When your association needs nonprofit status and how to get started

“A small group of people could change the world. In fact, it’s the only thing that ever has.” –Margaret Mead

If you are leading one of those small groups trying to change a small part of your world, you are very lucky. You have been able to channel all that enthusiasm towards a higher purpose, in an area where you can make a real difference. However, at some point you have hit a legal wall that prevents you from maximizing your potential to do good.

Let’s say you run your child’s high school booster club and want to raise money to buy new equipment for the kids or travel to a big event thousands of miles away. You know bake sales and car washes aren’t going to do it, and most parents are reluctant to turn their kids into beggars by begging everyone they know. There are plenty of private for-profit fundraising operations that would be happy, for a substantial part, to get kids into their program to sell candy, wrapping paper, or other useless gift items. You’d rather not go there, and it probably won’t produce the net income you need either.

Then someone has a brilliant idea: “Let’s start a weekly bingo game!” You find out that bingo can actually be a real money maker, and everyone on your board of directors is excited. So, he contacts the state government office that oversees charitable activities and learns that only incorporated non-profit organizations can conduct this type of gambling operation. This is just one of the many types of income-generating activities that require nonprofit status. Others may include qualifying to apply for a grant or being one of the recipients of a major civic fundraising event. And it’s not just any old type of non-profit organization: it has to be a bona fide 501(c)(3) charity.

How hard can it be, you think. Once you dig deeper, you find the answer: VERY difficult. There’s a bewildering variety of forms to incorporate, and that’s less than half. The most important thing is to get your 501(c)(3) status. At this point, looking at the overwhelming variety 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 their application for free.

Undaunted, you keep going even if you can’t find that attorney/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 website. You will usually find them inside the Secretary of State’s office.

(2) Find at least 3 people in your association willing to name themselves as the initial Incorporators. They will need to sign on the bottom line of your incorporation form, certifying that ever the organization is dissolved, its assets will be transferred only to some other non-profit entity. Mail it to your Secretary of State and shortly thereafter, you’ll receive it with the official seal of approval.

(3) Apply to the IRS for an employer identification number. This form, called the SS-4, is easy to find and file online at the IRS website. (Look for the Charities tab.)

(4) Gather all your financial records. If you’ve been in business for a while, you’ve probably been working under some type of budget plan and receiving some type of monthly and yearly financial statements from your treasurer. Make sure all those numbers are correct on your balances.

(5) Identify any assets your group already owns and assess their value by looking at used items on the open market.

(6) If you don’t already have a set of bylaws by which your business operates, you will need to write some. (Look for a separate article here on Nonprofit Bylaws Basics.) They must be included in your tax exemption application.

(7) You will need cash on hand. There are fees just to file the incorporation, plus fees to obtain a certified copy from the State, and a very high fee required by the IRS to process your 501(c)(3) application. Set aside at least $1,000 to cover these miscellaneous costs. If you plan on running that bingo game, you’ll also need a specific permit from your state’s charitable activities section; usually, that’s inside the state Attorney General’s office.

(8) Finally, get the complete IRS information packet for tax-exempt status, Publication 570. The application itself is called Form 1023.