Forming a nonprofit corporation and securing federal and state tax exemption is a long process involving interaction with multiple federal and state agencies. Tovella Dowling assists founders in the incorporation and exemption process for new nonprofits to ensure solid governance and procedural infrastructure is in place to achieve our client’s intentions for the organization.

Beyond preparation and filing of the necessary paperwork to establish the entity and secure tax exemption, our attorneys bring value to our clients by educating them along the way to solidify an understanding of corporate governance, compliance, fundraising strategy, programmatic legalities, taxation, and other relevant topics to guarantee the success of their mission and intended programmatic goals.

Critical to the process is identifying the filings involved, as well as the governing agencies to which the nonprofit will be required to register and periodically report.

Drafting of Nonprofit Governing Documents

The governing documents of a nonprofit are comprised of the Articles of Incorporation and the Corporate Bylaws. The Articles of Incorporation is the corporate charter that is lodged with the Secretary of State in the incorporating jurisdiction. The filing of the Articles of Incorporation serves to create a legally distinct entity, sole and separate from its founders. To qualify for federal, state, and local tax exemptions, the Articles of Incorporation must contain specific language which is imposed under applicable law. Our attorneys are well-versed with the federal, state, and local requirements necessitating the appropriate provisions to be included in the Article of Incorporation based upon the desired exemption that a particular client is seeking.

The Bylaws of the Organization serve as the procedural rule book, which should be referenced frequently by the Board of Directors to ensure compliance with all procedural requirements imposed under state law. Our attorneys draft custom bylaws to suit the specific needs of our clients and address considerations such as the creation of an optimal governance structure, adherence to applicable authorities, avoidance of unnecessary administrative burdens, and consideration of mechanisms that lend to maximum flexibility for future growth.

Following incorporation, corporate formalities must be followed to protect the nonprofit’s assets. One aspect of adherence to corporate formalities includes keeping consistent corporate records, such as resolutions and minutes of the Board of Directors, Committees, and membership classes, if applicable. Although the law generally does not require a particular format for such records, minutes and resolutions should be drafted with sufficient detail to set forth the basis for corporate action and summarize the deliberative process in the proper discharge of imposed fiduciary duties, while also avoiding detailed disclosures of sensitive information such as trade secrets, human resource information, and other confidential matters, which if produced to a third party, could be detrimental to the nonprofit. Tovella Dowling equips its clients with the resources and tools necessary to mitigate risk and carry out industry best practices.

Federal Tax Exemption Application

Once formed as a nonprofit corporate entity on a state level, the nonprofit organization is still subject to taxation unless and until it applies, and is approved, for tax exemption from the Internal Revenue Service. To obtain recognition from tax exemption, the organization must prepare and file IRS Form 1023, IRS Form 1023-EZ, or IRS Form 1024. The form filed is dependent upon the basis for federal tax exemption, proposed programmatic operations, and the operating budget of the nonprofit.

Tovella Dowling counsels clients in determining the most appropriate type of exemption and ensures understanding of the distinctions and tax consequences that are associated with the chosen basis for tax exemption. If seeking tax exemption under Section 501(c)(3) of the Internal Revenue Code, our attorneys advise on the proper classification between public charity versus private foundation status, including the legalities and taxation associated with each.

Here is an overview of the various types of Tax exempt organizations:

Type of Exempt Organization
IRC Section
Corporations Organized Under Act of Congress
Title Holding Corporations for Exempt Organizations
Charitable, Religious, Educational, Scientific, Literary Organizations
Civic Leagues and Social Welfare Organizations
Labor, Agricultural, and Horticultural Organizations
Business Leagues, Chambers of Commerce, etc.
Social and Recreation Clubs
Fraternal Beneficiary Societies and Associations
Voluntary Employees Beneficiary Associations
Domestic Fraternal Societies and Associations
Teachers’ Retirement Fund Associations
Local Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies
Cemetery Companies
State Chartered Credit Unions, Mutual Reserve Funds
Mutual Insurance Companies or Associations
Cooperative Organizations to Finance Crop Operations
Supplemental Unemployment Benefit Trusts
Employee Funded Pension Trusts
Organizations of Past or Present Members of the Armed Forces
Black Lung Benefits Trusts
Withdrawal Liability Payment Funds
Veterans’ Organizations
Trusts described in section 4049 of ERISA
Title Holding Corporations or Trusts
State-Sponsored High-Risk Health Coverage Organizations
State-Sponsored Worker’s Comp Reinsurance Organizations
National Railroad Retirement Investment Trusts
Qualified Nonprofit Health Insurance Issuers
Religious and Apostolic Associations
Cooperative Hospital Service Organizations
Cooperative Service Organizations of Operating Educational Organizations
Amateur Sports Organizations
Child Care Organizations
Charitable Risk Pools
Credit Counseling Organizations
Political Organizations

State Tax Exemption Application

In addition to securing exemption from federal taxation, many states also impose taxation on a nonprofit’s income sourcing from its state, unless and until recognition of state tax exemption is obtained. The process for obtaining state tax exemption varies by jurisdiction. In some instances, the state may require a detailed application process. In other instances, state tax exemption may be automatic so long as evidence of federal tax exemption is provided.

Importantly, if a nonprofit operates or sources income from more than one state, it will be required to obtain state tax exemption from each of those states. Our attorneys are intimately familiar with varying state laws to ensure the exemption is secure notwithstanding multi-jurisdictional nonprofit operations.

Charitable Solicitation Registration

Once an organization incorporates as a nonprofit and secures tax exemption, charitable solicitation registration is likely if the organization is an IRC 501(c)(3) charitable nonprofit. Fundraising is governed by state law and most states require nonprofits to register within the state before engaging in any fundraising efforts, or within a certain timeframe following receipt of any charitable assets. Failure to timely register by applicable state requirements can subject the nonprofit to late filing fees and penalties.

Charitable solicitation registration is generally lodged with the state Attorney General or Secretary of State and involves a unique application process. Like the state tax exemption process, nonprofits will be required to register with each regulating state in which it conducts fundraising activities.

Sales and Use Tax Exemption Application

Tax exempt nonprofits are not afforded a blanket tax exemption from sales and use taxes. There are many circumstances in which a nonprofit is required to pay or collect sales tax on a particular transaction, notwithstanding its federal or state Tax exempt status.

Individual states define rules regarding the imposition of sales and use tax and it is incumbent on nonprofits to understand state-specific rules relating to specific types of transactions to ensure compliance.

Real Property Tax Exemption Application

Tax exempt nonprofits are not afforded a blanket tax exemption from real property. Individual states and counties define rules regarding the imposition of taxation on real property. In some instances, an application process is available to secure a welfare exemption or exemption from real property tax.