If you are considering starting a nonprofit organization with 501(c)(3) status, there is some basic information you need to know.

IRS Designation

First, the 501(c)(3) status is solely an IRS designation. This status is reserved for foundations and public charities and allows your donors to deduct their contributions on their personal taxes - an important feature if your funding will come primarily from the public. The application process can be tedious, and the wording you use for your purpose statement must meet the IRS regulations. Some experts recommend that you hire a consultant or an attorney to develop your application, but like any other business, you are better off working through the details yourself. You can always hire an outside professional to verify your work, but knowing what's in the legal paperwork should be a priority for any serious founder.

Establish Your Nonprofit Corporation

Before you can apply with the IRS, your nonprofit first must be established at the state level. Every state offers a nonprofit corporation entity. Typically, this registration is pretty straightforward. States vary on the minimum number of board members required, usually one or three. If only one is required, you can register yourself and you are on your way. If they require three, you will need to find like-minded individuals to work through the initial stages of developing your nonprofit. Ideally, those you choose will be willing to help out - there is a lot of work to do before your nonprofit can actually launch!

Your state registration will require the Articles of Incorporation to be filed with the state. These can be pretty basic, covering only the information required by the state. The details of how your nonprofit will run can be developed within the bylaws your board sets up. The Articles and Bylaws (rules of the organization) should be the first work tackled by the board. The first board meeting will include adopting these two documents. Generally, changes to the Articles will require an additional fee paid to the state, whereas changes to the Bylaws can occur at any time, with the blessing of the board.

Collecting Contributions

Some states require a separate registration for collecting charitable contributions from the public, which typically includes certain restrictions and an obligation to file periodic reports on the amount collected. While you technically must have the 501(c)(3) status in place to make these contributions tax-deductible, it is possible to begin operations before the IRS gets around to approving your application. Typically, it takes six months or more for the IRS to issue the exemption determination letter (the Holy Grail of the process), but as long as you file and are approved within 15 months, you may begin collecting cash as soon as your state registration is approved. State incorporation can take from a few days to a few weeks, but most states offer an expedited process for an additional fee. The actual IRS rule states that the exemption determination is retroactive to the date of formation within the first fifteen months of formation. Thus, as long as you get the application prepared, submitted, and approved in a timely manner, you can get started with the nonprofit as soon as the state paperwork is squared away.

Pitfalls to Avoid

However, there are a couple of important points to keep in mind. First, the approval process itself is slow. Some horror stories have emerged of nonprofits delaying the application for 9 or 10 months from formation, only to have the IRS take far longer than six months to review their application. This can cause all kinds of headaches, so plan on beginning the process of developing your 501(c)(3) application immediately.

Also, if there is any problem with your application, the IRS will deny you, tell you what is wrong with it, and the timeclock starts all over. The sooner you get onto an IRS desk, the better chance you have of succeeding in securing the exemption within the 15 month timeframe.

The second issue to keep in mind is that many savvy philanthropists and most grantmaking organizations will want to see your approval letter before they will work with you. Raising cash without the exemption letter will be more difficult, but at least you have an opportunity to raise enough to cover the application fee!

Unless you are very familiar with the legalese of the IRS, you will likely want to find some good resources to help you through the 501(c)(3) process. It is important to understand and respond to each line the right way to give your application its best chance of success. Securing 501(c)(3) status is not always easy, but any nonprofit with intentions for growth should put in the time and effort to get it done.