A Nonprofit Guide to Compliance

Starting on the Right Foot: State Incorporation and Federal Tax-Exempt Status

Many founders mistakenly head straight to the IRS for tax-exempt status. The first step is registering your nonprofit with your state’s corporation division. This establishes you as a legal entity and triggers the need to recruit your initial governing board, with at least 3 people who fill these offices: Chairperson, Secretary, and Treasurer.

Second, apply for an Employer Identification Number (EIN) from the IRS, even if you have no employees. Then, using your EIN, register with your state Attorney General (or your appropriate state agency).

Next, contact your state taxation department and ensure you are identified as a nonprofit corporation.

To apply to the IRS for tax-exempt status, your Board must first develop a clear mission statement outlining your charitable purpose and create bylaws that govern your organization’s internal operations.

Now, it’s time to complete & submit a Request for Determination (IRS Form 1023) to the IRS to secure recognition as a 501c3, tax-exempt, nonprofit.

Compliance Layers: Federal, State, and Local

Once established, compliance becomes an ongoing process. Federal requirements include filing an annual Form 990 with the IRS. This form details your organization’s finances, programs, and governance practices. Be sure you know the IRS regulations around which form to complete – the postcard or long form.

State compliance varies but may involve submitting an annual report, registering for charitable solicitation within the state or specific municipalities where you intend to raise funds, and submitting a Statement of Continued Existence every few years. Make sure you know your state’s requirements.

Beyond the Basics: Policies and Procedures

The long-form 990 delves deep, requiring documentation of various policies, including conflict of interest, whistleblower protection, and document retention. Understanding these policies and their proper implementation is crucial for good governance and demonstrating responsible stewardship of donor funds.

Unfamiliarity with these requirements can lead to problems. For instance, nonprofits should acknowledge gifts exceeding $250 in writing and maintain separate records for donated vehicles to avoid complications with valuation.

Human Resources: Avoiding Misclassification Woes

Many nonprofits rely on contractors to save on payroll taxes and benefits. However, the IRS strictly regulates the distinction between employees and independent contractors. Misclassifying employees can lead to hefty fines and back taxes. When in doubt, err on the side of classifying workers as employees.

Strong human resource (HR) policies are essential for all nonprofits. These should include anti-discrimination, diversity, equity, and inclusion (DEI), sexual harassment prevention, and whistleblower protection policies. Additionally, developing clear procedures for hiring, managing, and terminating employees helps maintain compliance and protects your organization from legal issues.

This article provides a foundational understanding of nonprofit compliance. Remember, it’s always best to consult with an attorney specializing in nonprofit law for specific guidance.