Guest post by Angie Morris, CPA, Hawkins Cloward and Simister
Charitable giving is an American tradition. We contribute to charity for a multitude of reasons. For example, to give back to society or to support a cause we feel strongly about. The Center on Philanthropy at Indiana University found 88 percent of households in the U.S. give to charity. While there are numerous charitable organizations serving a variety of beneficial programs, the enterprise you feel strongly about may not be represented. Do not let that deter you, as you can still support your cause by establishing a nonprofit organization. Here are the steps you should take to create a nonprofit organization.
If you decide you want to create a nonprofit, your first step is to work with an attorney to create a nonprofit corporation. The attorney will verify that the organization name is available, prepare and file the articles of incorporation with the state, compose bylaws or governing documents and pay the filing fees with the state. Once you receive your articles, you are eligible to apply for tax-exempt status with the Internal Revenue Service. Tax-exempt recognition from the IRS allows your organization to be exempt from paying income tax on the net earnings of your organization. Exempt status will also grant donors a deduction for their contribution to your organization.
Remember, to be tax exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be operated exclusively for exempt purposes and the earnings cannot unfairly benefit an individual. The IRS considers exempt purposes to be providing for charitable, religious, educational, scientific, or literary purposes, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals. As you can see, charitable organizations include a broad range of activities that help the public.
It is important to remember that nonprofit organizations are regulated by state and federal governments. The regulation is in place to protect donors from fraud, and ensure that the nonprofits are serving the public. The IRS has granted you tax-exempt status and they want to follow the work your organization is performing. You will need to file an information return with the IRS annually. If you fail to file a return for three consecutive years, you will lose your tax-exempt status. It is a lot of work to get exempt status, so remember to file. Fundraising requires registration with the states. You should start with the state you are organized in and then any other states where you solicit funds. Registration typically requires an application and a fee paid to the state. States observe organizations soliciting funds over the internet; therefore, if you use the internet for fundraising, make sure you check the state registration requirements to avoid penalties. Come back next month for another article about setting up donor accounts.
After you have established your tax-exempt status, there are several things you will want to do to run your organization properly. The organization should be operated like a business and show measurable results. You need to have as much money coming in as you do going out. Budgeting your incoming cash and upcoming expenses will help you stay on target, allowing you to fulfill your mission. Make sure you keep good records and review them regularly. There are many reporting requirements for nonprofits. A good set of records makes the reporting accurate and easier to complete.
To reiterate, the steps you should take to create a nonprofit organization are:
• Establish a nonprofit corporation and file with your state.
• Apply for tax-exempt status with the IRS.
• Know and follow regulations such as fundraising registration, IRS filings, etc.
• Operate your organization like a business, allowing you to further your cause.
If you believe your cause could benefit by creating a nonprofit organization, talk an attorney today!
Angela A. Morris graduated from Brigham Young University. She is a member of the AICPA and the UACPA. She has served as the treasurer of the Utah Association of CPAs and president of the UACPA Southern Chapter. She is currently the vice chair for the Housing Authority of Utah County, the treasurer of the Utah Valley Chamber of Commerce Women’s Business Network, and on the executive board for the Utah Valley Chamber of Commerce. Angie loves spending time at Lake Powell and is a devoted St. Louis Cardinals fan.