Creating a nonprofit corporation in DC

Creating a nonprofit can be profoundly fulfilling for its founders and society. Nevertheless, launching such an entity necessitates meticulous planning and thorough due diligence. Legal advisors must form the organization under relevant state statutes and design its structure to align with the client’s objectives and meet the requirements for federal and state corporate tax exemption.

Nonprofits vary greatly in size and structure, and they can be established in any U.S. state, the District of Columbia, or territories. This piece focuses on how to create a nonprofit corporation in DC, though similar steps apply elsewhere.

Identifying the Nonprofit’s Mission and Organizational Structure

Before drafting the initial corporate paperwork, legal advisors should collaborate with the client to define the nonprofit’s planned activities, expected funding sources, governing framework, and desired federal tax-exempt status. At the very least, the lawyer must know what the organization will do, who it will help, and where it will operate.

Attorneys need to talk with the client about who will serve on the nonprofit’s first board. A corporation must have at least three directors to manage its affairs. These initial directors must be listed in the articles of incorporation, so identifying them early is key.

Counsel should also recommend that the client develop a business plan that covers the nonprofit’s activities, business, and finances. Doing this work early on can save time and expense later in the formation process. The plan should outline the nonprofit’s goals, objectives, and strategies for achieving them.

Preparing and Filing Articles of Incorporation

Once these preliminary steps are complete, the next action is to draft and file the articles of incorporation. These documents list the nonprofit’s name, initial directors, office location, and other basic details. To qualify for federal tax exemption, some groups must include specific language required by the IRS in these articles.

After the articles of incorporation are written, they must be sent, with a state filing fee, to the jurisdiction’s corporation regulator. In DC, this is the Department of Licensing and Consumer Protection. Upon approval, this agency issues a certificate of incorporation, officially recognizing the nonprofit as a corporation.

Right after incorporation, the lawyer should secure a federal employer identification number (EIN) for the nonprofit. Filing for this online usually takes ten to twenty minutes. The EIN is the nonprofit’s tax ID with the IRS and is needed to open a bank account and register for state taxes.

If the nonprofit plans to operate as a 501(c)(4) entity, counsel must file IRS Form 8976 to notify the IRS. This filing is due within sixty days of incorporation, or penalties may apply. Additionally, the organization must create bylaws and governance policies to outline its internal structure and procedures.

The next step after obtaining an EIN is to draft bylaws and governance policies for the nonprofit. Bylaws describe the nonprofit’s internal structure and operating procedures, including rules relating to director and officer elections and removals, meetings, and board committees. Governance policies enable the nonprofit to follow best practices and comply with applicable laws and regulations. Standard governance policies include confidentiality, anti-discrimination and harassment, and conflict of interest policies.

Certain nonprofits may require additional policies based on their planned activities. For example, a nonprofit that will operate a scholarship program may need a scholarship policy. A nonprofit that will provide foreign aid or transfer goods or funds across borders may need a foreign transactions due diligence policy. Counsel should prepare these policies to guide the client through its operations and ensure compliance with applicable laws and regulations.

Organizational Meeting and Applying for Federal Tax-Exempt Status

Many places, including DC, require the board to hold an initial meeting after incorporation. During this meeting, the directors will adopt the bylaws and policies and handle other administrative tasks. Lawyers can prepare draft meeting minutes or a unanimous written consent to help the client with these first actions. After the meeting and adoption of bylaws, the next phase is to prepare and file a federal tax exemption application.

The appropriate application depends on the size of the nonprofit and type of federal tax exemption sought. For example, the IRS Form 1024-A is used to apply for recognition of 501(c)(4) status, while the IRS Form 1023 is used to apply for recognition of 501(c)(3) status. The federal tax exemption application is filed online with the IRS, along with a mandatory user fee. When the application is approved, the nonprofit will receive a favorable determination letter from the IRS that confirms the recognition of its tax-exempt status.

The nonprofit may begin operating while the application is pending, but it must be clear with the public that its federal tax exemption application is pending with the IRS. If the application is filed within twenty-seven months of the nonprofit’s incorporation, the IRS will recognize the nonprofit’s exemption retroactively to the date of incorporation, and charitable contributions made to the nonprofit prior to receiving its determination letter will become tax deductible for the donor. The nonprofit will then need to register for state and local taxes and apply for a Basic Business License and charitable solicitation registration, if necessary.

After incorporation, the nonprofit must register with the relevant tax authorities.