What is a nonprofit?
A nonprofit is typically a business corporation that does not distribute its income to its members, directors, or officers. A nonprofit is organized for a purpose other than generating profit. Some nonprofits are also tax-exempt organizations. Tax-exempt organizations are recognized under the federal Internal Revenue Service (IRS) as operating exclusively for charitable, religious, scientific, educational, or certain other purposes recognized by the IRS.
Tax-exemption has two main benefits.
- The nonprofit organization is not liable to pay any federal income tax.
- Donors to the organization may deduct their charitable contributions from their own taxes.
What are some of the steps to forming a nonprofit, tax-exempt organization?
Forming a nonprofit and applying for tax-exempt status can be complex. Not every organization will follow the same steps as listed below. Many of these steps may require an expert’s assistance.
- Develop a mission, organize a group of people dedicated to that mission, and develop a fundraising plan.
- Draft bylaws to govern the Board of Directors.
- Incorporate as a nonstock corporation with the state of Maryland by filing Articles of Incorporation with the State Department of Assessments and Taxation (SDAT).
- File a Trade Name registration with SDAT if using a different name than the one listed in the Articles of Incorporation.
- Obtain a federal Employer Identification Number (EIN) from the IRS.
- Hold an organizational meeting.
- Apply for IRS tax exemption by completing and filing a form 1023, or form 1023-ez.
- Register with the State(s) for charitable solicitation. Read the law: Md. Code, Business Regulation Title 6
- Complete the Combined Registration Application with the State, obtain insurance, and apply for other necessary licenses or permits.
- Follow ongoing requirements, based on the developing needs of the organization. These may include:
- If incorporated, filing a Form 1 Personal Property return with SDAT.
- If tax exempt, file annual IRS forms (990-N, 990-EZ, or 990).
- Follow employment laws if you have employees or independent contractors.
- Obtain insurance for organization, board members, and officers.