Forming a Nonprofit Checklist

Starting a nonprofit organization checklist can seem like a daunting task when considering all that is involved. Between the forms, frustration and legal lingo, the whole process can be extremely overwhelming. To help with this, we’ve created a checklist for you to use when forming your organization. Just follow the steps below to get started:

1. Approve Your Articles of Incorporation
2. Apply for an EIN
3a. Tax-Exempt Status: Create Bylaws
3b. Tax-Exempt Status: Create a Board
3c. Tax-Exempt Status: IRS Tax Exemption

If you followed step one, then you’ll have already completed number one on the checklist. The next thing to complete will be an EIN.

2. Apply for an EIN

What Is an EIN?

All businesses (including nonprofits) need an Employer Identification Number (or EIN). An EIN works just like individual Social Security numbers. The EIN is formatted like this: 12-3456789. It is issued by the IRS and can be used for all of your organization’s legal activities, such as opening a bank account, hiring employees, applying for business licenses, and filing tax forms.

There are other names for the EIN, such as Federal Employer Identification Number (FEIN), and Federal Tax Identification Number (TIN). To avoid having to use a personal social security number while you begin the process of starting up your nonprofit, you should apply for an EIN once you have the details of your organization set up.

You may need an EIN before filing for incorporation in your state and before applying for tax-exempt status from the IRS. It is just as important to protect your EIN as it is to protect a personal social security number. So guard it carefully.

How to Apply for an EIN

The person applying for the EIN must be a “responsible and duly authorized member or officer of the exempt organization.” Your authorized agent or incorporator can also file for the EIN on your behalf. That person will use his or her personal social security number for the application. However, once the EIN is established, no personal social security number will be needed. The person applying for the EIN will need to have, besides his or her social security number, your organization’s legal name and both the mailing address and the physical address of your organization.

There are three ways to obtain the EIN, and they are all simple:

• Call 1-800-829-4933 (toll-free) to make the application.
• Download IRS Form SS-4 from the IRS website. Fill out the form, and fax or mail it in.
• Apply online and have the confirmation letter emailed to you. This is the preferred method and the fastest.

To make sure you understand how to apply for the EIN, check out the IRS instructions (PDF). Or, at the very least, read this short explanation specifically for nonprofits. Also, it is a good idea to print out the SS-4 and fill it out before you tackle the online form. If you don’t do this, the online form could time out before you finish.

Once you have the EIN, you can use it on all the documents for your nonprofit, from applying for a bank account to filing your annual tax form (known as the 990).

Important Side Note: Scams

There are ads online for services that would like to help you apply for your EIN at a considerable cost. These are scams. You do not need a specialist to get your EIN. Work directly with the IRS by following the tips above, and you will do just fine. Plus, the IRS charges nothing.

3. Tax-Exempt Status

You’ll notice on the checklist that the next three items are labeled 3a, 3b, and 3c. This is because some of the information on 3a will require information from 3b, and vice versa, so you’ll need to have all three completed before filing for tax-exempt status.

3a. Create a Board

You’ll also want to create a board. Your board is legally responsible for governance, fiduciary, and strategic oversight of your nonprofit corporation. This usually includes ratification of your initial bylaws, as well as overseeing budget management. The board has an obligation to ensure that the nonprofit stays on mission and operates effectively.

The IRS generally requires a minimum of three board members for every nonprofit, but does not dictate board term length. Board service terms aren’t intended to be perpetual, and are typically one to five years. Service terms must be outlined in the nonprofit bylaws. New board members are typically nominated and given an up or down vote by existing board members in traditional organizations, and by stakeholder vote in nonprofits that operate via membership.

The IRS expects (and state law usually dictates) that a board of directors should meet a minimum of once a year, and best practices suggest four times a year. During these meetings, the annual budget is passed, and operational and strategic decisions requiring votes are discussed. It is important to remember that the board of directors is responsible for the governance of the nonprofit, not the management.

Once you choose who will be on your Board of Directors, you’ll need to officially relinquish partial control of your organization to them so that they have the authority to act as a Board. The document is called incorporator minutes, because you, as the incorporator, are officially documenting your choice to give your board candidates power in the organization.

3b. Create Bylaws

Your nonprofit’s bylaws are both a legal document and a roadmap for your organization’s actions. A required element when forming a corporation, bylaws are a form of agreement or contract between the corporation and its owners to conduct itself in a certain way. While for a commercial business the owners are its shareholders, the ownership of a nonprofit corporation belongs to the public as represented by the nonprofit organization’s governing body, usually a Board of Directors.

Why a Nonprofit Needs Bylaws

Nonprofits apply to their states to become incorporated. A nonprofit is a form of business and is thus regulated by states. To be incorporated, an organization must have a set of bylaws. There is no requirement that a nonprofit doing charitable work must become incorporated, but there are many advantages to doing so. The most significant advantage is that there is limited liability should anything go wrong.

If you choose not to become incorporated at the state level, you could set up an unincorporated nonprofit. However, that only works if your organization is quite small with limited income. Incorporation requires you to set up all the legal requirements such as bylaws that the IRS looks for when granting tax exemption.

What Should Be in Your Nonprofit’s Bylaws

Bylaws vary according to the nature of your organization but consider them to be your internal manual for how you will operate. A Board is required in order to make bylaws, and the documentation your Board creates when making bylaws is called board minutes.

3c. IRS Tax-Exemption

To apply for recognition by the IRS of exempt status under section 501(c)(3) of the Code, use a Form 1023-series application. The application must be complete and accompanied by the appropriate user fee. See the Application Process for a step-by-step review of what an organization needs to know and do in order to apply for recognition by the IRS of tax-exempt status. Frequently asked questions about applying for exemption generally, and Form 1023 specifically, are also available. You may also want to view some of our tools designed to help you apply for an exemption.

Except for churches, their integrated auxiliaries, and public charities whose annual gross receipts are normally less than $5,000, organizations will not be treated as described in section 501(c)(3) unless they notify the IRS by applying for recognition of section 501(c)(3) status. Generally, organizations required to apply for recognition of exemption must notify the Service within 27 months from the date of their formation to be treated as described in section 501(c)(3) from the date formed. When the IRS determines that an organization qualifies for exemption under section 501(c)(3), it will also be classified as a private foundation, unless it meets the requirements to be treated as a public charity.

A charitable organization must make available for public inspection its approved application for recognition of exemption with all supporting documents and its last three annual information returns. The organization must provide copies of these documents upon request without charge (other than a reasonable fee for reproduction and copying costs). Penalties are provided for failure to comply with these requirements. For more information, see our frequently asked questions, the final regulations published in Internal Revenue Bulletin 1999-17, or Disclosure Requirements.

You can choose to submit an application letter requesting an expedited review, along with your Form 1023.

After Finishing the Nonprofit Checklist

Once you’ve applied for an EIN, have documentation for your bylaws, Board, and have filled out your Form 1023, you’re ready to submit them to the federal government.

Then, when you are good to go and need to start managing your nonprofit and its finances, Aplos is here for you. Manage your accounting, giving, donors, and more in one software.