A guide to forming a tax-exempt 501(c)(3) nonprofit organization, covering incorporation, board setup, IRS application, state registration, and ongoing compliance requirements.
Define your organization's mission, target population, and primary programs
The IRS scrutinizes mission statements during the application process. Your mission must fit one of the 8 exempt purposes under Section 501(c)(3): charitable, religious, educational, scientific, literary, public safety testing, amateur sports, or prevention of cruelty. Be specific about what you do, for whom, and where.
Research whether a similar organization already exists in your area
Search the IRS Tax Exempt Organization Search tool (free at irs.gov) and GuideStar.org. If a similar organization exists, consider partnering with them or using a fiscal sponsor ($500-$2,000 annually) instead of forming a new entity. The IRS may ask why a new organization is needed.
Create a 3-year budget projection showing anticipated revenue and expenses
The IRS Form 1023 requires detailed financial projections for the first 3 years. Include expected donations, grants, program service fees, and fundraising income. Be realistic — organizations with projected annual revenue under $50,000 can use the shorter Form 1023-EZ ($275 fee vs. $600 for the full Form 1023).
Recruit your initial board of directors — minimum 3 members in most states
Board members must be unrelated individuals in most states (no more than 49% can be related by blood or marriage). Choose members with skills in finance, law, fundraising, or your program area. Board members are not paid for board service, though they can be reimbursed for expenses.
Incorporate as a Nonprofit Corporation
Choose a unique name and check availability with your Secretary of State
Most states require the name to include 'Corporation,' 'Incorporated,' 'Inc.,' or a similar designator. Check availability online ($0) or by phone. Also search the USPTO trademark database to avoid conflicts. Reserve the name if your state allows it ($10-$50, valid for 60-120 days).
Draft articles of incorporation with required IRS tax-exempt language
The articles must include: (1) a purpose clause limited to 501(c)(3) exempt purposes, (2) a dissolution clause directing remaining assets to another 501(c)(3), and (3) a clause prohibiting private inurement. Missing any of these three clauses will result in IRS denial. Templates are available from your state's Secretary of State.
File articles of incorporation with your state's Secretary of State
Filing fees range from $25 (Montana) to $300 (Texas). California charges $30, New York charges $75. Processing time is 1-4 weeks for standard filing. Expedited processing (1-3 business days) costs an additional $25-$100 in most states.
Obtain an Employer Identification Number (EIN) from the IRS
Apply online at irs.gov using Form SS-4 — it's free and you receive the EIN immediately. You need the EIN before opening a bank account or filing for tax exemption. The responsible party listed on the EIN application should be a board officer, not a paid employee.
Draft bylaws covering governance, meetings, voting, officers, and conflict of interest policies
Bylaws don't need to be filed with the state but must be kept on record. The IRS requires a conflict of interest policy (sample available in Form 1023 instructions). Include provisions for board meetings (at least 2-4 per year), quorum requirements (typically a majority), and officer terms (usually 1-2 years).
Apply for Federal Tax-Exempt Status
Determine whether to file Form 1023 (full) or Form 1023-EZ (streamlined)
Form 1023-EZ is available for organizations with projected annual gross receipts under $50,000 and total assets under $250,000. The filing fee is $275 (vs. $600 for Form 1023). 1023-EZ is approved in 2-4 weeks on average. Form 1023 takes 3-6 months for IRS review.
Complete the application with narrative descriptions of all activities and programs
The IRS wants specifics: who benefits, how many people, how programs are delivered, and what percentage of time and budget each activity receives. Vague answers trigger IRS follow-up letters that add 2-3 months to the process. Have a board member with writing skills draft the narratives.
Attach required documents — articles of incorporation, bylaws, conflict of interest policy, and financial projections
Organize attachments in the order listed in the form instructions. Missing documents are the most common reason for processing delays. If any board member receives compensation from the organization (as an employee, not for board service), disclose the amount and explain the arrangement.
Pay the application fee and submit electronically (1023-EZ) or by mail (Form 1023)
Form 1023-EZ must be filed electronically through pay.gov. Form 1023 can be mailed to the IRS or submitted through pay.gov as well. Keep copies of everything submitted. The IRS sends a determination letter once approved — this letter is your proof of tax-exempt status.
Respond promptly to any IRS information requests during the review
The IRS typically gives 21 days to respond to additional information requests. Failure to respond results in your application being closed (you can reopen it, but it adds months). About 50% of Form 1023 applications receive at least one follow-up question.
Register with Your State
Apply for state tax exemption (income tax and/or sales tax) with your state's revenue department
Federal 501(c)(3) status does not automatically grant state tax exemptions. About 40 states require a separate application. Sales tax exemptions can save your nonprofit 5-10% on all purchases. Application fees range from $0-$75 depending on the state.
Register with your state's charitable solicitation registry before fundraising
About 40 states require registration before you solicit donations. Registration fees range from $0-$300 annually. Many states accept the Unified Registration Statement (URS), which simplifies multi-state filing. Fundraising without registration can result in fines of $1,000-$10,000 per violation.
Register as an employer with your state if you will hire employees
Register with your state's department of labor for unemployment insurance ($0 to register) and workers' compensation (premiums vary by state and payroll size). Even with only 1 employee, most states require both. Nonprofits can elect to self-insure for unemployment tax in some states, saving 2-5% of payroll.
Set Up Operations and Ongoing Compliance
Open a bank account in the organization's name using the EIN and articles of incorporation
Choose a bank that offers free or low-cost nonprofit checking accounts — many banks waive monthly fees for 501(c)(3) organizations. Require dual signatures for checks over $5,000. Set up online banking with separate login credentials for the treasurer and executive director.
Establish an accounting system to track income, expenses, and restricted funds separately
Grant and donor-restricted funds must be tracked separately from general operating funds. Accounting software costs $0-$50/month (many offer nonprofit discounts). Hire a bookkeeper ($200-$500/month) or recruit a volunteer CPA. The IRS requires you to maintain records for at least 7 years.
Hold an organizational board meeting to adopt bylaws, elect officers, and approve the budget
Record formal minutes of this meeting — the IRS may request them during the application review. Minutes should include: date, attendees, motions made and voted on, and results. Meeting minutes are internal documents but must be available for IRS inspection.
File IRS Form 990 annually — the deadline is the 15th day of the 5th month after your fiscal year ends
Organizations with gross receipts under $50,000 file Form 990-N (e-Postcard, free). Receipts of $50,000-$200,000 file Form 990-EZ. Over $200,000 file the full Form 990. Missing 3 consecutive years of filing automatically revokes your tax-exempt status — reinstatement requires a new application.
Obtain directors and officers (D&O) liability insurance for board members
D&O insurance protects board members from personal liability for organizational decisions. Policies cost $500-$2,500 annually for small nonprofits. Without D&O insurance, board members' personal assets are at risk. Many qualified board candidates will not serve without this coverage.
Frequently Asked Questions
How much does it cost to start a 501(c)(3) nonprofit?
Startup costs range from $600 to $2,500 depending on your state and IRS filing path. The IRS Form 1023 (full application) carries a $600 filing fee, while the streamlined Form 1023-EZ costs $275. State incorporation fees run $50 to $300 depending on the state — Delaware charges $89, California $30, and New York $75. Additional costs include registered agent services ($50-$300/year), charitable solicitation registration ($0-$250 per state), and optional attorney fees of $2,000 to $5,000 if you hire counsel. This is not legal advice — consult an attorney for your specific situation.
What is the difference between Form 1023 and Form 1023-EZ?
Form 1023-EZ is a streamlined 3-page application for smaller nonprofits that costs $275 and typically receives IRS approval within 2 to 4 weeks. To qualify, your organization must project gross receipts under $50,000 annually for the next 3 years and hold total assets under $250,000. The full Form 1023 is a 28-page application costing $600 with processing times of 3 to 6 months. Roughly 70% of new nonprofits qualify for the 1023-EZ. If your nonprofit operates a school, hospital, or supporting organization, the full Form 1023 is mandatory regardless of size.
How long does it take to get 501(c)(3) tax-exempt status?
The timeline depends on which IRS form you file and your state requirements. Form 1023-EZ applications average 2 to 4 weeks for IRS determination. Full Form 1023 applications take 3 to 6 months, sometimes longer if the IRS requests additional documentation. Before filing with the IRS, you need to incorporate in your state (1 to 4 weeks) and obtain an EIN (immediate online, or 4 weeks by mail). State tax-exemption applications add another 2 to 8 weeks. End to end, most nonprofits achieve full operational status in 2 to 8 months.
How many board members does a nonprofit need?
Minimum board size varies by state — most states require at least 3 directors, though some allow as few as 1. The IRS does not set a specific minimum, but applications from organizations with fewer than 3 independent board members receive extra scrutiny. Best practice is 5 to 9 board members to distribute governance responsibilities and meet quorum requirements. At least 51% of board members should be unrelated by blood or marriage, and the IRS expects that officers do not have financial conflicts of interest. Board members of 501(c)(3) organizations serve without compensation in most cases. This is not legal advice — consult an attorney for your specific situation.
What happens if a nonprofit fails to file Form 990 annually?
The IRS requires most 501(c)(3) organizations to file Form 990 (or 990-EZ or 990-N) every year, and the consequences of missing filings are severe. If you fail to file for 3 consecutive years, the IRS automatically revokes your tax-exempt status — this is not discretionary, it happens by operation of law. Reinstatement requires filing a new Form 1023 or 1023-EZ, paying the application fee again, and potentially losing your original effective date of exemption. Late filing penalties range from $20 to $100 per day depending on your organization size, up to a maximum of $50,000 per return. This is not legal advice — consult an attorney for your specific situation.