Creating a charitable organization usually begins with a passion for a cause. What often follows is a myriad of paperwork to ensure the organization meets various federal, state and local requirements, both in the formation and throughout the organization’s lifecycle. Understanding these requirements will help to make the formation process of your charitable organization more manageable.
Is the Organization a Charity?
The first step in creating a not-for-profit entity is to determine whether the organization will meet Tennessee’s definition of a charitable organization:
“a group which is or holds itself out to be a benevolent, educational, voluntary health, philanthropic, protect the public safety, or any person who solicits or obtains contributions solicited from the public for charitable purposes.”
If the organization qualifies, it must then create a mission statement – a description of what sets it apart from other organizations and its plans to fulfill needs. This step is not only a part of the required paperwork but also becomes a valuable tool in the organization’s long-term operation.
The not-for-profit entity can be incorporated with one person initially, though later steps require a minimum of three on the board of directors.
To learn more about the laws governing not-for-profit organizations in Tennessee, see Title 48, Chapters 51-68 of the Tennessee Code. The code details every step, from naming the organization to selling assets and dissolution.
Selecting a Name and Filing a Charter
Before an organization gets too far along, it must determine if its desired name is available. A simple search at the Secretary of State’s website provides a good place to start. The Secretary of State considers the naming of for-profit and not-for-profit entities under the same banner, so a charity’s name must be distinguishable from not only other charities, but also from for-profit businesses.
With the name selected, the paperwork can begin in earnest. A charter must be created and filed with the Secretary of State’s office. This form includes basic information, such as address, incorporator(s) and how assets will be disbursed upon dissolution. It must be accompanied by a $100 filing fee and sent to the address on the form.
Be sure you have listed the organization’s registered agent and registered address.
IRS Approval
While filing with the Secretary of State is an important first step, nonprofit status must also be approved by the Internal Revenue Service. The IRS designates tax-exempt nonprofits as 501(c) organizations, which allows those providing donations to receive tax deductions for contributions. These 501(c) organizations also are exempt from paying federal income tax. (This designation differs from state sales tax-exempt status, which means the nonprofit can purchase supplies without paying state sales taxes. The sales tax exempt status is provided by the state’s revenue department.)
A Form 1023 filed with the IRS will provide the necessary information for the government to make a determination of an entity’s nonprofit status. This form must be accompanied by numerous documents, including bylaws or other rules of operation. Depending on the type of organization – such as school, church or medical facility – additional information might also be required.
After the IRS has approved the form, it will provide a letter to the organization which includes written assurance about the tax-exempt status and its qualification to receive tax-deductible contributions.
As with any new enterprise, a not-for-profit organization must obtain an Employer Identification Number (EIN), whether it has employees or not. This number identifies the organization to the IRS, in much the same way a Social Security number identifies an individual.
Receiving Contributions
After completing the initial paperwork with the Secretary of State and IRS, the organization must take another step if it plans to solicit donations from the public, and register with the Secretary of State’s Department of Charitable Solicitations. Most states require some form of registration before an organization can solicit donations; if an entity plans to operate across state lines, it’s important to seek out information on other states’ requirements as well.
In Tennessee, the registration form requires the organization also to submit a copy of the IRS tax-exempt letter, if received, as well as an Application for Registration of a Charitable Organization. This registration must be accompanied by organizing documents, such as a charter, articles of incorporation and/or bylaws.
If the organization has completed an accounting year, it must also include an IRS Form 990 (if applicable), a summary of financial activities and an audited financial statement if revenues exceed $500,000, excluding grants received from governments and private foundations.
Annual Requirements
The foundational paperwork is complete, but as the organization operates, there are ongoing requirements. It must:
- Elect a board of directors, including at least three members. (It is recommended the board include a president, a secretary and one other at a minimum.)
- Create bylaws.
- Hold an annual meeting of the board.
- Create a conflict-of-interest statement for all board members.
- Keep accurate records, including notes of board meetings (for the previous three years); a listing of members of the board of directors with contact information; accounting records; charters and bylaws; and a copy of the most recent annual report.
Periodic Filings
To maintain good standing, the organization must file state sales tax returns if it sells any tangible goods, a Form 990-T with the IRS for any income not related to the organization’s business purpose and a Form 990 annually with the IRS. If the organization has paid employees, it also must file any applicable state and federal payroll forms. The organization must also file an annual report with the state each year. Each of the filing requirements above includes deadlines based on the organization’s fiscal year end.
This list is not comprehensive; additional filing may be required depending on a specific organization’s business.
Establishing procedures and controls over these administrative requirements will help an organization keep its exempt status in good standing and allow it to focus on its primary exempt purpose.