Establishing a nonprofit?

Toby Mathis, Esq. answers the most frequently asked questions about establishing a nonprofit, including the associated costs.

 

Updated September 20, 2021

If you’ve ever considered forming your own nonprofit, you probably wondered How much does it REALLY cost? Overall, my answer is the same go-to response of lawyers and accountants: it depends.

On what does the cost depend? Primarily, the cost of forming a nonprofit depends on the nonprofit organization’s complexity.

On average, the entire process (from state filing, binder documents, federal application for exemption, all the way to completion) can run upwards of $3,000. The “upwards” here refers to the complexity of the organization. If you’re creating a very complex nonprofit organization (for example, a HUD-qualified nonprofit that specializes in providing low-income housing), the costs can be significantly higher, more like $8,000. Despite this, the cost to form the typical 501(c)(3) nonprofit organization is around $3,000.

The Nonprofit Filing Process

The process for establishing a nonprofit differs from that of for-profit entities. With for-profits, you set up the entity with the state, then let the federal government know the entity’s tax election (for LLCs). For-profit entities do not have to apply for exemptions.

With nonprofits, it’s not enough to go through the state and get an EIN. Instead, establishing a nonprofit involves submitting a full-on exemption letter and application (called a 1023 or 1024, depending on the type of nonprofit).

This process can take over one year to complete. I know that sounds like a long time, but don’t freak out yet. The plus side is that, once your nonprofit exemption has been approved by the IRS, it relates back to the date of your original filing. Thus, you can establish a nonprofit in about a week, begin its operations, and, when you eventually receive your IRS exemption approval, that will relate back to when the nonprofit started.

How to Make Money in a Nonprofit

Again, I’m going to give you the go-to lawyer answer: it depends.

Ultimately, making money in a nonprofit depends on the type of nonprofit. If you’re a business association, your nonprofit will charge membership fees and the nonprofit won’t pay taxes on those membership fees; instead, the money goes back into the organization for its operational budget.

Typically, most of the nonprofits we hear about are 501(c)(3) nonprofits, which are religious, charitable, educational, or scientific organizations. This is the type of nonprofit that can actually solicit donations. Not only does the nonprofit not pay tax on any donations it receives, but the individual donor can also take a tax deduction for their donation.

So, how does the typical 501(c)(3) nonprofit make money? They go out and raise money. As long as the nonprofit uses that money for its purpose, the money is tax-exempt. Thus, you have to set up your purpose.

Additionally, I often receive questions about whether nonprofits can also engage in activities that make money. In some cases, yes. For example, if the organization’s purpose is to provide housing to veterans, then the organization can make money by charging rents, fees, etc. That money would still be tax-exempt.

Nonprofit Status

Generally speaking, it takes between 9-15 months to acquire nonprofit status. In some cases, we’ve received it at our firm in as little as 3 months, but this is not the norm. The length of time the entire process takes varies depending on the time of year and what’s happening in the government, among other factors.

At Anderson, we’ve set-up well over 3,000 nonprofits. We’ve never been denied tax-exempt status for a nonprofit we’ve established. Typically, approval takes between 6-9 months.

No matter what, you have up to 29 months to get the exemption letter, and it will still relate back to the date the nonprofit was filed. About 90 days out, the IRS will let you know they’re reviewing your application. The IRS will then either come back and ask questions or approve the application. Most of the time, if it’s a type of nonprofit that we’ve set up at Anderson before, you’ll get your exemption letter with no IRS questions. The reason for this is that we know from experience what the IRS will ask and include the answers in the initial application.

Nonprofits & Business Licenses

Nonprofits are still required to have business licenses. There are, however, exclusions and exemptions available — but you have to apply for them. They don’t happen automatically. The regulations and exemptions applicable to nonprofits also vary from state to state. More importantly, if your organization will solicit donations, you may need to be registered and licensed in your state.

The important thing to keep in mind is that, once you have a nonprofit, you’re entitled to exemptions. These won’t happen automatically, so you’ll have to be your own advocate on that front and apply for them.

Nonprofits & Tax ID Numbers

All nonprofits are still required to have federal tax identification numbers. In the case of nonprofits, the tax ID will be its EIN. The nonprofit will need this number when it files taxes. And yes, nonprofits have to file taxes (except churches).

The process for obtaining an EIN for a nonprofit is the same as for-profits: file Form SS4 and check “nonprofit.”

Overall, the most challenging part of establishing a nonprofit is the exemption letter and application. If you attempt to do this yourself, you’ll likely experience a learning curve and may have to weather a decline before securing federal approval.

If you’d like to discuss the steps to establishing a nonprofit with one of our experienced professional Advisors, schedule a complimentary consultation by phone at 800-706-4741 or online. We’ll be happy to answer your nonprofit questions in a no-obligation consult.

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

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