How to Start a 501(c)(3) Nonprofit: The Complete Guide

Ready to start a 501(c)(3) nonprofit but not sure where to begin? 

Earning 501(c)(3) status is the first step toward making positive change at scale. With this title comes greater levels of donor trust and income tax exemption status that protects your funding. So if you’re wondering how to start a nonprofit organization, we’re here to help.

Explore everything you need to know about starting a 501(c)(3) tax-exempt organization and strategize your next steps to make it a reality.

The Complete Guide to Registering a 501(c)(3) Nonprofit

In this guide, you’ll learn about starting a 501(c)(3) nonprofit, from selecting your operating structure and filing for tax exemption to finding resources and building your charitable contributions.

What Is a 501(c)(3)?

If you’re wondering what it means to be a 501(c)(3) or how to achieve 501(c)(3) status, you’ve come to the right place.

An organization seeking 501(c)(3) status must comply with that section of the Internal Revenue Code (IRC)—the tax law for the United States administered by the U.S. Treasury through the Internal Revenue Service (IRS)—that allows organizations to operate with tax exemption.

As a tax-exempt organization, 501(c)(3) organizations can receive donations and nonprofit grants. Such designation allows these entities to apply for government funding, corporate funding, individual donations, foundation grants, and more.

Additionally, 501(c)(3) organizations don’t receive money for services rendered, such as fundraising or administrative expenses. Instead, these organizations must raise all funds through private contributions.

Establishing a 501(c)(3) allows individuals or businesses to give money to the nonprofit without it counting against personal income taxes. And because these charitable contributions are tax-deductible contributions, donors can write them off as donations when filing taxes.

However, 501(c)(3) organizations must have an IRS-recognized charitable purpose and operate accordingly to qualify as a charity under federal law. So to start a nonprofit, you must register your organization with the IRS first. 

Once registered, the IRS allows nonprofits to deduct certain noncash charitable giving, such as volunteer hours, goods donated, and equipment used.

Limitations of a 501(c)(3) Organization

Organizations recognized as tax-exempt nonprofits enjoy significant benefits while also facing several restrictions to maintain that status. Some of the most notable limitations, especially pertaining to lobbying and political activities, include:

1. Political campaign activity: The IRC strictly prohibits 501(c)(3) organizations from participating in political campaigns for or against any candidate.
2. Lobbying: These organizations can engage in limited lobbying activities to influence legislation, but excessive lobbying can jeopardize their tax-exempt status. Therefore, lobbying can’t be a substantial part of what your organization does.
3. Unrelated business income (UBI): Organizations may have to pay taxes on business activities unrelated to their exempt purpose.
4. Benefit to private interests: Activities should not excessively benefit private interests, like nonprofit board members or employees.
5. Annual reporting obligation: Most 501(c)(3) organizations must file annual IRS forms (Form 990, 990-EZ, or 990-N) to provide operational details.
6. Public scrutiny: The application for tax exemption and annual tax returns are public records available for inspection by the general public.
7. Limitations on international activities: These organizations can operate internationally but must ensure alignment with their charitable purpose and legal guidelines.

3 Types of 501(c)(3) Organizations

There are three types of 501(c)(3) organizations, including:

1. Public charities: These organizations “serve a public purpose and exist to benefit the community as a whole.”
2. Private foundations: These charitable organizations own more than half of their assets and make grants for public purposes (for example, hospitals or universities).
3. Social welfare organizations: These organizations focus on serving one or more of five broad categories: 

• Helping people deal with poverty-related problems
• Assisting disadvantaged individuals in finding employment
• Preserving or restoring opportunities for low-income people  
• Improving conditions in low-income neighborhoods 
• Helping individuals improve their lives by providing them with services (day care centers or homeless shelters)

The IRS recognizes more than 30 types of nonprofit organizations, but only those that qualify for 501(c)(3) status can claim tax-deductible donations.

To be considered a charitable organization by the IRS, a group must operate exclusively for one of these purposes: 

• Charity
• Religion
• Education
• Science
• Literacy
• Testing for public safety
• Fostering national or international amateur sports competition
• Preventing cruelty to children or animals

Additionally, the IRS defines charitable activities as: 

• Relieving the poor, the distressed, or the underprivileged
• Advancing religious organizations
• Advancing education or science
• Erecting or maintaining public buildings, monuments, or works
• Lessening the burdens of government
• Lessening neighborhood tensions
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law
• Combating community deterioration and juvenile delinquency

Organizations that qualify for tax exemption under section 501(c)(3) must not serve any private interests, including those of the creator, the creator’s family, shareholders, other designated individuals, or others controlled by private interests. 

Additionally, an organization’s net earnings cannot benefit private shareholders or individuals, meaning the earnings must be solely for charitable purposes. Double-check these conflicts of interest before pursuing 501(c)(3) status.

Nonprofit vs. Tax-Exempt Organizations

You may have heard the term tax-exempt organization used interchangeably with the term nonprofit organization. However, just because an organization is a nonprofit doesn’t mean it also has tax exemption.

A nonprofit organization is an entity whose purpose is charitable or educational. It doesn’t have to be a tax-exempt organization, but if it is, it can deduct donations from individuals and corporations. As mentioned earlier, only the IRS can grant tax-exempt status, which includes different types of nonprofits with different requirements. Some require 501(c)(3) status, and others don’t. 

Additionally, any organization that qualifies as a charity under the law may apply for exemption from federal income tax (and some state income tax), but only certain nonprofits qualify for this treatment. These include churches, social welfare groups, schools, universities, hospitals, and scientific research institutions.

4 Steps to Starting a 501(c)(3) (2023 Guide)

Now, let’s look at the four steps to get started with a 501(c)(3). 

1. Decide Which Type of Nonprofit You Want to Establish

Before establishing your 501(c)(3) nonprofit, decide which type of nonprofit organization you want to be. Among the numerous types of nonprofit organizations, the most common are: 

• 501(c)(3), which are charities
• 501(c)(4), which are civic leagues
• 501(c)(6), which are trade associations

The IRS provides a chart detailing each organization’s purpose and rules for establishing each type.

2. File for 501(c)(3) Tax Exemption

The second step in starting a nonprofit is filing for 501(c)(3) tax exemption with the IRS. To obtain 501(c)(3) tax-exempt status, you must file Form 1023 and Form 990 with the IRS.

Form 1023 is an application for tax exemption, and every new 501(c)(3) organization (as well as any existing ones that wish to make an organizational change) must complete one. If you’re unsure whether your entity qualifies as a nonprofit under section 501(c)(3), consult with a tax attorney before proceeding with this step.

The IRS website provides detailed instructions on filling out Form 1023 (or Form 1023-EZ) and submitting it online through its electronic system called Exempt Organizations Select Check. You can also mail hard copies of both forms instead of submitting them electronically. However, this may delay your application process by several weeks due to postal mail delivery times.

If you have any questions or concerns while filling out either form (or after submitting them), the IRS has resources, including guidelines for when to expect to hear from them. However, keep in mind that the IRS receives more than 95,000 applications for tax-exempt status each year.

3. Prepare and File Your Incorporation Paperwork

Before you can incorporate your nonprofit, prepare and file paperwork with the state where you plan to incorporate. This includes:

• Articles of incorporation: The articles of incorporation are the formal paperwork you’ll file to form your nonprofit corporation. These include any licenses and permits required by your state’s nonprofit corporation laws. You’ll also pay a small filing fee.
• A board of directors: The board of directors is usually volunteers or paid employees of the organization who serve as fiduciaries for the group. Your board members ensure that all business conducted complies with the law and ensure proper handling of financial transactions. Regarding who you need on your nonprofit board, have at least three people.
• Bylaws: The bylaws are rules governing how the organization will operate, including its structure (for example, having a board), meeting procedures, elections, voting rights, and other organizational policies. Also, include provisions for amendments to these bylaws when appropriate. These amendments require majority vote approval at any regular or special meeting of members called for that purpose and 15-day notice in writing before such meeting specifying the changes considered for adoption.

4. Write Up Your Bylaws

Lastly, write up your nonprofit bylaws—the rules that govern the organization. Bylaws should be in plain language and approved by the board and the members. The IRS has specific requirements for these documents, so it’s best to consult a tax attorney or nonprofit expert to ensure your bylaws meet those standards.

Once approved, the board of directors will review the bylaws annually.

What’s Next?

After you’ve filed your paperwork, you’ll receive a determination letter from the IRS. It’s a formal document that confirms the tax-exempt status of your nonprofit organization. This document is crucial because donors often request it as proof that contributions to your organization are tax-deductible contributions.

You also can apply for your employer identification number (EIN) if you haven’t received that already. However, wait until you’ve filed for incorporation or received your federal tax exemption to apply for this.

Is a Nonprofit Right for You?

If you’re thinking about starting a nonprofit, you’re not alone. There are more than 1.8 million nonprofit charitable organizations in the U.S. doing everything from providing food to the homeless to supporting the arts to fighting human trafficking.¹ So, how can you tell if starting a nonprofit is right for you?

First, ask yourself: What are the goals of your organization? If your mission is broad or vague at the start, that’s OK. Just make sure it’s tangible and realistic, then iterate as you move throughout the development process.

Second, talk with other experienced founders or fundraisers. They’ll be able to advise you on what works and what doesn’t, current trends in the sector, how to set realistic expectations, and more.

Third, make sure your nonprofit fulfills a need and that there isn’t already another organization doing similar work. If another organization with similar goals and target beneficiaries already exists, see what you can do about joining their operation or creating a partnership to work together instead of functioning independently.

When creating a nonprofit organization, it’s crucial to remember that you have the potential to impact hundreds or thousands of lives. So think carefully about what impact you want your organization to have on society and make sure it aligns with your goals and values.

Now, It’s Your Turn

Are you ready to start a nonprofit? Learn best practices on how to get donations, and look no further than Classy’s comprehensive fundraising platform to help you build your nonprofit donation site and begin broadcasting your mission to the world. 

Copy Editor: Ayanna Julien

Article Source:

1. 1. “Health of the U.S. Nonprofit Sector Quarterly Review,” Resources, Independent Sector, last updated July 10, 2023, https://independentsector.org/resource/health-of-the-u-s-nonprofit-sector/.