How to start a nonprofit in the USA

There are 29 types of not-for-profit legal forms in the USA. The best known is the nonprofit corporation that the IRS has recognized as tax-exempt under IRC § 501(c)(3). In everyday English, loose terms like "charity", "nonprofit" or "private foundation" are often used for this and other legal forms, online as well. So you need to be careful not to mix up the facts.

1Why a US nonprofit for non-US founders?

Well, if you want to raise money to protect a local nature reserve, a local charity or association at home is probably your best bet. But if you have bigger ambitions and want to raise money internationally, a small local association quickly hits its limits.

The American nonprofit corporation is ideal for raising money worldwide for your cause. And an address in New York or Los Angeles only underlines that international ambition.

It is ideal if many of your donors are in the USA: they know the US nonprofit well and, above all, donations in the USA are far more generously tax-deductible than in most of Europe.

2What are the benefits of a 501(c)(3)?

Tax exemption under Section 501(c)(3) comes with many benefits.

1. Tax-exempt status: exemption from federal and state corporate income tax;
2. Tax-deductible donations: your individual and corporate donors can deduct their donations from income tax and corporate tax. Your organization can thank its donors by issuing receipts for cash and in-kind donations for their tax deduction.
3. Limited liability protection: nonprofit corporations shield their founders, officers and directors from personal liability for the nonprofit's activities.
4. Possible exemption from sales tax and property tax (varies by state)
5. Federal unemployment tax exemption: potentially higher thresholds before federal and/or state unemployment tax applies
6. Grant eligibility: eligibility for federal, state and local grants. An organization with 501(c)(3) status can also benefit from private and government grants.
7. Reduced postage rates and special privileges for nonprofit mailers.
8. Advertising discounts: free or reduced rates for nonprofit announcements and press releases.
9. Discounted software: as a registered nonprofit, you can get discounts on many online tools. Here is a detailed list of online tools that offer nonprofits big discounts.
10. Public legitimacy through IRS recognition: recognition as a 501c3 by the IRS makes your organization more official and credible in the eyes of the public and other institutions. Not just in the USA, but internationally too.
11. Perpetual existence: an organization with 501(c)(3) status lives on after its founders die. The status does not need renewing, but it does not run on autopilot either: if you fail to file the annual return (Form 990 or Form 990-N) for three consecutive years, you automatically lose the tax exemption (IRC § 6033(j)).

More benefits

Some businesses and stores offer discounts to nonprofits and their employees, and some publications give nonprofits advertising discounts. Many other businesses offer discounts to nonprofits and their staff when they can show a copy of the IRS document confirming their 501(c)(3) status.

3Every beginning is hard

Following bylaws, obtaining and keeping tax-exempt status, managing a board… Forming and registering a nonprofit in the USA can seem like a complicated and daunting task. But armed with the right information and a solid plan, the process is easier than it looks.

That's not to say starting a nonprofit comes without challenges. It takes strategy, planning, commitment and organizational skill. Not to mention the years of hard work and strong willpower needed to keep a nonprofit successful for years to come…

On this page, we give you a comprehensive overview.

4What is a 501(c)(3)?

When starting a new nonprofit, the first step for most organizations is applying for official 501(c)(3) status.

Section 501(c)(3) is the part of the US Internal Revenue Code that grants nonprofits federal tax exemption. A 501(c)(3) organization is a corporation, trust, unincorporated association or other type of organization that is exempt from federal income tax under Section 501(c)(3) of Title 26 of the United States Code.

Organizations must be classified as "charitable" by the IRS to receive 501(c)(3) status. According to the IRS, a nonprofit is an organization formed for the following purposes:

• Religious
• Charitable
• Scientific
• Testing for public safety
• Literary
• Educational
• promoting national or international amateur sports, and
• preventing cruelty to animals and children

Organizations that help the poor and underprivileged, build or maintain public buildings or national or state monuments, promote civil rights, or fight juvenile delinquency and urban decay can also qualify as nonprofits.

There are plenty of reasons why organizations choose to apply for official 501(c)(3) status.

5The 3 main types of 501(c)(3) organizations

5.1Public charity

A public charity, classified by the Internal Revenue Service (IRS) as "not a private foundation", must receive at least 1/3 of its donated income from a fairly broad base of public support, meaning directly or indirectly from the general public or from government. That support must be fairly widely spread and cannot be limited to a few individuals or families; it can come from individuals, companies and/or other public charities.

Public charities are defined in the Internal Revenue Code under sections 509(a)(1) to 509(a)(4).

Individual US donors can deduct up to 60% of their income for donations to public charities. Public charities must also maintain a governing board made up mainly of independent, unrelated people.

5.2Private foundation

A private foundation, sometimes called a non-operating foundation, gets most of its income from investments and endowments. That income is used to support the work of public charities through grants rather than being spent directly on charitable activities. Private foundations do not need public support, so their income can come from a relatively small number of donors, even individuals or families.

Private foundations are defined in section 509(a) of the Internal Revenue Code as 501(c)(3) organizations that do not qualify as public charities.

Donations to private foundations can be tax-deductible for individual US donors up to 30% of their income. The governance of a private foundation can be far more tightly held than that of a public charity.

5.3Private operating foundation

In general, a private operating foundation is a private foundation that uses most of its resources to actively carry out its tax-exempt activities.

These organizations often run active programs, much like public charities, but can share features of a foundation (such as tightly held governance). That is why private operating foundations are usually seen as a hybrid. Most of their income must go into running their programs.

A private operating foundation is any private foundation that spends 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly on carrying out tax-exempt activities.

The foundation must also pass one of the following tests:

• the assets test
• the endowment test
• the support test

Donations to private operating foundations, as described in section 4942(j)(3) of the Internal Revenue Code, are deductible up to 50 percent of a US donor's adjusted gross income.

6Setting up your 501(c)(3) nonprofit in 9 steps

Important: if you engage Mount Bonnell Advisors to form and look after your nonprofit, we take care of every aspect of forming and registering your US nonprofit. This section is here purely for your information and for transparency.

To help you set up a nonprofit, we have put together a guide below, with a particular focus on forming a 501(c)(3) nonprofit.

We assume that you, as the founder, do not live in the USA. The process is therefore designed so that you never need to be here in person.

Formation, bank account opening, registration with the authorities: with our process, all of it works without you setting foot in the USA.

6.1Step 1: Get clear on your goal

When you are thinking about the practical side of registering a nonprofit, this may not look like a major task at first. But getting clear on your purpose matters.

A clear purpose motivates staff and volunteers, attracts donors and supporters, and helps build a positive public image.

Once you can communicate your purpose clearly and concisely, every step that follows gets easier, especially step 2.

To get clear on your organization's purpose, it helps to ask the basic questions: who, what, where, when, why and how:

• Who will my organization affect, and who are our intended beneficiaries? Who will run our services? Who are the stakeholders who will support our mission? Who are my board members, potential staff and volunteers?
• What is my organization's mission? Identify the "problem" you are trying to solve. What values will guide my organization's activities?
• Where will we carry out our mission, and where will the activities take place? Is this a local initiative, a state or regional project, or a national/international one?
• Why am I starting this nonprofit?
• How will I fulfill my mission? How will we raise the money to run it?

Once you have the answers, you can start drafting a clear mission statement and a one to three-year action plan for your organization.

Pro tip: Don't rush it. Taking some time now to get clear on your goals will pay off later. Reflect on what you have gathered, write more than one draft and get feedback from your key stakeholders.

6.2Step 2: Choose a type of nonprofit

Once you have completed step 1, this step should be fairly easy. Based on your nonprofit's purpose, decide which type of organization you want to register as (for example arts, charity, education, politics, religion, research).

To apply for tax exemption, you need to fall into one of these 8 broad categories:

• Charitable (also covers fighting poverty, combating discrimination, advancing education and more)
• Religious
• Educational
• Testing for public safety
• Literary
• Youth/amateur sports competition
• Scientific
• Prevention of cruelty to children and animals.

There are 29 types of nonprofit organizations that can apply for tax exemption under section 501(c) of the Internal Revenue Code. The most common is 501(c)(3), which covers all charitable, religious, scientific and literary organizations. Other types of tax-exempt nonprofits fall under other 501(c) codes, for example:

• Fraternal societies: 501(c)(8)
• Social and recreational clubs: 501(c)(7)
• Trade associations and chambers of commerce: 501(c)(6)
• Agricultural or horticultural organizations: 501(c)(5)
• Social welfare organizations: 501(c)(4)

If your nonprofit fits one of the types above or another kind of organization, you can see the full list here.

6.3Step 3: Name your nonprofit

Every US state has its own rules and regulations for forming a nonprofit. One thing is certain, though: choose a name that is unique and connected in some way to your nonprofit's main activities.

This decision sets the tone and shapes your nonprofit's brand for years to come, so take your time over it.

Make sure your nonprofit's name is easy to say and easy to remember. Use descriptive words, but don't overdo it or make it too long. Avoid technical or industry jargon. Abbreviations are fine if you use them well.

If you get stuck on a name

Brainstorm with your team, friends and acquaintances. See which names sound most inspiring and which stick best. Think about your nonprofit's mission, your main activities, your members or even your location. It's wise to check which web domains are available, as that can influence the name you pick.

If a quality domain name is available, buy it right away, even if you don't plan to set up a website any time soon.

Many states require nonprofits to carry a corporate designator such as Incorporated, Corporation, Company or Limited, or their abbreviations (Inc., Corp., Co. or Ltd.). Check your state's website to see whether your nonprofit needs one.

Once you have settled on a name, check with the Secretary of State that it is available, and search the website of the US Patent and Trademark Office (USPTO) to make sure the name isn't already protected by a trademark.

Pro tip: Your state's filing office can tell you how to find out whether your proposed name is available. For a small fee, you can usually reserve the name for a short period until you file your articles of incorporation.

6.4Step 4: Appoint a board of directors

It's generally a good idea to form a board before you incorporate. Some states require you to list the names of your directors in your formation documents. Even if your state doesn't, it helps to have a board in place before you incorporate.

Your board can help you with incorporation and with the rest of the sometimes challenging process of setting up a 501c3. Choosing the right board is crucial to your nonprofit's success.

Who the "right" board members are depends on your nonprofit. Whatever its size or purpose, though, you need board members who are reliable, committed and aligned with your mission and values.

Another key point: your board should be made up of people who bring expertise and resources from a range of fields.

A good rule of thumb for recruiting:

• One third people who have access to financial resources or raise donations.
• One third people with management know-how in finance, marketing, law and similar areas.
• And one third people who are connected to the community and have expertise in your service area.

Take the time to define their roles and job descriptions before you start recruiting.

It can also help to put together some onboarding materials or an orientation guide for your new board members. You might also host a welcome event so everyone can get to know each other.

A US board member

Legally speaking, it makes no difference whether your board members live in the US or abroad. Keep in mind, though, that it's the IRS that has to grant your tax-exempt status. If your nonprofit has no US connection (no place of business in the US, no US board member), the IRS may decide it has no jurisdiction.

In our view, it's therefore important for nonprofits run by non-Americans to have at least one board member who lives in the US.

6.5Step 5: Write your bylaws

Important: If you engage Mount Bonnell Advisors to form and look after your nonprofit, we take care of every aspect of your US nonprofit's bylaws. This section is for your information and for transparency only.

The bylaws set out the operating rules and provide a framework for your administrative procedures. They are your tool for internal accountability and describe how your nonprofit works on the inside.

The power to adopt, amend or repeal bylaws rests with the board of directors, unless the articles or the bylaws provide otherwise.

The bylaws contain the rules and procedures for things like holding meetings, electing directors, appointing officers and handling other formalities.

Note: An organization exempt from federal income tax under Internal Revenue Code 501(c)(3) must report changes to its bylaws and other governing documents to the IRS each year on IRS Form 990 to stay compliant.

You can find bylaw templates online. Be aware, though, that not every template includes the elements needed for tax-exempt status. To obtain 501(c)(3) status, your bylaws must include a clause stating explicitly that:

• The organization's activities are limited to the purposes set out in Section 501(c)(3) of the Internal Revenue Code.
• The organization will not engage in political or legislative activities prohibited under Section 501(c)(3).
• If the organization dissolves, its remaining assets will go to another nonprofit, a government agency or another public purpose.

You'll find more detailed guidance and sample wording in IRS Publication 557.

Contact your state's incorporating agency (usually the Secretary of State) and ask for a bylaws template you can use.

6.6Step 6: File your formation documents

Important: if you engage Mount Bonnell Advisors to form and look after your nonprofit, we take care of every aspect of forming and registering your US nonprofit. This section is here purely for your information and for transparency.

Once you've chosen a name for your nonprofit and appointed a board, completing and filing your formation documents should be straightforward.

In your formation documents you officially state your organization's name, location, purpose, initial board and much more.

You file the "articles of incorporation" with the relevant agency in your state. Experts recommend incorporating in the state where your nonprofit will run its programs or services. If you operate internationally, the US state of incorporation naturally matters less.

You don't need to travel to the US or see a notary to incorporate.

IMPORTANT: You must register in every US state where you operate (that is, have a place of business) and apply separately for tax exemption there.

Filing costs and fees vary by state. Incorporating a nonprofit does not by itself make it 501(c)(3) exempt. The IRS requires a specific clause in your articles of incorporation if you want to apply for federal tax exemption.

Once your paperwork is complete, send it to the relevant agency in your state (in most cases the Secretary of State). Requirements differ from state to state. Some want you to file electronically, others ask for several copies by mail, and so on. In many states you also have to publish a notice of incorporation in your local newspaper after filing your articles.

Once the state has approved your articles of incorporation (sometimes this has to happen beforehand), you should hold your first official board meeting. The chair should report to the board that the state has approved the articles, and the board must then enter the articles of incorporation into the official minutes. This meeting is usually called the organization's "organizational meeting." Its minutes are simply a formal record of the proceedings and actions taken, such as setting the accounting period and tax year, approving the issue of memberships, authorizing and seating the board and other committees, adopting the bylaws, approving the opening of a bank account for the organization and much more.

6.7Step 7: Apply for 501(c)(3) tax exemption

IMPORTANT: The following description of the application process is for illustration only. It's not "just" a form to fill in. In the end you submit a document much like a business plan, with a great deal of prose describing your project in detail. We advise having an experienced US expert handle your tax exemption application; that's the only way to maximize your chances of success. This matters especially for non-US founders, because the documents have to explain and justify why the nonprofit is being formed in the US and what ongoing US connection it has. Mount Bonnell Advisors will gladly put you in touch with the right expert.

You apply for tax exemption with the Internal Revenue Service (IRS) by filing IRS Form 1023. To get the most out of tax-exempt status, you should file Form 1023 within 27 months of filing your nonprofit's articles.

Note that, depending on how you apply, a fee of $275 or $600 is due. You need to register an account at pay.gov and pay the fee by credit or debit card. It can also take 3 to 12 months for the IRS to send back its determination, depending on how many questions it has about your application. That's why many experts advise starting this process as early as possible.

You don't need to be in the US to file.

Form 1023 itself runs up to 28 pages. With the required attachments, schedules and other materials that may be needed, it's not unusual for these submissions to the IRS to reach 100 pages. Think of Form 1023 as a review of your planned (and/or past) activities and a thorough examination of your nonprofit's leadership structure, purpose and planned programs.

The IRS wants to make sure the organization was formed exclusively for 501(c)(3) purposes and that its programs are designed to serve those purposes. The IRS also pays close attention to conflicts of interest and possible benefits to insiders, both potential grounds for rejection.

You can also use a shorter application form (1023-EZ):

• Form 1023: the traditional 26-page application used by larger nonprofits
• Form 1023-EZ: a streamlined 3-page application for organizations with gross receipts under $50,000 and assets under $250,000

On the IRS website and in the form instructions you'll find a worksheet to complete to see whether your nonprofit qualifies for the shorter, simplified form.

You also need to attach your nonprofit's articles and bylaws to the application.

So before you start on Form 1023, make sure you have:

• Filed your articles
• Prepared your bylaws
• Held your first nonprofit meeting

The IRS will ask you to document some specific details in your application, so be ready to spend a few days completing the form and gathering your materials. Your articles and/or bylaws must include the following:

• a statement of your exempt purposes (e.g. charitable, religious, educational and/or scientific purposes)
• a dissolution clause
• a conflict of interest clause

Completing Form 1023

Be ready to give detailed answers on, and/or include, the following:

1. Basic information

• This covers your nonprofit's name, contact details and the date you filed your articles.

2. A copy of your articles of incorporation and bylaws, attached to the application.
   
   
3. Clauses as follows:

• a clause stating that your organization was formed for a recognized tax-exempt purpose under 501(c)(3) (e.g. charitable, religious, scientific, literary and/or educational purposes), and
• a clause stating that any assets remaining after the organization is dissolved will be distributed to another 501(c)(3) tax-exempt nonprofit or to a federal, state or local government for a public purpose.

4. A detailed narrative description of all your organization's activities.

• Describe past, present and planned activities, in order of importance.

5. Information on all proposed compensation and financial arrangements with:

• initial directors
• initial officers (e.g. president, chief executive officer, vice president, secretary, treasurer, chief financial officer or any other officer of your organization)
• trustees
• the five highest-paid employees earning more than $50,000 a year, and
• the five highest-paid independent contractors earning more than $50,000 a year

6. Income statement plus balance sheet.

How long does the IRS take?

The IRS says you should expect to hear back within 180 days of filing your application. The IRS reviews your application thoroughly, and if anything is incomplete, it may need to contact you. That can slow things down considerably, so it pays to prepare as well as you can before you file.

Pro tip: 40 states also require charitable solicitation registration, usually (though not always) handled by the Attorney General's office. Most states require you to register before you ask for donations. Most states also accept federal 501(c)(3) status for corporate tax exemption; California and Texas are the big exceptions. Both require a separate application for charitable status in their state.

6.8Step 8: Stay compliant for the long run

Once you have 501(c)(3) status, you don't need to file anything to renew it. In other words, 501(c)(3) status has no expiry date. There are, however, other steps you must take to keep your tax exemption.

Once the state has approved everything, get ready for your annual reporting obligations.

In most cases, a tax-exempt organization must file a version of Form 990 with the IRS, depending on its financial activity. Form 990 discloses your finances, activities, governance, directors and key employees, and it is open to public inspection.

Keep proper books on income, expenses, assets and liabilities. You also need proper employee records, such as payroll and payments of withholding taxes, workers' compensation, unemployment insurance and so on. If you hire independent contractors, keep copies of all miscellaneous income documents (Form 1099-MISC) you provide to them.

The individual states also have their own reporting and renewal rules. So track your organization's finances and activities throughout the year. That keeps reporting smooth.

If you want to change your name or address in the future, the IRS requires a tax-exempt organization to report changes to its name and address, as well as structural and operational changes. When an organization files an annual return (for example Form 990 or 990-EZ), it must report those changes on that return. If your organization needs to report a name change, please read the section Change of Name - Exempt Organizations. If you need to report a change of address, please read the section Change of Address - Exempt Organizations. The EO Determinations Office can issue an affirmation letter that shows the organization's new name and/or address and confirms its section of the Internal Revenue Code.

Our recommendations:

Well-organized recordkeeping is essential. Get a binder for all your key documents (registration papers, licenses and permits, meeting minutes and so on) so you stay organized and fully compliant.

Most experts also advise against raising donations until you have received the IRS determination letter confirming that you are tax-exempt.

If your tax exemption is denied and you want to appeal, talk to an attorney experienced in working with nonprofits.

Pro tip: Check with your state's consumer affairs department (or a similar state licensing agency) about state licensing requirements. If you sell to consumers, for example, you need a sales tax permit, and your activities may require a building permit.

6.9Step 9: Receive donations

As a 501c3, your donors can now deduct their gifts from their taxes. Nonprofits can raise funds in many ways, such as appeal letters and events, but online giving is fast becoming the most popular and cost-effective option.

Online giving keeps growing, and nonprofits have several ways to collect these donations.

Recurring donations

Recurring donations are a fantastic source of income for nonprofits. The money is predictable and can go straight into the annual budget. Donors love the convenience, because they can support their favorite causes regularly without thinking about it. Plenty of apps and tools let you set this up.

Corporate matching

In the US, it is common for companies to match donations from employees, suppliers and customers to a given cause with a gift of their own. Service providers offer nonprofits an affordable way to handle corporate matching gifts. Nonprofits can then give donors an easier way to find out whether their employer matches donations.

Crowdfunding

Donors use crowdfunding to raise money for their birthdays and to help people in need. Nonprofits are keen to jump on board too. With the right online platform, nonprofits can create crowdfunding campaigns, send updates to donors and share successes online. These tailored campaigns encourage donors to get involved and share their stories with new audiences.

Text-to-give

Text-to-give is increasingly popular with younger donors and nonprofits alike. Plenty of tech solutions give nonprofits a simple way to collect donations through donors' smartphones. Many local nonprofits, churches and politicians have already run successful campaigns this way.

Text your donors your campaign ID and a link to your donation page, and they can make a one-time or recurring gift within minutes. Make the most of this simple process and add a text-to-give campaign to your next event.

7FAQs on registering a 501(c)(3) nonprofit

7.1How much does it cost to become a 501c3?

It depends on which IRS form you file. You have two options.

• IRS Form 1023-EZ. The user fee for Form 1023-EZ is $275.
• IRS Form 1023: IRS Form 1023 is the standard application many new organizations must file with the IRS to obtain 501c3 tax-exempt status. The user fee for Form 1023 is $600.

User fees must be paid through Pay.gov when you file the application.

On top of that comes the cost of hiring an experienced advisor or professional to prepare your 501c3 application.

7.2How long does 501c3 approval take?

IRS 501(c)(3) approval usually takes between 2 and 12 months, including any written follow-up questions. Sometimes it is quicker, sometimes a little longer.

If you file Form 1023-EZ, the timeline is shorter thanks to the streamlined electronic filing process.

One of the main reasons for the long review is the time it takes for a case to be assigned to a reviewer. It can also depend on the time of year, the type and classification of the nonprofit and the complexity of the application itself.

You can request expedited review if a new organization is formed to provide immediate disaster relief, or if a committed, substantial grant with a deadline is tied to the organization's budget. There is no guarantee, however, that the IRS will grant an expedited review.

7.3Can you be a nonprofit without 501c3 status?

Some nonprofits operate informally without official recognition from the IRS, and it is perfectly legal for them to carry on that way. Without official 501(c)(3) status from the IRS, however, the group is not tax-exempt, and donors cannot deduct their gifts from their taxes.

As a rule, very small nonprofits with annual gross receipts under $5,000, as well as churches and the integrated auxiliaries of churches and conventions or associations of churches, operate without 501(c)(3) status. Donations to these organizations are tax-deductible even though the nonprofit does not hold tax-exempt status.

7.4Do you have to be a 501c3 to receive grants?

Grantmakers usually fund organizations that hold public charity status under Section 501(c)(3) of the Internal Revenue Code. Grants for organizations without 501c3 status are few, but they do exist. Charitable groups can apply for fiscal sponsorship, a formal arrangement in which a 501(c)(3) charity sponsors a project that may not have tax-exempt status. This lets the project apply for grants and raise tax-deductible donations under the sponsor's exempt status.

7.5I live in the USA. Can I make tax-efficient donations to my own 501c3?

Yes, as a US taxpayer you can donate to your own 501(c)(3) organization. You can make a tax-deductible donation to any 501(c)(3) charity, whatever your connection to it. Technically it is not your own charity, because charitable organizations have no owners. The donated money must, however, be used for charitable purposes.

Make sure the organization gives you a signed donation receipt. It shows what was donated, what the donation was worth and that no goods or services were received in return.

7.6Does a 501c3 pay US capital gains tax?

Organizations under Section 501(c)(3) of the IRC are generally exempt from most forms of US federal income tax, including income and capital gains tax on stock dividends and sale proceeds. As long as the 501(c)(3) entity keeps its tax-exempt status, it pays no tax on any gains.

7.7Does a 501c3 pay US property tax?

Property owned by nonprofits and used for an exempt purpose is exempt from property tax under state law. If the property, or part of it, is not used to advance the nonprofit's mission, the group may have to pay property tax.

Example: the group owns a building but leases part of it to a for-profit business. The group then owes property tax on the leased portion.

7.8What are the board requirements for a 501c3?

The board of directors is the governing body of a 501c3 nonprofit and oversees the organization's activities. The board must make sure the organization complies with the law and is run as well as possible. In a 501c3, the founders can serve on the board. Certain states require a 501c3 to appoint at least 3 people to its board. And at least one director must be responsible for making the organization's strategic and financial decisions.

7.9How to check your 501c3 status

You can track the progress of your application on the IRS website. Your review begins once an agent has been assigned to your application. You can check the status of your 501c3 application by calling IRS Exempt Organizations Customer Account Services at (877) 829-5500. You will need to give the organization's tax identification number and mailing address. The IRS only shares information on the status of your 501(c)(3) application with an identified officer of the organization.

7.10Can 501c3 founders draw a salary?

As a 501c3 founder, you can pay yourself reasonable compensation for the services you actually provide to the nonprofit. The IRS judges what is reasonable by looking at salaries at comparable nonprofits. Be careful to pay yourself fairly and avoid paying "too much", so you don't risk a charge of excessive compensation. Your salary should stay within reasonable limits based on hours worked, the organization's overall budget, the education required and average pay in your area.

7.11Are 501c3 organizations tax-exempt?

Yes, all 501c3 organizations are exempt from federal and/or state corporate income taxes. Not every activity is tax-free, though. Activities unrelated to a nonprofit's core mission or purpose are taxable. This can be any activity or business run to support the nonprofit's income. These are typically classed as unrelated business activities.

7.12Can foreign donors deduct their donation at home?

Although some countries in theory let you deduct at least part of a donation to a foreign organization, the requirements are fairly strict. Whether your nonprofit would meet them is best checked with a local tax advisor.

8What this means for you

There's no doubt about it: setting up a nonprofit is a challenge.

It's wise to turn to local expertise (an attorney, a tax advisor or someone who knows exemption law and how nonprofits work in your state) to make sure your new nonprofit complies with state and federal laws and requirements.

Investing in prevention up front is worth more than paying for damage control later, and the best time to set your nonprofit up for success is right at the start.

Don't let hurdles and obstacles discourage you. Remember why you do what you do. Think of your mission and the people you serve whenever it all gets to be too much.

We hope this article has helped you understand how to set up a nonprofit and obtain tax-exempt status.

For more on the US tax system, see our beginner's guide and our compact introduction to US tax law for European entrepreneurs. For an overview of all US entity types and formation topics, visit our Company Formation hub. Find out here whether you need to fill in a Form W-8.

In short

• The USA has 29 types of not-for-profit entities. The best known is the nonprofit corporation with status under Section 501(c)(3) IRC.
• A 501(c)(3) brings tax exemption, tax-deductible donations, liability protection and access to grants. If you fail to file Form 990 or 990-N three years in a row, you lose the exemption automatically.
• There are three main types: the public charity, the private foundation and the private operating foundation, each with different limits on deducting donations.
• Setting one up takes nine steps, and local professionals help you stay compliant with federal and state rules.

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