Nonprofit organizations are a valuable and integral part of our society. Nonprofits can include charities, churches, schools, legal aid providers, volunteer service organizations, museums, or sports groups.
If you operate a nonprofit and are incorporated in the state where you operate, you must adhere to state laws and regulations, including business licensing and registration requirements.
Understanding state and local government requirements
Before your nonprofit starts operating, it’s important to review state and local laws. These can include:
- Registering with the Secretary of State as a charitable organization
- Obtaining a state-specific fundraising registration
- Registering for additional tax exemptions, if necessary, such as property tax, sales tax collection
- Obtaining permits and licenses required due to the nature of the nonprofits goods or services provided (e.g., healthcare), clients served, types of employees (e.g., healthcare providers), and location (e.g., zooming permit)
- Registering for unemployment insurance
- Registering for lobbying activities
Tips on forming a nonprofit organization
How a nonprofit is created
To create a nonprofit organization, Articles of Incorporation must be filed with the formation state (in the same way as a for-profit corporation). Once accepted your nonprofit has the same formalities and protections of a corporation. For instance, the assets of directors, trustees, officers or members are protected in the event of a lawsuit.
As part of the filing process, your nonprofit must appoint and maintain a registered agent in its formation state. You may also need to obtain permission from state departments or agencies before the Articles of Incorporation are filed. In New York, for example, several agencies must approve of the nonprofit’s business purpose. This adds time and fees to the process.
Note: A nonprofit differs from a for-profit corporation in that it exists for a charitable purpose or to serve the public good. None of the organization’s income can benefit its directors, members or officers. Furthermore, unlike a for-profit, a nonprofit does not issue stock and there are no stockholders or shareholders — just members who vote on governance matters.
Articles of Incorporation must contain specific language
Your nonprofit’s Articles of Incorporation must include certain clauses before it can apply for tax-exempt status. For example, the articles must reference a public purpose and ensure that any distributions are not issued to organizers or members. Without this language, the IRS can require that the articles are amended before an application for tax-exempt status is made.
Your nonprofit must also state that it is organized for charitable, religious, educational, or scientific purposes. This is known as the “purpose clause”.
There is also a “distribution clause”. This attests that the founders, members, directors, and officers receive no benefits from the nonprofit organization, other than reasonable compensation for their services. This “no private benefit” rule applies while your nonprofit is operating and continues when the organization is terminated. At that point, distributions can be made only to organizations that qualify as exempt under Section 501(c)(3) of the IRS code.
CT tip: If you are not sure you want the organization to be organized exclusively for a tax-exempt purpose, you may want to consider forming a benefit corporation. A benefit corporation allows the stockholder to enjoy profits while the corporation actively benefits a public good.
Obtaining an EIN
Once your nonprofit is legally formed, it can apply for a federal tax ID number or Employer Identification Number (EIN). This is a unique number, like a Social Security Number, that identifies the organization to the IRS. An EIN is also needed when applying for tax-exempt status.
Note: An EIN is not your organization’s tax-exempt number. A tax-exempt number identifies a nonprofit as exempt from state sales and use taxes. Contact your state revenue department for more information about tax-exempt numbers.
Filing for tax-exempt status
Tax-exempt status is not automatically granted to nonprofits. Your organization must apply for tax-exempt status with the IRS — also known as getting 501(c) status.
Filing for tax-exempt status can be a long and complicated process, and it’s a good idea to work with a tax professional.
Certain state and local governments also require a nonprofit to complete additional filings to receive tax-exempt status in the state (typically for sales tax purposes).
Securing local licenses and permits
Local government agencies are generally responsible for issuing business licenses. They also regulate where a nonprofit can be located based on zoning ordinances. Operating without the necessary registrations and licenses may result in penalties and fines.
Many cities and counties don’t require business licenses or other filings by nonprofit organizations, although you should contact your local clerk’s office to determine if you need to make any necessary filings.
You may also need to obtain additional licenses and permits to comply with other local regulations, such as building codes.
Meeting state requirements for charitable solicitations
Many states require nonprofits to register for charitable solicitations and to have adopted the Model Act Concerning the Solicitation of Funds for Charitable Purposes.
As a rule, if your nonprofit conducts charitable solicitation within a state’s borders, it must register before funds are solicited from residents of that state. The registration process involves application fees, supporting documents, renewal deadlines, and annual financial reporting requirements. You may also need to provide a copy of your IRS Form 990 tax return.
Although many states have a uniform registration statement, the forms and requirements can vary by state.
Lastly, in addition to the initial registration for charitable solicitations, your nonprofit must complete annual or biannual filings. Late fees apply, so diligence is required.
Keeping up with corporate formalities
Because nonprofits are corporations, they must comply with corporate laws and adhere to the following:
- Hold annual meetings of directors and members
- Adopt bylaws
- Record meeting minutes
Your nonprofit must also maintain good standing as a corporation in its formation state and comply with annual or biannual filings with state agencies.
CT Corporation can help
CT Corporation can help guide nonprofit organizations through the entire licensing process.
Outsourcing business registration and license research, applications, management, and renewals can help you take the pressure off internal resources and minimize time-consuming tasks and costly delays. By working with a full-service management provider who specializes in the efficient processing of business licenses, permits, and registrations, you can free up your time to focus on starting and building your nonprofit organization while ensuring you keep up with changing compliance requirements.
For more information on CT Corporation services and how we can streamline your business licensing, please contact us.