Have you ever wondered how to obtain 501(c)(3) designation for your nonprofit? Below I’ll outline the steps I took to obtain the designation for Save a Soul Animal Rescue. There’s a lot of information to share with you and I apologize for this page being so long!
Disclaimer
Dealing with the IRS, state agencies, and legal documents can be a headache. Luckily, there is a lot of help available if you don’t feel comfortable setting up your nonprofit and applying for 501(c)(3) determination on your own. You can check with local attorneys as well as organizations like the Foundation Group who can help with each step of the process. (The Foundation Group is just an example. I’ve never used their services so I’m not sure how good or reliable they are!)
I’m not an accountant, attorney, or legal expert when it comes to creating a nonprofit, tax-exempt, or 501(c)(3) organization. The process of obtaining designation was lengthy and involved a lot of research. I researched every detail and double and triple-checked everything as I was going along. Please use this information page only as a guide. Rules, regulations, procedures, and filing fees could have changed since Save a Soul obtained 501(c)(3) designation in 2015!
Also, each state is different. I can only tell you what was required in Colorado in 2015. You’ll want to contact your state’s Revenue Department and Secretary of State to learn what filings are required in your state.
During the process of setting up your organization, you’ll be working with the IRS and State Revenue Departments. My biggest advice is, to be honest! Obtaining 501(c)(3) designation is a huge reward for a lot of hard work. Don’t take away from the reward by cutting corners or making false statements on your paperwork that you’ll have to answer for later on down the road!
Before You Start
Before you do anything, it’s really important to talk to your county’s zoning department to make sure you can legally run your nonprofit in the location you want to. Although Cottontail Acres and Save a Soul is located on a 5-acre residential-rural lot, there are lots of restrictions on what businesses we can operate on the property. Also, if your organization will operate out of your home, you’ll want to make sure there aren’t any HOA restrictions prohibiting home-based businesses.
Definitions
These are some terms you should be familiar with before you begin setting up your 501(c)(3) nonprofit.
Nonprofit means the organization (usually a corporation) is organized and operates for a nonprofit purpose under state law. Nonprofit organizations are centered around a mission or cause and work to make a positive difference in the area it serves, rather than operate with the intention of making a profit. All money raised or earned goes back into the organization to help it meet its goals. Nonprofit organizations don’t have to have 501(c)(3) designation to operate. Nonprofits aren’t automatically exempt from local, state, and federal taxes.
Tax-exempt happens when a nonprofit organization is recognized under federal law as operating for charitable purposes under Internal Revenue Codes 501(c)(3) through 501(c)(27). Nonprofit organizations are usually exempt from having to pay sales, income, and property taxes; however, the charity is required to pay federal employee taxes like Social Security and Medicare with regard to all employees of the nonprofit.
501(c)(3) is the designation a nonprofit organization receives when it has been recognized by the IRS as being tax-exempt specifically under Internal Revenue Code section 501(c)(3). A benefit of having an organization designated as 501(c)(3) is the ability to apply for grants and collect tax-deductible donations.
Public Charity is an organization with a wide support base. Donations usually come from large amounts of people from all over the place.
Private Foundation is an organization that usually receives donations from a small number of people.
Board of Directors is the governing body of the organization. It’s a group of people who are responsible for overseeing the nonprofit’s activities and making sure the organization is following its mission and goals. Board members usually don’t get paid in nonprofit organizations because the goal of the nonprofit is to serve the cause, not make board members money.
Registered Agent is the person, or business, responsible for receiving tax and legal documents on behalf of the organization. Once received, the Registered Agent is responsible for forwarding the documents to the proper department within the organization.
Bylaws are an outline of the organization. They are the operating manual for the organization and sets the rules and procedures for everything the organization does. It covers what/where/how the Board of Directors meetings will be run, how and when to appoint officers, dissolution of the organization, roles of the Directors, etc.
Determination Letter is the letter you’ll receive from the IRS stating your nonprofit is recognized as a 501(C)(3) organization. The Determination Letter, as well as all documents you file on behalf of the organization, is public record.
Steps To Obtain 501(c)(3) Designation
Now that we’ve gone over the disclosures and clarified some terms, it’s time to get started!
I found that these things had to be done in the order listed. You’ll be able to work on some things (like drafting the Bylaws, Articles of Incorporation, and Liability Waiver) while waiting for other documents to be accepted by the local and federal agencies.
step one
Check Organization Name Availability with your Secretary of State (state filing) (free)
In Colorado, you can check here. You want to make sure your organization’s name is unique and isn’t being used by someone else. You don’t want your nonprofit confused with another one of the same (or similar) name that’s being run by someone who doesn’t share your ethics or values. Reputation and integrity are always important, especially for nonprofits that work with animals.
step two
File Statement of Trade Name (state filing) (filing fee – $20)
This form tells the state your intended “doing business as” name. That way, you don’t have to use your own name as your business name if you don’t want to. For example, Tabitha’s trade name is “Save a Soul Animal Rescue”.
step three
Decide Who Will Be On The Board of Directors (free)
The IRS requires at least three board members for each nonprofit. The best practice is to choose people who aren’t related and who aren’t business partners.
step four
Appoint a Registered Agent (state filing) (filing fee – $10)
The registered agent doesn’t have to be the director or founder of the organization. In most cases, the founder of the organization can be the registered agent as long as he/she has a physical address where documents can be received. There has to be a registered agent in each state the organization is registered to do business in.
step five
File Articles of Incorporation for a Nonprofit Corporation (state filing) (filing fee – $50)
This process is also called “incorporating”. The Articles of Incorporation tell the state, and public, everything about your organization. The Articles cover the who, what, where, when, and why about it.
step six
Set Up Secure Business Filing (state filing) (free)
I’m not sure if every state has something like this, but this system makes life so much easier. It allows you to (securely) file yearly renewal documents with the state and pay filing fees online. You’ll get verification that the filings were received and a printable receipt of payment. You can also sign up for email reminders about upcoming renewal dates. Check on your Secretary of State’s website to see if you can set something like this up.
step seven
Draft Corporate Bylaws (free)
You can do an online search for sample Bylaws that pertain to the area your nonprofit focuses on (animal rescue, food bank, etc.). According to the IRS, Bylaws must include topics such as how compensation of employees/volunteers/board members will be handled, how to handle conflict of interest, how you plan on retaining documentation, and whistle-blower policies.
step eight
File IRS Form SS-4 – Federal EIN (federal filing) (free)
This form is used to obtain a Federal Employer Identification Number. You’ll need this number to put on the receipts you give to donors and at other times such as when/if your nonprofit hires employees, when you apply for grants and discount cards, etc.
step nine
File Colorado Form CR0100 – Colorado State Tax ID number (state filing) (fee – $8)
This form is the same thing as the application for the Federal Employer Identification Number, only for the state-level. I’ve tried to find current filing fee information on this form, but I haven’t been able to. In 2015 when I filed it for Save a Soul, the fee was $8.00. Since available information is vague, and no one at the state-level can verify, I’m wondering if Colorado has eliminated the need to file this form since it does seem a bit redundant considering you’ll have your Federal EIN.
step ten
File IRS Form 1023 – Tax Exemption Application (federal filing)
This is what you’ve been working so hard for! It’s one of the most important forms you’ll file. This is the application to have your nonprofit designated as a 501(c)(3).
There are two ways you can handle Form 1023. You can file the regular Form 1023 or you can file Form 1023-EZ.
Form 1023
*File by mail
* 26-page application
*Takes 2-12 months to receive Determination Letter
* $600 filing fee
Form 1023-EZ
*Must be filed online through Pay.Gov
* 3-page application
*Takes 2-4 weeks to receive Determination Letter
*Restrictions – In order to qualify for using Form 1023-EZ, your nonprofit’s gross receipts have to be $50,000 or less each of its first 3 years AND the nonprofit can only have $250,000 or less in assets
*$275 filing fee (decreased from $400 which is what it was in 2015)
I used the Form 1023-EZ for Save a Soul. I knew the rescue was going to start out small, so the income and asset restrictions weren’t a concern. At the time, people I spoke with told me the income restrictions were $5,000 or less each of the rescue’s first few years. I’m not sure if the amount changed, or if it was bad information, but looking back, I still think filing Form 1023-EZ was the right thing to do for Save a Soul.
step eleven
File Colorado Form DR0715 – Sales Tax Exemption for Colorado
Organizations (state filing) (free)
Once your nonprofit obtains 501(c)(3) recognition, you’ll want to apply for a Sales Tax Exemption Certificate (if you qualify in your state). This is helpful because it allows the nonprofit to purchase items and services without having to pay sales tax, as long as the items and services are directly related to the nonprofit’s activities.
step twelve
File Colorado Form DR0716 – Statement of Nonprofit (state filing) (free)
This Colorado form is filed along with the Colorado DR0715. By signing the form, you attest to (copied directly from the form):
“No part of the net earning inures to the benefit of any private member or individual;
No substantial part of the activities involves the carrying on of propaganda or otherwise attempting to influence legislation;
The organization does not participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of any candidate for public office.
The organization does not limit its deeds and gifts to its members or beneficiaries only;
The funds received by the organization are not solely dependent on required payments (generally, dues) of its members.”
step thirteen
File Colorado Registration for Charitable Solicitation and Fundraising (state filing) (filing fee – $10)
This form is required for all nonprofits in the state of Colorado. It tells the state your nonprofit plans on soliciting contributions and donations.
step fourteen
Establish Organization Records (cost of supplies vary)
You’ll need to put together a binder with divider tabs to hold your organization’s Bylaws, Articles of Incorporation, copies of all state and federal filing documents, yearly filing reminders, important phone numbers, recordkeeping, bookkeeping, receipts for purchases and services paid for by the nonprofit, licensing documents, insurance policies, etc. If your nonprofit ends up being audited by the IRS, this binder will come in handy because everything will be in one place!
step fifteen
Hold Organization Meeting of the Board of Directors (free)
The organization meeting brings the Board of Directors together to make sure the charity is off to a good start and ready to get to work. At the meeting, the Board will make sure the nonprofit’s bank accounts are set up, minute books are ready, officers are appointed, Bylaws are approved, etc.
step sixteen
Register on OrgHunter.com (free)
OrgHunter is a website where you can register your nonprofit to help generate donations. Funding is critical. Even if not enough money comes in, your organization still needs to handle day-to-day operations. When Save a Soul doesn’t have enough funding come in to pay for food, supplies, veterinary care, etc., all of the expenses come out of our pocket. The animals can’t wait to be fed or seen by a doctor until donations come in so we cut back everywhere we can so they never have to wait or go without. So, register on OrgHunter and always have a back-up plan on how to keep your nonprofit running if you experience a dry spell in your funding!
step seventeen
Apply for Grants (free)
Search online, and check with local businesses, for grants that can help your nonprofit. Most grant applications will require you to submit your 501(c)(3) Determination Letter along with your nonprofit’s financial records for consideration.
step eighteen
Obtain Business License (state license)(costs vary, but in Colorado, it’s $400-$1,000 for an animal shelter license)
Your business license will depend on what type of organization you have. For animal-based businesses in Colorado, the Colorado Department of Agriculture handles licensing.
step nineteen
Obtain Liability Insurance (costs vary)
The cost and scope of liability insurance will vary from state to state and business to business. Because Save a Soul is located on our homestead at Cottontail Acres, I called our homeowner’s insurance company about coverage for volunteers and visitors to the rescue and homestead. Not all insurance companies will cover nonprofit home-based organizations (especially animal-related nonprofits). Your best bet is to contact your current homeowner’s insurance company and ask if they can help you obtain liability insurance. If they can’t help you, you might want to ask if they have any recommendations for companies that might be able to.
step twenty
Draft Liability Waiver (free)
Your insurance company might require you to have a Liability Waiver for anyone who works and/or volunteers in your nonprofit. If they don’t require it, it’s a good idea to cover yourself and have one anyway. Most nonprofits will have their Liability Waivers posted on their websites. While you can’t, and shouldn’t, copy their waivers, you can get ideas for what to include in yours for your specific area of service.
Annual Filings
Every year you’ll need to renew certain documents to keep your nonprofit/tax-exempt/501(c)(3) status. Here are Colorado and IRS requirements-
State of Colorado
Annual Business Report (aka Periodic Report)
Filing Fee – $10
Due yearly by the month of incorporation of the organization (for example, if your charity was incorporated in January, your Periodic Report is due by January every year)
Renew online or by mail – Colorado Secretary of State, Business Division, 1560 Broadway, Ste. 200, Denver, Co 80202-5169
Charitable Solicitation Registration Renewal
Filing Fee – $10
Due by the 15th day of the 5th month after the nonprofit’s fiscal year ends (for example, if your charity’s fiscal year ends on December 31st, the renewal is due by May 15th)
Renew online only
Federal / IRS
Form 990-N
Free to File
Due by the 15th day of the 5th month after the nonprofit’s fiscal year ends (for example, if your charity’s fiscal year ends on December 31st, the renewal is due by May 15th)
Renew online only
*Important Note…There are several IRS 990 forms. The amount of income and assets your nonprofit owns will determine which version of Form 990 you have to file. You should get a renewal reminder in the mail which should tell you which 990 form you can file. If you don’t get a reminder letter, or if the letter doesn’t tell you which form to file, you’ll need to check with the IRS to find out which form they want. All versions of the 990 are your 501(c)(3)’s yearly tax returns so it’s important to file the correct form on time so you don’t lose your 501(c)(3) determination.
Other Things
Something to consider is registering your business trademark with your state.
It’s a good idea to set up social media accounts and a website for your nonprofit to help promote it.
You’ll need a copy of the Certificate of Fact of Good Standing from your state to open your nonprofit’s checking account so be sure to bring it with you along with your driver’s license. Depending on the bank you choose, you might not need to wait for your 501(c)(3) Determination Letter in order to open the account.
There are a lot of tax issues that come up when you own a business. Especially a non-profit business. I’d recommend talking with a tax professional, or tax lawyer, to make sure you are following all applicable laws. When it comes to taxes, my thought is…the IRS is scary, it’s best not to upset the beast!
Best of Luck
I hope this information helps! There are months of preparation and work involved, but all of the hard work is worth it in the end! Tabitha and I were sitting in the Jeep when we opened a notice from the IRS and realized it was Save a Soul’s Determination Letter. We were so excited that we screamed! I wish you the best of luck with your nonprofit!
“We have the choice to use the gift of our life to make the world a better place.” – Jane Goodall