501(c)(3) process

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501(c)(3) is a tax-exempt designation from the IRS which generally applies to nonprofit organizations. 501(c)(3) refers to that section of the tax code, found at 26 U.S.C. § 501.

Being a 501(c)(3) has the following benefits (copied from the interwebs)

  • We won't pay federal corporate income tax except on income derived from unrelated business income. With this exemption, an organization can save 15% - 35% of its taxable income.
  • In most instances, we won't pay state corporate income, franchise, excise, use, or sales tax.
  • Can offer members, individuals, and corporate donors a tax deduction for their contributions.
  • Eligible to receive private foundation grants. Private foundations are required by law to distribute a minimum amount of money for charitable purposes. One way they fulfill this obligation is by making grants to 501(c)(3) public charities.
  • Eligible for lower postal rates on third class bulk mailings through the US Postal Service.

The process

  1. Come up with our Mission Statement
  2. Select a few people to act as incorporaters. These people will have their name in the Articles of Incorporation and act as the interim Board of Directors until our organizational meeting.
  3. File our Articles of Incorporation with the state of Maryland. The application fee is $170 and takes 7-8 weeks. Or $220 for same day, in person service at their office in Baltimore.
  4. Apply for an Employer Identification Number (EIN) so we can open a bank account. This is a simple form on the IRS website. Someone on the interim Board of Directors can fill out the online form and we'll get an EIN immediately
  5. Open a bank account. One of the interim members of the Board of Directors can do this once we haven an EIN.
  6. Hold our organizational meeting where we will ratify the bylaws and elect Officers (President, VP, Treasurer, Secretary) who will also serve as the Board of Directors. (At least that's what's in the draft Bylaws at the moment.) We will need to take special care in keeping minutes at this meeting for later filings.
  7. File 501(c)(3) application with the IRS (pretty time consuming but worth it). We are anticipating annual revenue over $10,000 so the application fee will be $750.
  8. In a few months we'll get a designation letter back from the IRS authorizing you to be a nonprofit for five years
  9. Each year we will need to file Personal Property Forms with the state.
  10. At the end of five years we have to prove to the IRS that we are really a charitable organization (they have a few tests they apply to our financial records)

Forms / paperwork

Maryland Tax-Exempt Non-Profit Corporation Form, Maryland Department of Assessments and Taxation This form is for creating a tax-exempt corporation in the state of Maryland. It includes some basics steps that need to be completed.