Before you can start your nonprofit and begin making an impact, you first have to take important legal steps to ensure your tax-exempt status and other internal decisions are up to your state’s standards.
For charitable organizations in the Commonwealth of Virginia, these 7 steps are critical before getting to work.
The first step to create a nonprofit in Virginia is to incorporate a nonstock corporation by filing Articles of Incorporation with the State Corporation Commission (SCC). Articles of Incorporation usually are filed online but also may be mailed to the SCC. Once the SCC accepts the Articles, it issues a certificate of incorporation, and the nonstock corporation comes into existence. If you are not ready to incorporate but have a name that you want to use, you can pay a small fee to reserve your desired name on the SCC’s website.
If the Articles of Incorporation did not set forth the initial directors of the nonstock corporation, then the person who filed the Articles of Incorporation must select the first Board of Directors. The Board of Directors must then adopt bylaws that will govern the organization. The bylaws may include provisions about member qualifications and powers, the election and powers of the Board of Directors, the calling and conducting of meetings, and what actions will initiate dissolution.
Obtain an EIN
Every incorporated organization needs an Employer Identification Number (EIN). An EIN functions like a social security number. It is a nine-digit number assigned by the IRS that identifies an organization and allows it to open a bank account, file taxes, and apply for tax exemption. An organization may apply for an EIN by filing with the IRS online or filling out Form SS-4.
Apply for Federal Income Tax Exemption
Once the organization has an EIN, it may apply for federal tax exemption by filing Form 1023. The IRS has also created Form 1023-EZ for “small” nonprofit organizations. To qualify as “small,” the organization must either anticipate or already have received less than $50,000 in annual gross receipts for the first three years of its existence. Its total assets must also be worth less than $250,000. There are other structural and purpose limitations on organizations that may file Form 1023-EZ. It is always best to seek the opinion of an attorney when deciding whether to file Form 1023 or Form 1023-EZ.
On Form 1023, the IRS asks whether the organization has adopted a conflict-of-interest policy. Any organization applying for federal tax exemption should have such a policy in place. It may be a freestanding policy, or it may be incorporated into the organization’s bylaws. The IRS also requires certain language concerning purpose and dissolution to be in organizations’ Articles of Incorporation before the organizations may qualify for federal tax exemption. The application for federal tax exemption is generally the most complicated step in creating a nonprofit.
If the IRS approves the organization’s tax exemption, the organization will receive a determination letter stating that it qualifies as tax-exempt. Potential donors may ask for a copy of this letter as proof that their gift is deductible.
Apply for Virginia State Tax Exemption
Organizations that receive an IRS determination letter do not need to apply for Virginia state income tax exemption because organizations are exempt from the state income tax upon receiving federal exemption. However, to obtain a Virginia sales and use tax exemption, an organization should file Form NP-1 with the Virginia Department of Taxation. An organization will need to include proof of charitable solicitation registration in its state tax exemption application.
Charitable Solicitation Registration
Virginia requires any nonprofit organization that plans on soliciting charitable contributions within Virginia to register with the Virginia Department of Agriculture and Consumer Services(VDACS). Many other states also require charitable solicitation registration. An organization that plans on raising funds in multiple states should register in each state before receiving money. If an organization does not register before soliciting charitable donations, it could face a fine.
Keep Up with Annual Filings
Once the nonprofit is created by following the steps listed above, it is free to engage in its planned activities. The organization simply must remember to file an annual report with Virginia as well as renew its charitable solicitation registration(s) each year. It will also need to file state and federal tax returns each year.
Davis Law Group Can Help
If you need help setting up your nonprofit, contact us today to set up a consultation with one of our experienced attorneys. We work with many churches and charitable organizations to ensure they are operating within the legal requirements so they can continue to do the greatest good possible.