Once a non-profit founder looking to start a nonprofit has surveyed the non-profit landscape and found a legitimate need, recruited an initial board, created business and fundraising plans, and scraped together some start-up funding, he or she is ready to proceed. In Arizona, it usually makes the most sense to form the entity as an Arizona non-profit corporation. Very generally, the steps to creating a new non-profit corporation in Arizona are as follows:
1. Prepare and File Articles of Incorporation. The filing of the articles of incorporation begins the organization’s legal existence. To qualify for tax-exemption under Section 501(c)(3), the articles must limit the corporation’s activities to tax-exempt purposes. The purpose statement should be broad and flexible enough to give the organization room to evolve, without being so all-encompassing that it would permit it to engage in non-exempt activities. The articles must permanently dedicate the corporation’s assets to tax-exempt purposes and must not permit distribution of profits to private individuals. If the Articles do not meet these basic IRS requirements, the IRS will require amendments and may only grant exemption from the date of the amendment rather than retroactive to the date of incorporation. There are other organizational requirements for organizations that plan to qualify for exemption under some other section of 501(c) such as social clubs, social welfare organizations, business leagues, and labor organizations, to name a few.
2. Prepare the Bylaws. The articles and bylaws collectively form the governance structure for the corporation. Perhaps most importantly, they prescribe how the board of directors is selected. In Arizona, directors can be selected by board vote, by designation of a third-party, by one or more members or delegates, or through a combination of these methods.
3. Prepare Governance Policies. We recommend that newly formed nonprofit corporations adopt certain key governance policies. Arizona law requires certain Arizona nonprofits to have a Conflict of Interest Policy. Whistle blower and Document Retention and Destruction Policies help the corporation avoid violations of Sarbanes Oxley’s criminal provisions. Other governance policies that are typically considered at this stage include Gift Acceptance, Signature Authority, Confidentiality, Compensation, Travel and Expense Reimbursement, and Joint Venture Policies.
4. Hold Organizational Meeting. At the organizational meeting, the directors will approve the corporation’s articles and bylaws, elect directors and officers not identified in the Articles, adopt governance policies, pass a banking resolution authorizing the opening of a bank account, authorize the hiring of the chief executive and any conduct other initial corporate business.
5. Obtain Tax Identification Number. In order to open bank accounts, the corporation will need to obtain a tax identification number from the IRS. It is very important that the number not be obtained before the organization is formed because the identification number cannot attach to a corporate entity that does not yet exist.
In Arizona, the time required to accomplish these steps depends on how complex the governance structure is, how quickly the founders can make the necessary decisions, and how quickly the Arizona Corporation Commission can process the articles. If the articles are filed on an expedited basis, a new Arizona non-profit corporation can usually be formed in a few days. Once the entity is formed, the next step is to apply for tax-exempt status which will discussed in Part III of this post.