Nonprofits

The short version

Nonprofits, including 501(c)(3) organizations, are businesses created for purposes other than making a profit for owners. They serve charitable, educational, or other public-benefit goals. Understanding state laws and federal tax rules helps you form one correctly and stay compliant, ensuring your organization can achieve its mission.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

State Business Corporation and LLC Acts (e.g., Delaware General Corporation Law, California Corporations Code)
These acts define how legal entities, including corporations and limited liability companies, are formed, governed, and dissolved within a state. They outline requirements for articles of incorporation, bylaws, and board structures.
Why it matters: You must follow your state's specific laws to legally create a nonprofit entity before you can seek federal tax-exempt status.
15 U.S.C. § 1 (Sherman Act)
This federal law prohibits contracts, combinations, or conspiracies that restrain trade or commerce among states. It aims to prevent monopolies and promote competition.
Why it matters: Even nonprofits must avoid anti-competitive practices, like colluding with competitors on pricing or services, or risk legal penalties.

Words you need to know

Nonprofit Corporation: A legal entity formed under state law for purposes other than generating profit for its owners. It typically has members or a board of directors.
501(c)(3) Organization: A specific type of nonprofit corporation that has been recognized by the IRS as exempt from federal income tax because it operates for charitable, educational, religious, scientific, or literary purposes.
Articles of Incorporation: The foundational document filed with your state's Secretary of State to create a nonprofit corporation. It includes the organization's name, purpose, and registered agent.
Bylaws: Internal rules that govern the operations of your nonprofit, such as how board meetings are held, how directors are elected, and who has authority.
Board of Directors: A group of individuals legally responsible for governing the nonprofit, overseeing its mission, finances, and operations.
Private Inurement: A forbidden practice where the nonprofit's earnings or assets unfairly benefit a private individual, such as a founder, director, or their family members. This can lead to loss of 501(c)(3) status.

Your rights

✓You have the right to form a nonprofit corporation in your state if you meet the statutory requirements.
✓You have the right to apply for federal tax-exempt status for your nonprofit if it meets IRS criteria (e.g., 501(c)(3)).
✓You have the right to operate your nonprofit according to its stated purpose and bylaws, as long as it complies with all laws.
✓Your nonprofit, if 501(c)(3), can receive tax-deductible donations from donors.
✓Your nonprofit must be treated fairly under antitrust laws like the Sherman Act, meaning you cannot be prevented from competing fairly.

How the process actually works

1
Choose your State
Before any legal filings.
Decide which state you will incorporate your nonprofit in. This is usually where you plan to operate primarily.
2
Form State Legal Entity
Initial step after planning; Varies by state for processing.
File Articles of Incorporation with your chosen state's Secretary of State (or equivalent office). This creates your nonprofit corporation under state law.
3
Adopt Bylaws and Elect Board
After incorporation, before applying for 501(c)(3) status.
Develop and formally adopt bylaws, which are your organization's operating rules. Elect your initial board of directors according to your bylaws.
4
Obtain EIN
After state incorporation, before applying for 501(c)(3) status.
Apply for an Employer Identification Number (EIN) from the IRS. This is like a Social Security number for your nonprofit.
5
Apply for 501(c)(3) Status
Within 27 months of incorporation for retroactive exemption, but ideally as soon as possible after incorporation.
File Form 1023 (or 1023-EZ for smaller organizations) with the IRS to request federal tax-exempt status. This is how you become a 501(c)(3).
6
Register with State Charities Bureau
Before soliciting donations; Varies by state.
Many states require nonprofits that solicit donations to register with their state's Attorney General or charity oversight office.
7
Comply Annually
Annually, based on fiscal year; Varies by state and IRS.
File annual reports with your state and the IRS (Form 990 series). Maintain proper records, hold board meetings, and follow your bylaws.

Deadlines that can end your case

IRS Form 1023 Filing
Within 27 months of legal formation (date of incorporation)
If you file after 27 months, your 501(c)(3) status will typically only be effective from the date you filed Form 1023, not from your incorporation date.
State Annual Reports
Varies by state (e.g., annually by specific month)
Missing this can lead to fines, loss of good standing with the state, and potentially administrative dissolution of your corporation.
IRS Form 990 Series Filing
By the 15th day of the 5th month after your organization's fiscal year ends (e.g., May 15 for a December 31 fiscal year end)
Failure to file for three consecutive years will result in automatic revocation of your 501(c)(3) tax-exempt status.
State Charitable Solicitation Registration
Varies by state (e.g., annually, or before soliciting donations)
Operating without proper registration can lead to fines and legal action, impacting your ability to fundraise legally in that state.

Costly mistakes

✕Not formally incorporating your nonprofit with the state before attempting to get 501(c)(3) status.
✕Failing to adopt proper bylaws and hold regular board meetings, which can lead to governance issues and challenges to your tax-exempt status.
✕Missing the 27-month deadline to file Form 1023, causing you to lose a period of retroactive tax-exempt status.
✕Engaging in 'private inurement' or allowing individuals to benefit personally from the nonprofit's assets, which is prohibited for 501(c)(3)s.
✕Not filing required annual reports with the state or IRS (Form 990 series), leading to loss of good standing or tax-exempt status.
✕Not understanding or complying with state charitable solicitation registration requirements before asking for donations.

Your checklist

Choose your nonprofit's name and state of incorporation.
Draft and file Articles of Incorporation with your state's Secretary of State.
Obtain an Employer Identification Number (EIN) from the IRS.
Draft and adopt bylaws, and elect initial board members.
Open a bank account in the nonprofit's name.
File IRS Form 1023 (or 1023-EZ) to apply for 501(c)(3) tax-exempt status.
Register with your state's Attorney General or charity regulator, if required.
Set up a system for record-keeping and prepare for annual state and IRS filings.

Common questions

What's the difference between a nonprofit and a 501(c)(3)?

A nonprofit is a legal entity formed under state law for a non-profit purpose. A 501(c)(3) is a specific type of nonprofit that has been recognized by the IRS as tax-exempt for federal income tax purposes due to its charitable, educational, or other qualifying activities.

Can a nonprofit make a profit?

Yes, a nonprofit can generate revenue beyond its expenses. However, these 'profits' cannot be distributed to individuals like shareholders. Instead, they must be reinvested back into the organization to further its mission.

Do I need a lawyer to form a nonprofit?

While you can technically do it yourself, the process involves understanding complex state corporation laws and IRS tax regulations. A lawyer can help ensure your documents meet all legal requirements and avoid costly mistakes, especially with the Articles of Incorporation and bylaws.

How does the Sherman Act apply to nonprofits?

The Sherman Act prohibits anti-competitive practices. Even nonprofits are subject to this law if their actions restrain trade or commerce. For example, if two competing nonprofits collude on pricing for services or divide up service territories, they could violate the Sherman Act (15 U.S.C. § 1).

What happens if my 501(c)(3) status is revoked?

If your 501(c)(3) status is revoked, your organization will lose its federal income tax exemption. This means it may have to pay taxes on its income, and donors will no longer be able to deduct contributions to your organization. The IRS may also impose penalties.

How this changes by state

The process and requirements for forming a nonprofit corporation vary significantly from state to state. Each state has its own business corporation or nonprofit corporation act that dictates how you file your Articles of Incorporation, what information they must contain, and what ongoing compliance (like annual reports) is required. For example, some states require specific language in your articles of incorporation related to dissolution, while others might have different rules for director residency. To find your state's specific rules, you should visit the website of your state's Secretary of State or equivalent business filing agency, or consult your state's compiled statutes.

When you need a lawyer

You should consider consulting a lawyer when drafting your Articles of Incorporation and bylaws to ensure they meet both state corporate law requirements and IRS 501(c)(3) rules. A lawyer is also crucial if you face any challenges to your tax-exempt status, are involved in an audit, or if your organization is accused of anti-competitive practices under laws like the Sherman Act. They can also help navigate complex state charitable solicitation registrations or significant governance changes.

Do this today

→Research your state's specific requirements for forming a nonprofit corporation by visiting your state's Secretary of State website.
→Outline your nonprofit's mission, purpose, and initial board members.
→Begin drafting your Articles of Incorporation and bylaws, or seek legal assistance to do so.

This lesson is legal information for educational purposes only, based on State business corporation & LLC acts; 15 U.S.C. § 1 (Sherman Act). It is not legal advice and does not create an attorney-client relationship.