How to Start a Non-Profit -- The Path to Becoming a 501(c)(3)

Written by Denise Yan on Sunday, 28 February 2021. Posted in RMHS

Photo Courtesy of Katt Yukawa via Unsplash

Starting a non-profit and becoming a 501(c)(3) group is a great way to develop and improve an organization. 501(c)(3) groups are extremely popular across America, with notable names such as Planned Parenthood or the American Red Cross. However, most individuals are unfamiliar with the steps of getting their organizations up and running, and the unknown regions within the IRS often turn creators away as well. Although this is true for many, learning about the life of a 501(c)(3) group can actually be eye opening for any individual in the business field.

For a bit of background knowledge, the name 501(c)(3) is derived from subsection 501(c)(3) of the Internal Revenue Code—there are also additional subsections, such as 501(c)(6) and more, which all fall under the umbrella of section 501(c). Additionally, these groups also have slight differences between them; for example, 501(c)(3) groups allow their donors to take tax deductions on their donations while 501(c)(6) groups do not.

Before starting an organization, it’s important to recognize that 501(c) groups and regular non-profit organizations are not the same—not all non-profits are 501(c) groups. To obtain 501(c)(3) status, approval from the Internal Revenue Service (IRS) is the deciding factor. Further, not any group can become a 501(c)(3), as the categories of qualifying non-profits are based on the service the organization provides—generally, service for the public good is the overall rule. Most 501(c)(3) groups are charities with goals of education, children/animal safety, or science and research—other types of qualifying 501(c)(3) categories include churches or religious organizations and private foundations.

When confirmed 501(c)(3) status, the organization then becomes a tax exempt group— meaning that these organizations do not have to pay property, federal/local, sales, and payroll taxes. Be aware, obtaining this status still means that it can be taken away as well; the guidelines of keeping tax exemption status focus on whether organizations are staying true to their mission or not. In detail, creators cannot use their organizations to serve their own private interests; 501(c)(3) groups are also not allowed to use their organizations politically—for example openly supporting a candidate or to influence legislation. Lastly, these groups are not allowed to make any profit other than from donations. When creating an organization, adjusting to these principles and taking them into consideration is critical.

With no doubt, maintaining a 501(c)(3) organization takes a considerable amount of effort—paperwork definitely cannot be avoided and financial aspects are definitely going to come into play as well. Not only are fees attached to 501(c) applications, but the IRS also requires annual records of finances from non-profit organizations—note that these records are open for the public to view. Despite these downsides, starting a 501(c)(3) group is a great opportunity to spread services to the public and includes many benefits beyond exemptions from taxes. To explain, limited liability is one of the advantages 501(c)(3) groups have—this means that, in most cases, none of the stakeholders are liable for any debt within their organization. 501(c)(3) groups are subject to government and private grants as well, giving founders an impressive way to gain recognition for their group, along with great opportunities for their non-profit to develop. 

Studying the path towards one’s objectives is the first step to achieve any goal in life— and understanding the steps to create a 501(c)(3) group is no exception. Although this article only provides a surface level explanation about the life of 501(c)(3) groups, being more knowledgeable about the system can go a long way. On this note, lengthy paperwork and processes with the IRS should not deter founders from developing their organization. With a positive mindset, the path to becoming a 501(c)(3) is well in reach for any aspiring leader — in fact, Girls For Business is an example of how 501(c)(3) groups are accessible to anyone!

About the Author

Denise Yan

Denise Yan

Denise is a Business Staff Writer at the RMHS chapter of Girls For Business.

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