Do-It-Yourself Steps to Start a Nonprofit
Starting a nonprofit organization is a complex and time-consuming endeavor. A nonprofit is a business and, just like a for-profit, it requires a collection of resources ranging from time and effort to financial support. While the mission is always the most important element of a successful nonprofit, founders must also focus on business planning and legal compliance.
In order for your organization to be treated as tax-exempt for federal income tax purposes, and to receive tax-deductible contributions, it must receive a determination about its status from the IRS. To do this, you must file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The 1023 Application is complicated – the IRS estimates that it takes a novice 100+ hours to complete. A successful application is only the first step to achieving and maintaining tax exemption and federal and state legal compliance.
Planning on tackling your Form 1023 yourself? We encourage you to consult a licensed professional before submitting your application. In preparation, follow the phases below to launch your nonprofit organization. Be aware that tax-exempt organizations can take different forms. If you’re a Maryland Nonprofits member, give us a call for help figuring out which tax-exempt status your organization should pursue (501(c)(3), 501(c)(4), 501(c)(6), etc…). The process below presumes you will be filing for 501(c)(3) public charity status.
Phase 1: Research and Organize
Follow the steps below to put a solid foundation in place before incorporating your organization and submitting your Form 1023. Reference our “Checklist for Starting a Nonprofit in Maryland” throughout your journey.
- ESTABLISH A PURPOSE
The purpose of the organization needs to be exclusively charitable and/or educational, aligning with the restrictions of IRS §501(c)(3).
- RECRUIT A BOARD OF DIRECTORS
This should be a group of at least 5-7 unrelated individuals that will be responsible (legally) as fiduciaries for the organization’s governance, finances, and legal compliance. “Unrelated individuals” means people who are not related to each other by family or business relationships. The most important quality of a successful board member is their commitment to your mission, but you want to recruit individuals that have skills to share with your organization.
- RESEARCH SIMILAR ORGANIZATIONS
Before you start your own nonprofit, it is essential to understand if there are organizations in your community already providing the services and programming you want to deliver. Conduct a market analysis to identify other organizations that have similar purposes to your intended organization. Such organizations are resources to help you determine the need in the community, the viability of your idea, the types of programs that already exist, and the level of support available, both financial and otherwise. Research potential sources of revenue for your program and determine if other members of the community will be supportive of your efforts (these could be future board members).
- DEVELOP PROGRAM PLANS & A BUDGET
You will need to describe your proposed program activities in detail. This includes exactly whom you plan to serve and by what means. Once you make those determinations you will need to create a projected budget for your first three years. This includes all expected forms of income (grants, donations, fee for service, etc.) and necessary expenses to operate your business and deliver the programs described.
- CREATE A MISSION STATEMENT
Your founding board must articulate a mission for the organization: a clear, brief statement that tells the community what your purpose is, and what you wish to accomplish through your charitable efforts.
- DRAFT BYLAWS
Bylaws are the organization’s rules for internal governance and dictate the specifics regarding how the board of directors functions and how important decisions are made and carried out. Bylaws should be signed by at least two officers and must be attached to the federal tax-exemption application (but do not need to be submitted to the State). Download our Sample Bylaws customizable template.
- DEVELOP A CONFLICT OF INTEREST POLICY
This policy will ensure that conflicts of interest are avoided whenever possible, and mitigated when decisions are made regarding the use of organizational resources. A conflict of interest policy and accompanying declaration of interest statement help to protect the organization and its board members in cases where competing interests exist. An organization’s Conflict of Interest Policy should be attached to its federal tax-exemption application. Members of Maryland Nonprofits can download a copy of our Conflict of Interest Policy template by logging in to the Member Portal. Join Maryland Nonprofits now.
Phase 2: Create a Corporation
Before applying for federal income tax exemption you should create a legal entity (corporation) by following the process outlined below.
- FILE ARTICLES OF INCORPORATION (CORPORATE CHARTER)
File Tax-Exempt Nonstock Articles of Incorporation. In order to have articles that will qualify your corporation for Federal §501(c)(3) tax-exempt status, you must have a dissolution clause that meets the IRS’ requirement that if your organization is dissolved, “assets will be distributed for an exempt purpose described in §501(c)(3), or to the federal government, or to a state or local government for a public purpose.” File with Maryland State Department of Assessments and Taxation, Corporate Charter Division. You may now also file electronically through the Maryland Business Express. To file by mail or in person: 301 W. Preston Street, Room 801 Baltimore, MD 21201-2395 410.767.1184 Fee: $170 ($150 fee plus $20 Organization & Capitalization Fee); we recommend you consider expedited service, which is an additional $50. Download our Articles of Incorporation Template.
- CONDUCT ORGANIZATIONAL BOARD MEETING
At this meeting, board members identified in the Articles of Incorporation elect a slate of officers including President, Vice President, Secretary, and Treasurer, ratify bylaws, and accept Articles of Incorporation. The Secretary should record meeting minutes to create a record of the meeting and elected officers. This meeting is required by law in order to complete the formation of your corporation. Note: Founders must understand the difference between serving on the Board and serving as paid employees. We encourage founders to determine in advance of formation whether to serve as a volunteer board member or to serve as a paid staff member (for example, Executive Director).
- OBTAIN FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN) FROM THE IRS
You can file the form SS-4 online or by mail, phone, or fax. Internal Revenue Service Attn: EIN Operations Cincinnati, OH 45999 Phone: 800.829.4933 Apply for an Employer Identification Number
- READ FAQS ABOUT CORPORATIONS AND TAXES. Download Corporations and Taxes FAQs sheet.
Phase 3: Get Your 501(c)3 Status
Become a nonprofit organization by filing a 1023 Application with the IRS. Nonprofits obtain public charity status under Section 501(c)(3) of the Internal Revenue Code by filing an application with the IRS. Depending on its circumstances, an organization may file either the Form 1023 Application or the online-only Form 1023EZ*. The time needed to complete this form varies greatly based on individual circumstances. The Form 1023 (long-form) can be difficult to understand and extremely time-consuming. Answering incorrectly can jeopardize the application and your chances of success.
*To determine if you are eligible to file the short form, you must complete the Form 1023-EZ Eligibility Worksheet on pages 11-20 of the Form 1023EZ Instructions. You do not submit incorporation or other organizational documents with the online filing but must attest under penalty of perjury to the existence and content of the documents and other required information. Learn about filing the IRS Form 1023EZ online.
COMPLETING AND FILING THE IRS FORM 1023
IRS Form 1023
IRS Form 1023 Instructions
IRS Frequently Asked Questions about using the Form 1023
In addition to the printable paper IRS Form 1023, there is also an “Interactive Form 1023” that you can complete online, then download and print for filing by mail or in person. Filing a Form 1023 will require a date-stamped copy of your filed Articles of Incorporation, signed Bylaws, an adopted Conflict of Interest Policy, a detailed description of program activities, and your program budget for at least 3 years.
IRS FORM 1023 FILING FEES:
$400 – if your projected gross revenue average is less than $10,000 for the first three years.
$600 – if your projected gross revenue average is greater than $10,000 for the first three years After filing the Form 1023, IRS response time can vary, taking anywhere from 3-12 months before you receive your determination letter.
Phase 4: Once You Have Your 501(c)3
Congratulations! You received your determination letter from the IRS and are tax-exempt! However, there are still some important legal requirements you will need to meet to obtain exemption from certain state taxes and to register to fundraise. Follow these important next steps to wrap up your work.
CHARITABLE SOLICITATIONS – REGISTER WITH THE MARYLAND SECRETARY OF STATE
- Organizations that received less than $25,000 in the previous fiscal year, file the Exempt Organization Fund Raising Notice.
- Organizations that receive more than $25,000 in the previous fiscal year, file the Registration Statement, or COR-92 with necessary attachments.
Maryland Charitable Organizations Division
Office of the Secretary of State
Annapolis, Maryland 21401
410.974.5534 or 1.888.874.0013 (within Maryland)
REQUEST SALES & USE TAX EXEMPTION FROM THE COMPTROLLER
File the Sales and Use Tax Exemption Certificate (SUTEC) Application to:
- Apply for exemption from Maryland Sales Tax on purchases for your organization
- Establish payroll withholding account for employees, if applicable
- Filing for employees’ unemployment insurance, if applicable
- Establishing workers’ compensation coverage, if applicable
FILE FOR STATE INCOME TAX EXEMPTION
Send a letter to the Comptroller of the Treasury stating the charitable nature, purpose, and scope of your organization. Include a copy of the IRS’ determination letter, a copy of your organization’s bylaws, and a copy of the latest financial statement (which could be the COF-85, if you have not completed a tax year) of your organization to:
Comptroller of the Treasury
Revenue Administration Division
Attention: Legal Department
110 Carroll Street
Annapolis, MD 21411
1.800.MD.TAXES (638.2937) and 410.260.7980
If your organization owns real estate, you may apply for exemption from state and local property taxes by filing an application with the local office of the State Department of Assessments. These forms may be downloaded:
Phase 5: Maintain Your Nonprofit Status
REQUIRED FILINGS FOR KEEPING YOUR NONPROFIT STATUS ACTIVE:
- FILE MARYLAND FORM NO. 1 – PERSONAL PROPERTY RETURN
Due every year by April 15th. All business entities formed, qualified, or registered to do business in Maryland must file an Annual Report. If the business can answer yes to either of these questions, it must also file a personal property return:
- Does the business own, lease, or use personal property located in Maryland?
- Does the business maintain a trade’s license with a local unit of government in Maryland?
- FILE FORM 990-N, FORM 990-EZ, OR FORM 990 WITH IRS BASED ON ANNUAL GROSS RECEIPTS
The form required depends on the organization’s annual gross receipts. This form is due the 15th day of the 5th month after the organization’s accounting period ends (May 15th for a calendar year filer).
- READ IRS COMPLIANCE GUIDE FOR 501(C)(3) PUBLIC CHARITIES
- READ “THE IMPORTANCE OF AN ACCURATE FORM 990.”
Download our “Importance of an Accurate 990” sheet.
- UPDATE SOLICITATION REGISTRATION ANNUALLY
File an annual update of the forms listed above in “Once You Have Your 501(c)(3) – Charitable Solicitation Form (COR-92)” within six months of the end of the organization’s fiscal year (other deadlines may apply in other states).
- SUBSTANTIATION AND DISCLOSURE REQUIREMENTS
Organizations must give written acknowledgment of charitable contributions and must make certain documents available publicly. For more information, see: Disclosure Requirements
- RESIDENT AGENT AND PRINCIPAL OFFICE
Update resident agent and office information, as necessary, by filing a resolution with the State Department of Assessments & Taxation.
- MAINTAIN ACCURATE AND COMPLETE CORPORATE AND FINANCIAL RECORDS
Adopt policies that ensure proper oversight and controls on financial matters and retention of documents.
- OBTAIN ANY REQUIRED STATE OR LOCAL LICENSES OR PERMITS
For more information, consult the Maryland State Department of Labor, Licensing and Regulation or the Maryland Department of Commerce. The State Department of Assessments and Taxation has a comprehensive listing of possible other considerations for new business entities.
IF YOU HAVE EMPLOYEES AND/OR INDEPENDENT CONTRACTORS:
Failure to comply with some employment laws may expose individual Board Members to personal liability that is not covered by Directors’ & Officers’ Liability Insurance.
- Register employees with the comptroller of Maryland
- Pay state employment and unemployment taxes
- Pay federal employment taxes
- Pay workers’ compensation insurance
- Display required posters
- Obtain proper insurance for the organization, board members, and officers
- Assess all insurance needs for the organization, including general hazard, property, and Directors and Officers liability