So you’re thinking of starting a 501(c)(3) nonprofit organization in Virginia? Congratulations! You probably have your mission statement and a name for the organization, maybe even a website address, and now you’re ready to start thinking about how you want the organization to actually operate. Here’s some information on the steps you’ll need to take to get the new organization off the ground in Virginia.
Creating Your Bylaws
Bylaws function as a sort of operating manual for your organization, and will cover things like how many members you’ll have on your board of directors, how a director can be replaced, voting rights, etc. Your bylaws will be a legal document, so it’s in your best interest to work with an attorney prepare them to ensure they comply with all applicable laws. You’ll probably start working on this with individuals who you expect to be directors on your board, even though without the bylaws you won’t technically have a board!
Determining Who Will be on the Board of Directors
Once you have your bylaws drafted (they won’t be final until they’ve been adopted by a board of directors), the next step will be to determine who you’d like to serve on the board of directors of the new organization. This is a critical step. While Virginia only legally requires a corporation to have one director, the IRS will want to see more than that as it lessens the likelihood of a person setting up an organization to benefit themselves, which is strictly prohibited by the IRS. In a perfect world you’ll probably want at least three directors so that when there is a vote you’ll have an odd number to avoid ties. You’ll also want your board members to be independent from one another if at all possible to avoid the appearance of the risk of conflicts of interest. For example, having a board made up of you, your husband and your brother may sound like fun, but if you do that you can expect those interested in working with or regulating your organization (including the IRS) scrutinize you more closely than if you had a completely independent board. The IRS pays close attention to any relationships between directors, officers and other key participants in the organization’s affairs. As you meander through your 1023 application (more on that later), you’ll see very clearly that the IRS is interested in any and all of these relationships. That interest will continue over the life of the organization, which you’ll see reflected in the questions the IRS asks in the annual form 990.
As you evaluate who will serve on the board, you should take care to choose directors that will bring valuable expertise to your organization across a range of disciplines. For example, you may want someone with broad community ties to help with fundraising, someone with a finance background to help with budgeting and financial compliance, and/or maybe someone who has experience serving on other boards who can help with identifying and developing the appropriate policies and procedures.
Setting Up the Legal Structure of Your Organization
Once you have your board figured out, you’ll need to legally set up your organization in Virginia by preparing and filing articles of incorporation with the Virginia State Corporation Commission. For a nonprofit, you’ll need to create what is called a nonstock corporation. The “nonstock” portion of that term essentially means that the corporation has no owners, which makes sense when you consider that a 501(c)(3) organization is supposed to provide some benefit the general public. As you prepare your articles of incorporation, keep in mind that there is specific language the IRS will require if you hope to be approved for an exemption from federal income tax. The IRS has a webpage with suggested language that can be used as a reference.
Obtain Your IRS Employer Identification Number (“EIN”)
While you may not actually employ anyone at your nonprofit, at least initially, you’ll need to get an EIN from the IRS that will be used to identify your organization. That number will be used with all your IRS filings, and if you ever do have employees it’s the number you’ll use to identify the organization on payroll filings as well. You may fill out the paper form SS-4, or if your principal business is located in the U.S. or a U.S. Territory, you may apply online.
Applying for Tax-Exempt Status with the IRS
Now that you have your board selected and the core legal work out of the way, you’ll need to apply for tax-exempt status with the IRS. This is probably going to be the most time-consuming part of the process. Applying for tax-exempt status means completing one of two forms: the 1023-EZ or the much lengthier form 1023. While the 1023-EZ is a much simpler form and doesn’t require all the documentation that the full form 1023 requires, it is only available to a subset of organizations. In order to determine whether your organization is eligible or not you’ll need to complete the 1023-EZ eligibility worksheet, which is included in the 1023-EZ instructions, but it will generally be available only to small organizations, and is more likely to be available to newly formed organizations than organizations which have been operating. In addition to that, because the 1023-EZ relies heavily on the “honor system”, requiring only attestations of the person completing the form in lieu of providing actual documentation to the IRS that is required when submitting a form 1023, many grant-making organizations may not make grants to organizations who did not file a full form 1023. Using a form 1023-EZ instead of a full form 1023 may also subject the organization to a heightened risk of audit in the future. Whichever path you choose we’d recommend you consult with a professional to discuss the pros and cons for your organization specifically.
Charitable Solicitation Registration
Before you can legally solicit charitable contributions in Virginia, which most 501(c)(3) organizations will want to do, you’ll need to register your organization with the Virginia Department of Agriculture and Consumer Services (“VDACS”). For most organizations this will involve completing your VDACS form 102 and supplying all the information that it requires. Some organizations may find they are exempt from the registration requirements, but even if your organization is exempt you’ll need to confirm that by completing and submitting an application for that exemption using VDACS form 100. There are a number of ways you can be exempt from the registration which you can find listed on the form 100, so before you go through the process of completing a form 102, check the form 100 to see if you qualify for an exemption.
Other Tax Exemptions
Once you’ve been approved for tax-exempt status by the IRS you’re automatically given tax-exempt status by the Commonwealth of Virginia as well, which means you’re not subject to state income tax (except on unrelated business income tax). You will, however, still be subject to state sales and use tax until you file for exemptions from those as well. Property tax and other taxes may be levied by localities, so for exemptions to those taxes check with the locality where you’ve registered your nonprofit.
Getting your organization up and running will not come quickly, and it also isn’t the end of the process. You’ll have work that you need to do every year to make sure you’re in compliance with IRS and Virginia regulations. Find out more on what you’ll need to do in the future here.