Starting a nonprofit organization is a noble endeavor, but it comes with its fair share of legal challenges. One of the most critical steps in establishing a nonprofit is obtaining tax-exempt status under section 501(c)(3) of the Internal Revenue Code. For attorneys advising nonprofit clients, understanding the intricacies of this process is crucial.

Key Topics:

In this comprehensive guide, we will explore the essential steps involved in obtaining 501(c)(3) status and provide insights into ethical considerations when representing nonprofit organizations.

Eligibility and Charitable Activities

Before diving into the application process, it’s vital to ensure that your organization is eligible for 501(c)(3) status. To qualify, your nonprofit must be organized and operated exclusively for one or more of the following purposes:

  • Religious
  • Charitable
  • Scientific
  • Educational
  • Literary
  • Public safety testing
  • Prevention of cruelty to children or animals

The organization’s activities should primarily fall within these categories. Additionally, no part of the organization’s net earnings can inure to the benefit of any private shareholder or individual.

Special 501(c)(3) Types

While many organizations can qualify for 501(c)(3) status, some special types have distinct considerations:

  • Churches: Churches are automatically exempt under 501(c)(3). However, the IRS does not provide a specific definition of what constitutes a church. Determinations are made on a case-by-case basis.
  • Educational Organizations: Schools and educational organizations must meet additional requirements, particularly concerning non-discrimination policies. They must ensure that their policies align with federal and state guidelines.

Reinstatement

If a nonprofit’s tax-exempt status is revoked due to failing to file Form 990 (the annual informational return) for three consecutive years, it’s possible to seek reinstatement. This process typically involves providing the missing returns and demonstrating that the organization has taken corrective action to prevent future non-filing.

Form 1023-EZ vs. Form 1023 (Long Form)

The heart of the application process lies in selecting the appropriate form. For small organizations with projected annual gross receipts of less than $50,000 in each of the first three years, the simplified application, Form 1023-EZ, may seem like an attractive option. However, it’s important to be aware of the trade-offs. While this form streamlines the application process, it offers limited space to describe your organization’s activities. As a result, organizations that choose this path may expose themselves to future audit risks.

On the other hand, the long-form application, Form 1023, is more extensive and requires more detailed documentation. It provides a comprehensive platform to describe your charitable programs in detail. This can offer better protection against potential IRS audits.

Your choice between the two forms should be influenced by the complexity of your nonprofit’s activities. In many cases, the additional work involved in submitting Form 1023 is well worth the investment in terms of long-term clarity and protection.

Transitioning to 501(c)(3)

Some organizations may have initially formed under a different tax-exempt category but wish to change their status to 501(c)(3). This process involves filing an application as if the organization were new and providing a clear and compelling explanation for the change. It’s essential to demonstrate that your organization meets the requirements for 501(c)(3) status.

Online Filing

Both Form 1023 and Form 1023-EZ can now be filed online through the Pay.gov website. Online filing has streamlined the application process, making it more accessible and efficient for nonprofit organizations. However, it’s important to note that the financial section of the online application lacks auto-calculation features. This means that careful attention to detail is essential to ensure accurate financial reporting.

By understanding these crucial aspects and making informed decisions during the application process, nonprofit organizations and their legal representatives can navigate the complexities of obtaining 501(c)(3) tax-exempt status with confidence. This guide serves as a foundation for attorneys advising nonprofit clients, allowing them to provide expert guidance in this intricate but rewarding process.

Ethical Considerations for Attorneys

As legal representatives, it’s imperative to approach nonprofit representation with a keen awareness of the ethical considerations unique to this field. Here are a few key points to keep in mind:

  • Conflict of Interest: Be vigilant about potential conflicts of interest. Ensure that your personal interests or those of your firm do not interfere with your client’s best interests. This is particularly important when dealing with compensation arrangements within nonprofit organizations.
  • Compliance and Transparency: Advise your clients on the importance of maintaining strict compliance with 501(c)(3) regulations. Emphasize the significance of transparent financial reporting, non-discrimination policies, and adherence to the organization’s stated charitable purpose.
  • Public Trust: Recognize that nonprofit organizations play a crucial role in society, and public trust is paramount. Help your clients understand the importance of maintaining public trust through ethical behavior and fulfilling their charitable missions.

Conclusion:

In the world of nonprofit law, obtaining and maintaining 501(c)(3) status is not merely a legal process but a profound commitment to social betterment. As attorneys, your role extends beyond compliance with IRS regulations; it encompasses safeguarding public trust, nurturing future change-makers, and empowering nonprofits to thrive in their mission. Your dedication to this cause echoes the commitment of the nonprofits you represent, and it plays a pivotal role in creating a brighter future where compassion, innovation, and progress flourish. Whether choosing the streamlined path of Form 1023-EZ or the more comprehensive route of Form 1023, your commitment to excellence defines your practice and contributes to a world where generosity, kindness, and positive change reign supreme. Together, attorneys and nonprofit organizations can build a world where good deeds continue to flourish under the protective canopy of 501(c)(3).

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Further Reading

Alyssa M. Gross

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Attorneys should consult with their clients on a case-by-case basis and remain updated on applicable laws and regulations to provide accurate and tailored legal guidance.

FAQs

How can I check if my nonprofit organization is eligible for 501(c)(3) status?

Nonprofit organizations that are organized and operated exclusively for charitable, educational, religious, scientific, or other specific purposes may be eligible for 501(c)(3) status. Eligibility criteria can vary, so it’s essential to review IRS guidelines and consult with an attorney.

Can I apply for 501(c)(3) status on my own, or should I hire an attorney?

You can apply for 501(c)(3) status on your own, but many organizations choose to hire an attorney specializing in nonprofit law. Attorneys can provide guidance, ensure compliance, and streamline the application process.

How long does it typically take to obtain 501(c)(3) status?

The processing time varies but can take several months. Form 1023-EZ generally has a shorter processing time compared to Form 1023. Delays can occur if the application is incomplete or if the IRS has questions.