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Community Law Center
Pro Bono
E-News
June 2005
For
nonprofits - What does 501(c)(3) mean, anyway?
Your organization wants to obtain its 501(c)(3)
tax-exempt status. What do you do?
The term 501(c)(3) refers to the section of
the IRS code that addresses organizations with charitable
purposes. An organization has to meet certain criteria to be
given the distinction of being a nonprofit by the IRS. Once
an organization has earned this distinction, however, donations
from donors are tax deductible. There are many items that need
to be in place before the application process can be pursued and
the Law Center's Nonprofit Legal Services Project can assist
with this application process.
A.
ORGANIZE. You should have
a core group of people committed to a common purpose and who
understand how they will establish the organization and raise
the money to carry out the planned activities. The group should
develop a basic working plan for the
organization or project by setting its
goals, planning activities and developing a fundraising plan.
1. Create Articles of Incorporation (also called a Charter):
This document, when filed with the State creates a new legal
entity.
2. File the Articles of Incorporation with the State of
Maryland (as a non-stock corporation)
Department of Assessment and Taxation
Charter Room 809
301 W. Preston Street
Baltimore, Maryland 21201-2395
The cost is $100.00 (Fees are subject to change, check their
website
http://www.dat.state.md.us before you go.)
3. Draft the Bylaws. The purpose of bylaws is to lay out the
rules of conduct and authority for the board of directors,
officers and members
4. Organizational Meeting. The organizational meeting is the
first official meeting of the new corporation. The persons who
must be present or sign the minutes are the directors named in
the articles of incorporation. By the time you hold the
organizational meeting, you should have a diverse and committed
group as the board of directors. An all-family or one-person
board will not pass muster with the Internal Revenue Service.
Bylaws should be in at least draft form.
5. Federal Employer Identification Number (EIN). This is like
a Social Security number for an organization. Every organization
needs such a number in order to open a bank account or transact
business with the federal government - even if there will never
be any employees. To get an EIN, you must file an "Application
for Federal Employer Identification Number" Form SS-4, with the
IRS.
To get IRS forms call: (800) 829-3676 or visit
http://www.irs.gov
6. IRS Tax Exemption. Nonprofit does not mean tax exempt. An
organization can be incorporated and nonprofit without being tax
exempt. Most beginning small businesses do not make a profit.
The only way an organization can be determined to be tax exempt
is to make an application to the IRS. There are two exceptions
to the application requirement:
1) The organization's gross revenues normally do not exceed
$5000 or
2) The organization is a church or an integrated auxiliary of a
church.
Most organizations applying for tax exempt
status will seek a 501(c)(3) as a charitable, educational
organization. In a 501(c)(3) organization, the IRS will require
a board of directors to have an arms-length relationship with
the organization and not benefit from its services.
B.
FEES AND PROCESSING TIME. The cost to apply for tax exempt status is
$150 for an organization with a projected budget of under
$10,000 per year and $500 for organizations projecting budgets
of more than $10,000. Calling the IRS at (800) 829-3676 to
check on any fee changes is recommended. IRS form to get -
Application for Recognition of Exemption Under Section 501(c)(3)
Package 1023. (This is a really long form - hence the term
"package." You need to have a fully developed business plan to
complete this paperwork.) The IRS may mail your paperwork back
to you and ask you for additional information or to clarify a
response. It normally takes a minimum of 3 months from start to
finish to complete the process. Once you have received your IRS
determination letter, you are a nonprofit organization.
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construction please watch for updates
Last Updated:
September 25, 2006 ©
2006 Community Law Center, Inc. Baltimore, Maryland
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The Community Law Center, Inc.
