Forming your charity legally

This is the stage where your idea becomes a legal organization. It has the most paperwork, and it's where small mistakes can cost months. The good news: thousands of volunteers do this every year, and the steps are always the same.

There are two separate things to get. First, your state creates the organization, usually as a nonprofit corporation. Second, the IRS recognizes it as tax-exempt under section 501(c)(3) of the tax code, which is what lets donors deduct their gifts. Being a nonprofit corporation in your state does not, by itself, make you a 501(c)(3). You need both.

What to do

1. Choose a name

Pick a name that is clear and easy to say. Then check that it's free to use:

• State name search: your secretary of state (or similar office) has a free online business name search. Your name must be different enough from names already registered there.
• Trademark search: search the USPTO Trademark Search (opens another site) system to see if someone has a federal trademark on a similar name. A trademark is a legal claim to a name or logo for certain goods or services.
• Web address and social media: check whether the website address and social media handles you want are available.

2. Incorporate in your state

Incorporating means filing a document with your state that creates a nonprofit corporation. Most states call it articles of incorporation (New York calls it a certificate of incorporation). Fees vary by state; New York, for example, charges $75. You'll usually file with the secretary of state, often online.

Two clauses matter a lot to the IRS. Under the IRS "organizational test," your founding document must:

• Limit your purposes to exempt purposes under section 501(c)(3), and not allow more than a small amount of other activity. This is the purpose clause. The IRS sample reads: "Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code."
• Lock your assets to charitable use forever. This is the dissolution clause. It says that if the charity ever closes, what's left goes to another exempt purpose or to a government for a public purpose, never to the founders or board.

The IRS publishes sample wording in Publication 557 and on its sample organizing documents page. Use your state's form and add these clauses if the form doesn't include them.

3. Name a registered agent

A registered agent is a person or company with a street address in your state who agrees to receive official legal mail for the charity. Many small charities name a board member who lives in the state. Check your state's form for what it needs.

4. Adopt bylaws

Bylaws are your charity's internal rule book. They cover how many directors you have, how they're elected, how long they serve, officer roles, how meetings work and how many people must be present to make decisions (called a quorum). Your state's nonprofit law may require them, and Form 1023 asks you to upload them if you have them. Start from our bylaws template and check it against your state's law.

5. Adopt a conflict of interest policy

A conflict of interest policy sets out what a director must do when a decision could benefit them personally, such as disclosing it and stepping out of the vote. The IRS says adopting one isn't required to get exempt status, but it publishes a sample in Appendix A of the Form 1023 instructions, and the application asks whether you have one. Adopt one. Our template follows the IRS sample.

6. Hold your first board meeting

At the first meeting, the board usually:

• adopts the bylaws and conflict of interest policy;
• elects officers (chair or president, secretary, treasurer);
• approves opening a bank account;
• approves applying for an EIN and 501(c)(3) status;
• sets the fiscal year, meaning the 12-month period your books cover.

The secretary writes minutes, a short written record of who attended and what was decided. Keep them forever. Our board minutes template shows the format.

7. Get an EIN

An Employer Identification Number (EIN) is your charity's federal tax ID number. You need one even with no employees: banks ask for it and the IRS uses it for your application. It is free from the IRS online, and the IRS warns: "Beware of websites that charge for an EIN." Apply only at irs.gov. The person applying online (the "responsible party") must have a Social Security number or individual taxpayer identification number, and you can get only one EIN per responsible party per day.

8. Apply for 501(c)(3) status

You apply on one of two forms. Both are filed online through Pay.gov, and the user fee is paid there.

Who can use Form 1023-EZ? Complete the Eligibility Worksheet at the end of the Form 1023-EZ instructions. A "yes" to any question means you must use Form 1023. The size questions are:

• Do you expect annual gross receipts (all money coming in, before costs) over $50,000 in any of the next three years?
• Have your gross receipts been over $50,000 in any of the past three years?
• Do you have total assets worth more than $250,000?

Other questions rule out, among others, churches, schools, hospitals, limited liability companies (LLCs), groups that will run donor advised funds, and groups dealing in digital assets.

How long does it take? The IRS posts current times on its "Where's my application" page. When we checked, it said it issues 80% of Form 1023-EZ determinations within 22 days, and 80% of Form 1023 determinations within 191 days. These change, so check the page.

The 27-month rule. If you file within 27 months after the end of the month you were legally formed, and you're approved, your exemption generally counts back to the day you formed. File later and it usually starts only from the date you applied, which means gifts made before then may not be deductible.

9. Check state tax exemption

Federal exemption doesn't automatically exempt you from state taxes like income, sales or property tax. Some states recognize your IRS letter; others need a separate application. Rules vary by state, so check with your state's department of revenue or taxation.

Your checklist

• Search your state's business name database for your chosen name.
• Search the USPTO Trademark Search system for similar names.
• File articles of incorporation with your state, including the purpose and dissolution clauses.
• Name a registered agent.
• Draft bylaws and a conflict of interest policy.
• Hold your first board meeting and adopt both documents.
• Record the meeting in written minutes.
• Get a free EIN at irs.gov.
• Complete the Form 1023-EZ eligibility worksheet to choose your form.
• File Form 1023 or 1023-EZ on Pay.gov within 27 months of forming.
• Check whether your state needs a separate tax exemption application.
• File your IRS determination letter somewhere safe.