“A small group of people could change the world. In fact, it’s the only thing that ever has.” — Margaret Mead
If you’re leading one of those small groups trying to change some small part of your world, you’re very fortunate. You’ve been able to harness all that enthusiasm toward a higher purpose, in an area where you can make a real difference. At some point, though, you’ve run up against a legal wall that prevents you from maximizing your potential to do good.
Let’s say you’re in charge of your kid’s high school booster club, and you want to raise money to get the kids new equipment, or travel to some big event that’s thousands of miles away. You know that bake sales and car washes aren’t going to do it, and most parents are reluctant to turn their kids into beggars asking everyone they know for a handout. There are plenty of private, for-profit fundraising operations that would be happy, for a substantial cut, to get the kids into their program to sell candy, wrapping paper, or other useless gift items. You’d rather not go there, and it likely won’t produce the net income you need either.
Then someone has a bright idea: “Let’s start up a weekly Bingo game!” You find out that Bingo can actually be a real money-maker, and everyone on your board of directors is jazzed. So you contact the state government office that oversees charitable activities and learn that only incorporated nonprofits are allowed to conduct this type of gaming operation. This is only one of many kinds of income-producing activities that require nonprofit status. Others may include qualifying to apply for a grant, or being one of the beneficiaries of some major civic fundraising event. And it’s not any old type of nonprofit — it’s got to be a bona fide 501(c)(3) charitable organization.
How hard can it be, you think. Once you dig into it, you find the answer – VERY hard. There’s a bewildering array of forms just to incorporate, and that’s less than half of it. The biggie is getting your 501(c)(3) status. At this point, looking at the daunting array of forms and financial data required, many people give up. Or they start looking for a lawyer to put on their board, hoping they’ll handle your application for free.
Undaunted, you forge ahead even if you can’t find that lawyer/board member. Here’s what you’ll need to get started:
(1) Get all the forms you’ll need by downloading them from your state government’s website. Generally, you’ll find them within the Secretary of State’s office.
(2) Find at least 3 people in your association willing to name themselves as the initial Incorporators. They’ll have to sign on the bottom line of your incorporation form, attesting that the organization ever dissolves, its assets will be transferred only to some other nonprofit entity. Mail it back to your Secretary of State, and shortly thereafter you’ll receive them back with the official seal of approval.
(3) Apply to the IRS for an Employer ID number. This form, called SS-4, is easy to find & file online at the IRS website. (Look for the Charitable Organizations tab).
(4) Gather all your financial records together. If you’ve been operating for a while, you’ve probably been working under some kind of budget plan, and receiving some form of monthly and annual financial statements from your treasurer. Make sure all those numbers are correct on your balance sheets.
(5) Identify any assets your group already owns, and appraise their value by looking at used items on the open market.
(6) If you don’t already have a set of Bylaws by which you operate your business, you’ll have to write some. (Look for a separate article here on Nonprofit Bylaws Basics.) They must be included in your tax exempt application.
(7) You will need cash on hand. There are fees just to file for incorporation, more fees to get a certified copy from the State, and a very fat fee required by the IRS for processing your 501(c)(3) application. Reserve at least $1,000 to cover these miscellaneous costs. If you’re planning to run that Bingo game, you’ll also need a specific permit from your state’s charitable activities section; usually, that’s within the state Attorney General’s office.
(8) Finally, obtain the full IRS packet of information for tax exempt status, Publication 570. The application itself is called Form 1023.