Step-by-Step Guide to Forming a Non-Profit

A non-profit organization can have several definitions depending on the perspective of the people discussing the matter and the context of the discussion. To the layman, the term generally means a charitable institution or perhaps a church, or an organization which provides assistance to the community which isn't provided by the government.

To a tax accountant, the term refers to a legal loophole which provides deductions and changes the amount of taxes owed in relation to profits earned. Arguably the best explanation is that a person or people realize how important the community is to themselves and their business interests, and with the best of intent want to return the support the community has provided the organization with a show of appreciation for their continued business.

Name the Company

The first step toward forming a non-profit organization is fairly simple, deciding a name for the group. Although the name can be similar and represent the for-profit business sponsor, it does have to be different. It also has to be unique, a name that hasn't already been taken by a different non-profit charity. The given name is followed by “Incorporated,” “Corporation,” Or “Limited Liability Company (LLC)” according to the category it falls under, which is going to be legally defined by the function the charity serves and the type of insurance it has.

File for Official Name Recognition

“Articles of Incorporation” refers to filing the company officially with the local government. The exact process varies by state, but is generally a relatively easy task for someone successful enough already to be starting a non-profit organization. Assuming a lawyer is already involved with the process, that would usually be the person who fills out such paperwork, perhaps in some cases an accountant would do it. With that said, there's nothing which prevents the owner or any of their staff from reading the instructions and filing such papers, as long as it gets done and the company is officially recognized as a non-profit.

File for Tax Exempt Status

Along the same lines, an official 501(c)(3) form needs to be filed with the IRS for recognition of the tax exempt status at a federal level. This aspect is important because it allows the parent company, or an individual person as the case may be, to write off the charity funds from being taxed as regular income or profit. Additionally, and again this varies by state, but some states require a similar but separate form for state tax purposes while other states recognize a copy of the IRS form as adequate to prove tax exempt status.

Declare Company Policy

Policies are important to maintain the appropriate level of responsibility for the company. Bylaws prevent misuse of funds, and routine meetings prove to potential donors their money is being properly managed and going to the cause they intended to support. Casual discussions among members and employees are generally sufficient for daily operations, but formal scheduled meetings have to be held regularly to provide accountability. It isn't very different from how a for-profit business manages itself, there has to be a paper trail to prove what money came in and how it was spent to assure investor confidence and proper tax reporting. The bylaws determine how the organization is going to operate and define what is or is not appropriate use of the funding the company receives.

Appoint an Oversight Committee

An oversight committee, or Board of Directors, is another way to assure the business is operating as intended and according to what is legally required. Essentially, the Board of Directors accepts ultimate responsibility for how the company operates, and determines if or when policies are appropriate or need to be changed. Again, it has to do with investor confidence and tax accountability, in that one person isn't making all the major decisions without being held accountable for their actions. As an example, a charity that provides assistance for homeless people might find a hot tub to be an inappropriate expense, but a small gym could potentially be a boon to the facilities. The Board of Directors prevents any one person from making such a decision, but instead discusses options and work together to determine what is best for the company's long term goals.

Schedule Board Meetings

The first board meeting is going to schedule a timeline for future board meetings, and also assign direct responsibilities to elected officials. The president is going to have the authority to make immediate decisions between board meetings, the treasurer is going to be accountable for funds. An elected secretary will keep minutes for each meeting and often be the first person approached by potential donors or recipients of the charity. Other officials may be elected as needed according to the non-profit organization's setup and purpose. As the saying goes, “the buck stops here,” and elected officials define exactly where that proverbial buck stops.

Accept Appropriate Licenses and Permits

As the company evolves, it is going to be properly licensed and permitted to conduct the actions it uses to achieve its goals. To cite the previous example of helping homeless people, even a free soup kitchen has to be properly licensed according to local regulations of how a restaurant is allowed to operate. If fundraising events include sales, the company has to be properly licensed with a sales tax permit to record such transactions. Even though the company is a charity, or non-profit organization, it has to abide by all federal and state laws and local ordinances when conducting business.

What Are the Benefits of Forming a Nonprofit?

Just as the definitions of a non-profit organization vary according to the context of the conversation, the benefits are also a matter of perspective. The immediate and most obvious answer is that the people involved with the company want to and are doing something good for their community at either a local, state, federal, or global level according to their resources. A less pure but equally acceptable benefit is more individual, as charitable contributions can change a tax bracket or exempt certain money from taxation. Regardless of intent, non-profits are governed in such a way as to be a boon to society with resources not generally available through government budgets and funding.

If you’re planning to form a non-profit, be sure and consult with your CPA. A CPA will help to ensure that you comply with all the regulations surrounding non-profits and help you establish operating procedures that will keep you in compliance for years to come.