GUIDE FOR STARTING A 501(c)(3)

Why apply for 501(c)(3) status?

Federal tax laws provide tax benefits to nonprofit organizations under section 501(c)(3) of the Internal Revenue Code. One must complete an application and provide proper documentation to receive these benefits. Once recognized, the organization is exempt from federal income tax, may be exempt from certain employment taxes and is eligible to receive tax-deductible charitable contributions. A 501(c)(3) status is recognized by many sources including individual and corporate donors; state laws, specifically exemption from state income, sales and property tax; and the US Postal Service.

Organizations may receive 501(c)(3) benefits by affiliating with an existing nonprofit which has already received 501(c)(3) status. The nonprofit with the official status will be the fiscal agent and have full control and authority over the second organization.

Who is eligible for 501(c)(3) status?

A nonprofit must be organized and operate exclusively for one or more exempt purposes.

  • Organized: The nonprofit must be organized as a corporate, trust or unincorporated association. The organization of the nonprofit must fall within the limits of the purposes described in section 501(c)(3) of the tax law.
  • Operated: A substantial portion of the nonprofit's activities must further its exempt purposes. Restrictions include not participating in political campaigns, restriction from lobbying, ensuring that earnings do not benefit the shareholder(s), not operating for private interests, etc.
  • Exempt Purpose: The nonprofit must have one of the following exempt purposes: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.

How do you apply for 501(c)(3) status?

FEDERAL

  1. File IRS form SS-4 Application for Employer Identification Number: An employer identification number (EIN) is required regardless of whether the organization will have employees. Once an EIN has been obtained, include it in all correspondence with the IRS. For more information, see IRS Publication 1635, Understanding Your EIN. The process of applying for an EIN takes about four weeks.
  2. File an application with IRS Exempt Organizations Division, applications include:
    1. IRS form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The application requires a user fee and will not be processed without it. Included in the form:
        • Narrative describing the organization's past, present and planned activities
        • Organization's current and proposed financial support
        • Actual and planned fundraising program
        • Financial information - for new organizations, current year and two future years' projected budgets; established organizations, budget for the current year and three years previous
    2. Two IRS forms 872-C if requesting an advanced ruling (Consent Fixing Period of Limitation Upon Assessment of Tax under Section 4940 of the Internal Revenue Code).
    3. IRS form 8718, User Fee for Exempt Organization Determination Letter Request, and check payable to "Internal Revenue Service" in appropriate filing fee amount
    4. Conformed copy of Certificate of Incorporation and By-laws if any have been adopted
    5. IRS form 2848, Power of Attorney and Declaration of Representative, if attorney-in-fact is representing the organization - for this process, adopt a resolution authorizing filing for tax exemption and all documents related to the application and authorize an officer or attorney-in-fact to sign the application

It is STRONGLY recommended that you use the services of a knowledgeable attorney for this step.

  1. A request for 501(c)(3) status may take six months or more to be granted. While waiting, you must indicate to interested parties, "Application for 501(c)(3) tax exemption pending." If your application is rejected, you must inform past, present and future donors of the rejection in order to protect them from tax liability.
  2. An IRS tax specialist may contact you in writing requesting additional information. If your organization meets the requirements for exemption, you will be issued an IRS determination letter recognizing your tax exempt status and providing public charity classification. Keep this document with your permanent records.

See Applying for 501(c)(3) Tax-Exempt Status published by the Internal Revenue Service.

ILLINOIS

  1. Select and reserve your corporate name: Your organization's name must be different from all others on file.

To see if a name is available, contact:

Illinois Secretary of State

Centennial Building

Corporate Development, 3rd Floor

Springfield, IL  62706

(217) 782-9520

It takes 2 to 4 weeks to confirm the receipt of your charter. Reserving the name for 90 days requires a $25 fee and either a written request of a copy of the Articles of Incorporation form (Form NP-104.10) to the same address.

  1. File Form NP-102.10, Articles of Incorporation: submit it with a $50 registration fee to:

Illinois Secretary of State

17 North State Street, Suite 1137

Chicago, IL  60601

(312) 793-3380

It takes 2 to 4 weeks for confirmation and receipt of a state charter.

  1. Register with the Recorder of Deeds Office in the county where the registered office of the nonprofit is located: In Cook County, IL there is a fee of $13 for the first two pages and $1 for each additional page.

Cook County Recorder of Deeds

118 North Clark Street

Chicago, IL  60602

(312) 443-5050

See A Guide for Organizing Not-For-Profit Corporations published by the Illinois Secretary of State.

Questions?

While ESC does not provide programs and services to those without or applying for 501(c)(3) status, we would be happy to answer questions and recommend resources, contact us.