Finding support and funding in the nonprofit world is often more challenging than finding funding for a for-profit venture. In addition, contrary to the belief of many nonprofit founders, foundation grant dollars do not grow on trees and are, in fact, the most competitive and scarce source of funding available.
In 2003, the number of applications for exemption had gone up by over 40% with no corresponding increase in the number of IRS Exempt Organization employees. This motivated the IRS to consider how to streamline the application for exemption process to make processing easier for both the IRS and the applicant. The IRS invited a panel of experts from the nonprofit legal community to make recommendations to improve the application process. The panel’s key recommendation was that the IRS revive earlier plans to develop and fund an interactive online Form 1023 filing tool accessible through the IRS website known as the “Cyber Assistant.”
UPDATE: On May 7, 2010, IRS announced in IRS Exempt Organization Update 2010-11, that Cyber Assistant is delayed – no release this year.
Forming a nonprofit corporation is not the same as being tax-exempt. To obtain 501(c)(3) status, newly formed entities must apply to the IRS for a formal determination of exemption. Entities seeking 501(c)(3) status apply by filing Form 1023. (Entities seeking exemption under other sections of 501(c) file Form 1024.)
Newly formed organizations applying for exemption face a chicken and egg dilemma. Form 1023 requests considerable detail regarding the charity’s planned programs and activities. The attitude of the IRS is that requiring applicants to articulate detailed plans is a small price to pay for the significant tax benefits associated with 501(c)(3) status.
I receive several calls a week from people who want to start a new non-profit. Looking back on my legal career, I realize that many of the tax-exempt organizations I helped to create early on never got off the ground. Today, I consider it part of my responsibility to the potential new client and to the sector to educate would be founders on the realities of the marketplace. What follows is a walk through the typical discussion that I have with potential founders.
Most states require you to register your organization if you solicit donations from their residents. Many states also require registration if your organization collects substantial or ongoing donations from their residents, even if you aren’t specifically targeting donors in that state. Download our comprehensive list of each state’s requirements.
Download our free guide to learn about the many elements needed to run a successful nonprofit organization, as well as how to avoid common pitfalls and mistakes.