How to Start a New Nonprofit (Particularly in DC)

Starting a nonprofit organization can be deeply rewarding, not only for its founders but also for society at large. However, just like starting a for-profit company, forming a nonprofit demands careful planning and due diligence. Our firm frequently assists first-time founders and seasoned nonprofit leaders with establishing new nonprofits in the District of Columbia (DC) and across the United States. Many of our clients are surprised to learn how much preparation and forethought it takes to start a successful and enduring nonprofit. This article will attempt to demystify the formation process and provide an overview of the steps involved in creating a nonprofit, from incorporation to obtaining an EIN to drafting corporate documents to applying for recognition of federal tax-exempt status.

Nonprofits come in all shapes and sizes and can be formed in any state or DC in the United States. For the sake of brevity, this article will focus primarily on the process of forming a nonprofit corporation in DC, though the incorporation process is similar in most other jurisdictions.

1. Clarify Your Mission and Organizational Structure

Before starting any paperwork, it’s critical to conceptualize the framework and purpose (i.e., mission) of the nonprofit. You should ask yourself these questions, among others:

• What am I trying to accomplish by forming this nonprofit?
• Who will the nonprofit serve?
• What goods or services will the nonprofit provide?
• Will the nonprofit operate locally, regionally, nationally, or internationally?
• How will the nonprofit be funded?

We recommend developing a comprehensive business plan that answers these and other questions about the nonprofit, its business, and finances. Doing this work early on can save you a lot of time and expense later in the formation process.

Additionally, each nonprofit corporation should have at least three directors (but preferably five or more) who will manage and oversee the nonprofit’s affairs. In many jurisdictions, you must list the initial directors in the nonprofit’s Articles of Incorporation (more on Articles of Incorporation below), so it’s important to begin recruiting directors as early as possible. At this time, you also should be thinking about who will serve as the nonprofit’s corporate officers (e.g., President, Secretary, Treasurer, etc.). The officers are charged with carrying out the nonprofit’s day-to-day activities, so those individuals should be genuinely and enthusiastically dedicated to the nonprofit’s mission.

2. Prepare and File Articles of Incorporation and Obtain an EIN

After you have nailed down those preliminary items, the next step is to prepare Articles of Incorporation. Articles of Incorporation state the name of the nonprofit, its initial directors, office address, registered agent information, whether the corporation will have members, and other basic information. To qualify for federal tax exemption, some nonprofits also must include certain IRS-required language in their Articles of Incorporation. For example, a nonprofit that is organized as a 501(c)(3) entity must include a purposes clause and a dissolution clause that complies with the federal Internal Revenue Code’s (and corresponding U.S. Treasury Regulations’) requirements. The Articles of Incorporation become public record once they are accepted by the jurisdiction of incorporation, so we generally recommend keeping the Articles of Incorporation brief and concise, only disclosing the information required by law and to qualify for recognition of federal tax exemption.

Once the Articles of Incorporation have been drafted, they must be submitted, along with a state filing fee, to the corporation regulator in the jurisdiction of incorporation. In DC, that is the DC Department of Licensing and Consumer Protection. When the Articles of Incorporation are approved, the DC Department of Licensing and Consumer Protection will issue a Certificate of Incorporation recognizing the nonprofit as an officially formed corporation.

Immediately following incorporation, you should obtain a federal employer identification number (EIN) from the IRS. This can be done by filing an application online and usually takes 10-20 minutes to complete. The nonprofit’s federal employer identification number serves as its tax identifier with the IRS and is required to open a bank account in the nonprofit’s name, register for state-level taxes, and apply for recognition of federal tax-exempt status, among other things.

3. Draft and Adopt Bylaws and Policies and Hold the Organizational Meeting

After incorporation, you should adopt comprehensive Bylaws and governance policies for the nonprofit. The Bylaws describe in detail the nonprofit’s internal structure and operating procedures. This includes rules relating to director and officer elections, removals, meetings, Board committees, membership, and other matters related to the conduct of the nonprofit’s business and affairs. A set of governance policies also should be prepared. An effective set of governance policies enables the nonprofit to follow best practices and comply with applicable laws and regulations while providing clear guidance for navigating typical nonprofit transactions. Common governance policies include Confidentiality, Anti-Discrimination and Harassment, Joint Venture, Whistleblower Protection, Executive Compensation, and Conflict of Interest.

Many jurisdictions, including DC, require that the Board of Directors hold an initial Board meeting after incorporation. The first Board meeting is called the “organizational meeting.” At the organizational meeting, the Board will adopt the Bylaws and policies and take care of other initial housekeeping matters and corporate formalities, such as adopting a fiscal year, electing officers, authorizing the opening of a bank account, and ratifying any corporate acts taken prior to the meeting. Often this will be done via unanimous written consent – a document stating the relevant corporate resolutions and signed by all directors in lieu of holding a meeting.

4. Apply for Recognition of Federal Tax-Exempt Status

Once the nonprofit is incorporated, has adopted Bylaws and governance policies, and held its organizational meeting, the next step is to prepare and file a federal tax exemption application. There are four types of federal tax exemption applications: IRS Form 1023, IRS Form 1023-EZ, IRS Form 1024, and IRS Form 1024-A. The appropriate application depends on the (anticipated) 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 IRS Form 1023-EZ also is used to apply for recognition of 501(c)(3) status but is reserved for smaller, less complex nonprofits.

The federal tax exemption applications (except for the IRS Form 1023-EZ) are comprehensive and require you to explain the nonprofit’s business, finances, and affairs in detail. This includes a detailed description of the nonprofit’s planned activities and financial projections for the first few years of operation. It is important to be as detailed as possible in the federal tax exemption application to maximize your chances of approval and minimize the chances of questions and requests for additional information.

The federal tax exemption application is filed, along with a mandatory user fee, online with the IRS. While it is hard to gauge exactly how long it will take the IRS to process and approve an application, the general rule of thumb currently is to expect to wait six to eight months. During that time, you may begin operating the nonprofit, but you must be clear with the public, and especially potential donors, that the nonprofit’s federal tax exemption application is pending with the IRS, and that for would-be 501(c)(3) organizations, donations are not yet tax deductible as charitable contributions. When the IRS does approve the nonprofit’s application, it will recognize the nonprofit’s exemption retroactively to the date the nonprofit was incorporated.

5. Register for DC Taxes and Apply for a Basic Business License and for Charitable Solicitation Purposes, if Necessary

As a corporation, the nonprofit is subject to state and local taxes. Each jurisdiction has different taxes (e.g., income, franchise, sales, use, real and personal property, etc.) and tax reporting requirements. In DC, if the nonprofit has employees, it will need to withhold DC-level income tax from wages, consistent with current DC withholding requirements. Generally, you must register the nonprofit with the relevant tax authorities in each jurisdiction where the nonprofit is conducting business or has employees. In DC, corporations must register as a new business with DC Office of Tax and Revenue (“DC OTR”). To register as a new business, the nonprofit must complete and file Form FR-500 with the DC OTR.

Federal tax exemption does not necessarily provide exemption from state and local taxes. Each jurisdiction has different rules for qualifying for, applying for, and maintaining state and local tax exemptions. In many cases, state and local tax exemption is available only after the IRS has issued a determination letter. In DC, certain 501(c)(3) organizations may qualify for exemption from DC’s income and franchise, sales and use, and personal property taxes. To apply for these tax exemptions, the nonprofit must complete and file Form FR-164 with the DC OTR.

In DC, any entity, including a nonprofit, that provides goods or services for compensation must obtain a Basic Business License from the DC Department of Licensing and Consumer Protection. Accordingly, if the nonprofit’s activities include the sale of goods or services (even at a discounted rate), the nonprofit will need to obtain a Basic Business License.

Finally, most jurisdictions require 501(c)(3) organizations to register to solicit donations from individuals or businesses located within that jurisdiction. The purpose of these “charitable solicitation registrations” is to protect the public from deceptive or misleading fundraising activities. In DC, 501(c)(3) organizations intending to solicit donations must apply for a Basic Business License with the DC Department of Licensing and Consumer Protection under the “Charitable Solicitation” category. To maintain its charitable solicitation registration, the nonprofit must file annual reports, which typically include a copy of the nonprofit’s most recently filed IRS Form 990 (annual information return). The definition of “solicitation” varies with each jurisdiction. In several states, simply having a “donate” button on the nonprofit’s website may trigger registration, depending on the circumstances. If you are unsure about whether your nonprofit needs to register to solicit charitable contributions in any jurisdiction, we highly recommend reaching out to an attorney or other professional experienced in nonprofit compliance for assistance.

Conclusion

Forming a nonprofit involves more than simply filing paperwork. It’s about laying a solid legal and organizational foundation upon which the nonprofit can grow and thrive for many years to come. By carefully following each step—from defining your purpose and incorporating to adopting Bylaws and policies and securing recognition of federal tax exemption—you help ensure your nonprofit’s credibility, sustainability, and impact. While many founders can manage the process independently, consulting with an attorney experienced in nonprofit law can provide valuable guidance, particularly when drafting the Articles of Incorporation, Bylaws, policies, and the federal tax exemption application, or when navigating complex tax law requirements. With the right preparation and structure in place, your nonprofit will be well positioned to focus on what truly matters, making a meaningful difference wherever it formed.

For more information, contact the author at kmejia@TenenbaumLegal.com.