization who serve as fiduciaries for the group. They make sure that all business conducted is in accordance with the law and ensure proper handling of financial transactions. When it comes down to who you need on your nonprofit board of directors, you’ll want to have at least three people on your board.
• Bylaws: The bylaws are rules governing how the organization will operate, including its structure (for example, having a board), meeting procedures, elections, voting rights, and other organizational policies. You should also include provisions for amendments to these bylaws when appropriate. These amendments require majority vote approval at any regular or special meeting of members called for that purpose and 15-day notice given in writing before such meeting specifying the changes considered for adoption.

4. Write Up Your Bylaws

Lastly, you’ll need to write up your bylaws—the rules that govern the organization. Bylaws should be in plain language and approved by the board and the members. Additionally, the IRS has specific requirements for these documents, so it’s best to consult a tax attorney or nonprofit expert (like us!) if you want to make sure your bylaws meet those standards.

Once approved, the board of directors will review the bylaws annually.

Is a Nonprofit Right for You?

If you’re thinking about starting a nonprofit, you’re not alone. After all, there are more than 1.5 million nonprofit charitable organizations in the United States—doing everything from providing food to the homeless to supporting the arts to fighting against human trafficking. So how can you tell if starting your own nonprofit is right for you?

First, ask yourself: what are the goals of your organization? While you want them to be meaningful, you also need to decide what you want them to accomplish. And if your mission is broad or vague, that’s OK—just make sure it’s something achievable by one person or a small group (unless you want to start a large-scale operation).

Second, talk with other people experienced with nonprofits. They’ll be able to advise you about what works and what doesn’t work regarding running a nonprofit.

Third, make sure your nonprofit fulfills a need—and that there isn’t already another organization doing similar work. If competition in your market is fierce enough that one more player won’t change anything for potential donors or the community, perhaps another type of nonprofit would better meet their needs.

When creating a nonprofit organization, it’s important to remember that you have the potential to impact hundreds or thousands of people’s lives—so think carefully about what impact you want your organization to have on society, and make sure it aligns with your goals and values.

You’ll also need to determine what your motivations are. Do you want to start a nonprofit because:

• You’re ready to take on the challenge of starting something new
• You want to be part of a community that shares your values and goals
• You want to help people in need
• You want nothing more than to make a difference

Not to mention, nonprofit status can be an excellent way to attract donors and receive tax-exempt donations from them. However, there are some restrictions on how much money a nonprofit organization can receive in donations. For example, if you want to start a 501(c)(3) nonprofit organization in New York City, your donation limit is $5,000 per person per year. And if you want to start a nonprofit in California, the limit is $10,000 per person per year.

Now, It’s Your Turn

In this guide, we looked at everything there is to know about starting a 501(c)(3) nonprofit—from what a 501(c)(3) is, to the types of 501(c)(3) organizations, to how to apply for tax-exempt status, and more.

Now, it’s your turn. Are you ready to start a nonprofit? Learn best practices on how to get donations and look no further than Classy to help you build your nonprofit website for donations and begin broadcasting your mission to the world. 

Sources:

1. IRS, Where’s My Application for Tax-Exempt Status?, https://www.irs.gov/charities-non-profits/charitable-organizations/wheres-my-application-for-tax-exempt-status

2. NOLO, How to Form a Nonprofit Corporation: A 50 State Guide, https://www.nolo.com/legal-encyclopedia/form-nonprofit-501c3-corporation-30228.html