Once a potential founder has read our post on Nonprofit Business Planning – Steal All the Underpants, and has determined that a new nonprofit organization would serve a legitimate need in the community and can be supported without stealing any underpants, she must then consider the steps necessary to form the nonprofit corporation in Washington State and obtain tax-exemption from the IRS.
Although incorporation as a different entity is possible, incorporating as a nonprofit under the Washington Nonprofit Corporation Act (the “Act”) usually makes the most sense. The following are the basic steps a founder will need to take to form the nonprofit in Washington:
1. Prepare and File Articles of Incorporation. Filing articles of incorporation is the act that creates a corporation’s legal existence. In Washington, they are filed with the Secretary of State’s office. Although form articles of incorporation are available from the Secretary of State, certain provisions required under federal tax law to qualify for exemption under 501(c)(3) (or a different section of 501(c)) are not included. Therefore, an attachment containing the appropriate provisions must be created. Specifically, the articles must limit the corporation’s purpose to tax-exempt purposes. This purpose statement should be broad enough that the organization is able to evolve, but not so overbroad that it would permit the organization to engage in non-exempt activities. Further, the articles must permanently dedicate the corporation’s assets to tax-exempt purposes and must prohibit distribution of profits to private individuals. If the articles do not meet these basic requirements, the IRS will require amendments and may only grant exemption from the date of the amendment.
2. Draft the Bylaws. The bylaws provide the corporation’s internal operating rules. They should be drafted to coordinate with state law and should not include provisions that conflict with the articles. Except with respect to the number of directors, provisions in the articles will control over inconsistent provisions in the bylaws. Most importantly, the bylaws establish the procedure for electing directors and officers, outline their duties and powers, and provide for notice, time, and place of meetings. Founders should become familiar with the Act, which provides default provisions that control where the bylaws are silent.
3. Prepare Governance Policies. Governance policies can help ensure that the new organization operates
smoothly and in compliance with law and best practice. A Conflict of Interest policy is helpful to guarantee that directors do not breach their fiduciary duty of loyalty by putting their interests ahead of the corporation’s. Whistleblower and Document Retention and Destruction Policies help the corporation avoid violations of Sarbanes Oxley’s criminal provisions. Additional policies such as those covering confidentiality policies, travel and expense reimbursement, compensation, signature authority, foreign aid, and the like may be helpful depending upon the organization’s structure and planned activities.
4. Hold the First Meeting of Directors. Once the entity is formed, the incorporator should appoint additional directors (if they haven’t already) via a consent resolution and then the entire board should hold an organizational meeting. At the organizational meeting, directors approve the bylaws, elect additional directors, appoint officers, adopt governance policies, pass a banking resolution authorizing the organization to open a bank account, authorize the hiring of the chief executive and the filing of the application for exemption. Any any other initial corporate business should also be approved at this meeting. Minutes of the organizational meeting as well as all future board and committee meetings should be taken and kept in the corporate minute book.
5. Apply for a Federal Employer Identification Number. A federal employer identification number (EIN) is required to apply for tax-exempt status and is required by banks to open a bank account in the corporation’s name.
6. Prepare and File a Business License Application. Filing the business license application will provide the organization with its basic state tax registration and employer registration. Washington nonprofits are treated like any other business when it comes to state taxes. State tax registration is required if the organization plans to engage in any “business activity.” The business license application will also register the corporation for payment of certain state employment taxes.
In Washington state, the incorporation process can take anywhere from two months if done by mail to two or three business days if expedited by mail or online. New nonprofit corporations should be aware that they may be subject to additional state and local taxes and regulations, charitable solicitation registration, and state business and occupation taxes on gross revenue – including revenue from regularly conducted fundraising and sale activities.