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HOW
TO START A 501(c)(3)
Analyze
your current position by asking the following questions:
• Do I have a clearly defined mission for the organization?
• Is the venture I plan to start more properly a small business
and not a charitable organization?
• Is the issue with which I am working already being addressed
by another 501(c)(3)? Would it be more efficient and helpful if
I would join forces with an established organization?
• Do you have other people, with experience and expertise,
prepared to help you and serve as board members?
• Have you established some long range goals (3-5 years) and
detailed planning for the first year of operation?
• Do you have a plan for long term financial support for the
organization?
• Are you prepared to comply with all financial reporting requirements
from federal, state and local agencies?
Incorporation
Call the Arkansas Secretary of State's Office at 1-888-233-0325
or in Little Rock at 682-3409 to request information about incorporation.
The Secretary of State will send you a form designed to help you
create the organization's articles of incorporation.
The Articles of Incorporation establish the name and purpose of
the nonprofit organization. Incorporating the organization serves
three primary functions:
- To
establish legitimacy for your organization. Nonprofit incorporation
says to the world that you mean business.
- To
prepare for anticipated future developments. You will have "done
your homework" and be ready to proceed with a major fundraising
effort. Incorporation is a necessary condition for being granted
tax-exempt status.
- To
help you meet the requirements of another organization with
whom you wish to collaborate. Funders or contractors may require
that your program be incorporated.
Potential Advantages to Incorporation:
* The process of incorporation can be strengthening for an organization.
It requires careful planning about your purpose and how you are
going to do your work.
* It establishes minimum accountability for your management of a
public trust - a nonprofit organization.
* It readies an organization for application for federal tax-exempt
status.
* It helps to formalize decision making and ownership among the
principals involved.
* It reinforces the legitimacy of the organization.
Potential Disadvantages to Incorporation:
* It takes time and money to accomplish.
* It entails playing by state and federal government rules. You
must be knowledgeable about the laws related to charitable organizations.
* There may be some risk of over structuring the organization. Is
it strong enough?
* There is some risk of people involved thinking incorporation will
accomplish something magical - it will not!
The Articles must be filed with the Secretary of State's office,
which will charge a $50 filing fee. The Arkansas regulations for
Articles of Incorporation are very simple, and you can order a form
directly from the Secretary of State's office by calling 682-1010.
Some organizations may wish to have more detailed Articles, and
Nonprofit Resources has provided a sample of such. To
view this sample, click on Articles of Incorporation.
Familiarize yourself with the state laws that govern nonprofit corporations.
The Arkansas Nonprofit Corporations Act of 1993 governs nonprofits
incorporated after 1993 and those that incorporated earlier but
elect to come under its provisions. This Act is in the Arkansas
Code.
Bylaws
Bylaws are your organization's primary governing document. They
establish the rules by which the nonprofit will conduct business.
It is important to write them wisely, know them well, and faithfully
abide by all their provisions.
What should be covered in the Bylaws:
The Name of the organization
The Mission of the organization
The geographic area served by the organization
Membership (Responsibilities, Dues, Quorum, Voting Procedure)
Board of Directors (Duties, Officers, Meetings)
Committees
Rules of Order
Fiscal Year of Operation
Procedures for amending the bylaws
The details of these operations can be complicated. To help you
with drafting your Bylaws, Nonprofit Resources has provided you
with a sample of Bylaws which you can print on your computer. To
view this sample click on Bylaws.
Tax Exemption
Federal Tax Exemption
Call the Internal Revenue Service (IRS) at 1-800-424-FORM or the
IRS Tax Exempt Organizations Section at 1-877-829-5500 and request
the following:
| Form
8718 |
User
Fee for Exempt Organization/Determination Letter Request |
| Package
1023 |
Application
for Recognition of Exemption with Instructions |
| Form
SS-4 |
Application
for Employer Identification Number |
| Publication
557 |
Tax-
Exempt Status for Your Organization |
The IRS also has a good internet site from which you can download
forms and publications. It is at www.irs.ustreas.gov.
Familiarize yourself with the forms and materials. Information about
how to apply is found in Publication 557 and Package 1023. File
a Form SS-4 with your application. This is the application for an
Employer Identification Number. The IRS charges a processing fee
for tax-exempt status application. Complete User Fee Form 8718 and
submit the appropriate fee.
Federal law recognizes an organization as qualifying under Section
501(c)(3) if it meets the following criteria:
- It is "organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary
or educational purposes, or to foster national or international
amateur sports competition or for the prevention of cruelty
to children or animals."
- No individual can personally benefit from the income or activities
of the organization.
- The organization may engage in business activities that are
not substantially related to the exempt purpose of the organization,
but the unrelated business activities cannot comprise a "substantial
part" of the organization's activities.
- Lobbying cannot comprise a "substantial part" of the organization's
activities. Certain kinds of lobbying are permitted but restricted.
Legislative activity and policy work can be important functions
of a 501(c)(3) nonprofit but it must follow applicable rules.
A 501(c)(3) can elect to follow an expenditure test which measures
the percentage of monetary expenditures allocated toward lobbying.
- The organization must be a public charity as opposed to a
private foundation. To be a public charity, the organization
must receive its funding from a broad base of public support.
Generally, public support, as defined by the Internal Revenue
Code, must make up a third of the organization's income.
- 501(c)(3) nonprofits are eligible to receive tax deductible
contributions.
Prepare to wait and answer questions from the IRS. Most applicants
receive at least one query after submitting form 1023. Don't panic,
just answer completely and promptly. Expect the process to take
at least ten weeks.
State Income Tax Exemption
Call the Arkansas Department of Finance and Administration, Corporate
Income Tax Section at 501-682-4775, to get the information you will
need to apply for Arkansas state income tax exemption. They will
ask for the following:
A. Organizations with an IRS ruling letter:
1. Arkansas Form AR1023CT
2. Copy of pages 1 and 2 of IRS Form 1023 or 1024
3. Statement declaring Arkansas Code and subsection under which
exemption is claimed
B. Organizations without an IRS ruling letter:
1. Arkansas Form AR 1023CT
2. Copy of Articles of Incorporation, Articles of Association, copy
of Trust Indenture or Agreement
3. Copy of Bylaws
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