Starting a Non-Profit: FAQ
There are many types of tax-exempt organizations. Two of the most common are 501(c)(3) charities and 501(c)(6) trade associations.
To form a non-profit, the organization must first incorporate as a Non-Stock Corporation in Connecticut or another state, and then file with the IRS for a determination of tax exempt status. Note that a 501(c)(6) organization, unlike a 501(c)(3), is exempt from paying income tax, but is not qualified to accept tax deductible contributions.
We provide a “turn-key” package that includes certificate of incorporation, by-laws, organizational consents, application for an EIN, and preparing and filing the correct Forms with the IRS (Form 1023, Form 1023-EZ or Form 1024). Creating a nonprofit organization does require on-going maintenance, filing and commitment on the part of the organization, and you should consider the pros and cons.
Two questions we are always asked: How much will it cost? How long will it take?
How much will it cost?
We offer a 10% discount from our current hourly rates for nonprofit organizations if payment is made within 30 days. We may also consider a flat fee, and can provide a cost estimate after we have met the people involved and assessed the complexity of the situation.
A simple incorporation and filing the standard Form 1023 or 1024 application for tax exempt status usually takes about 15-20 hours of lawyer time to complete correctly. That being said, we just finished a very simple project in about 12 hours, and a more complex project that took more than 25 hours.
The IRS has introduced a new form, called the Form 1023-EZ, which is 3 pages, rather than 9 + schedules. If an organization is qualified to apply for tax exempt status as a 501(c)(3) charity, and is otherwise eligible to use this form, it can substantially reduce the time it takes a lawyer to complete the application for tax exempt status; although questions remain about the wisdom of using the short form.
The Form 1023-EZ must be filed electronically at pay.gov. The Form 1023-EZ does not change any of the procedures required to incorporate as a Connecticut Non-Stock Corporation.
Who Is Eligible To File Form 1023-ez?
Organizations with gross receipts of $50,000 or less and assets of $250,000 or less may be eligible to file the Form 1023-EZ.
The Organization must also complete the Eligibility Worksheet prior to filing the Form 1023- EZ. The client and attorney will review the Eligibility Worksheet together during the initial consultation.
What Keeps A Project Simple?
- Using our standard form documents, including by-laws. We can incorporate critical provisions from existing by-laws into our forms, but the more customized the by-laws, the greater the time/cost. Using the client’s existing by-laws rarely, if ever, works out.
- The client provides us with complete, accurate and timely information based on checklists we provide. There is quite a bit of work for the client to do, so an organized and thorough person should be designated to work with us. This can be the most important factor in keeping the cost down.
- No question as to whether the organization meets the criteria for tax exempt status.
- Eligibility to file a Form 1023-EZ.
- No IRS “hot button issues” (which can be hard to predict).
- Simple operations, budget and governance structure.
- A governance structure with members is more complicated than a self-perpetuating board of directors.
Will It Save Time If The Client Does Some Of The Work Themselves?
No. Many nonprofit founders try to reduce legal fees by creating organizational documents, such as by-laws, themselves. But, fixing client documents usually takes more lawyering than using our standard checklists and forms would.
The Form 1023 may look simple, but legal counsel is often required to complete it correctly, even if the organization is eligible to file the new Form 1023-EZ. Although the application may have gotten easier, the rules governing 501(c)(3) organizations have not changed, and nonprofit organizations must understand what is required to remain exempt.
A client can save legal fees by completing the checklists accurately and answering follow-up questions quickly.
How Long Will The Process Take?
The time frame to submit an application for tax exempt status is really driven by how fast the client can provide us with all of the required information in a timely and accurate manner.
The IRS review process takes 6 months or more for a long-form 1023, and 90 days for the 1023-EZ. That being said, we just obtained tax exempt status for a simple 501(c)(3) charity in two months. We can help reduce the wait time by making sure the documents are submitted correctly from the outset. Generally, once tax exempt status is achieved, it is effective as of the date the organization was incorporated.