The Legal Basics of Nonprofit Startup (Step 1)
Starting a nonprofit starts with getting legal. In this episode, Iβll break down what you need to legally form your organizationβwithout overpaying or falling into online service traps.
Episode 162 | The Legal Basics of Nonprofit Startup (Step 1)
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Speaker 1 (00:00):
How do I start a nonprofit? It is the most common question that I get from individuals thinking about how to start a nonprofit. In this episode, I'll break down what you need to legally form your organization without overpaying or falling into an online service trap.
Speaker 2 (00:16):
Welcome to On Air with Amber Wynn, where nonprofit leaders learn to fuse passion and commitment with proven business strategies to create long-term funding, impact, and sustainability. And now here's your host and resident Philanthrepreneur, Amber Wynn.
Speaker 1 (00:40):
Hey, fam. It is your girl, Amber Wynn, Philanthrepreneur. And today we're going to talk about the first step in legally forming your nonprofit. It's called the legal basics of nonprofit startups. So there's two steps to actually starting a nonprofit. When people say, "Oh yeah, I want to start a nonprofit." There's the actual formation, which is the legal part. And then it's starting a nonprofit with your programs and all of the things. Today, I want to talk to you about filing for your nonprofit organization and why filing actually matters because it does. So I get the question, of course, always, "Well, should I file it myself? Should I pay for an attorney to do it? What does filing even mean?" When you decide to start a nonprofit, what you need to understand is there are rules and regulations. You are starting a business. And so in any state, when you start a business, the authorized agency, which is the State of Secretary, the Secretary of State needs to know that you're forming a business.
(01:54):
So think of it like a birth certificate, right? We're going to bring a life into this world. You're bringing a business into the world. So the first thing you want to do is to file what's called an articles of incorporation. And what that does is it lets the authorized agency know that you are forming a business. Now you get to choose what type of business that is. Are you an LLC? Are you a corporation?
(02:20):
What are you forming as? Because you are a 501(c)(3). The C stands for a corporation. So you are a business. So the first thing you're doing is letting your state know that you are forming a business. So when we talk about legally forming your organization, there's a two step process. The first step is letting your state know that you are actually forming a business. A 501 the C stands for corporation. So that's the type of business that you are going to form. You file what's called an articles of corporation. In your articles of incorporation, you're saying to the Secretary of State, "I am forming a business." That's it and that's all. Right? The second part is what type of business are you going to form? You can be a for- profit or you can be a nonprofit. Here's a question that I want you to know the answer to.
(03:20):
The first part you're filing with the state. The second part is with the federal government. When you form at the state level, you're forming a business that's operating as a nonprofit. You will forever be a nonprofit. The second step is once you get your articles of incorporation and the state says, yes, you are approved to function as a nonprofit business in the state in which you incorporate it. You take that information and you file what's called a 1023 with the IRS. And you say, "I am a nonprofit. Now I need your approval to become tax exempt." This is important because whether or not you're tax exempt, your organization on the state level will forever be a nonprofit. When I say you can lose your tax exempt status, that is from the federal government. That is from the IRS. You can function as a nonprofit without tax exempt status because the business is a nonprofit.
(04:25):
To become a public charity where people can actually get the tax benefit, you have to get approved from the IRS. So when we talk about legally starting your organization, it's a two-step process and that first step is filing with the state. And then the second step is actually filing with the IRS. When we come back, I'm going to talk to you about why those two different types of steps happen and what they mean when we come back.
(04:55):
Most founders don't realize that they're more applicants than there is money. This fact impacts a nonprofit's fundability. Nonprofit founders should administer research on their competitors, determine if their community is oversaturated and identify their competitive advantage before they start a nonprofit. Check out How to Validate Your Nonprofit Idea, a step-by-step guide on how to administer the research you need to validate your idea before spending hundreds of hours and thousands of dollars only to struggle to fund it. Get your copy today. Welcome back here On Air with Amber Wynn, and today we're talking about how to start a nonprofit. It's a two-step process, and step one is basically the legal process for starting a non-profit. The reason why you have to legally form, if I'm just being honest, it comes down to taxes. As a public charity, the IRS says the revenue that you generate won't be taxed.
(05:56):
That is the benefit that you get from being a public charity. So if you only do that first step, which is to file with the Secretary of State as a business, as a nonprofit business, you will have to pay taxes on the revenue that you generate. It's when you do that second step and you become tax exempt that the IRS then says, "Okay, we won't charge you on the revenue that you generate in support of your mission." Now, here's the part that most people don't know. When they start a nonprofit, they think a nonprofit is exempt from paying taxes. That is not true. When you form as a business on the state level, you have to report to the authorized agencies. So let's just say you hire a staff. You have to pay taxes on the payroll, right? You don't get exemptions from that. You don't get exemptions from paying taxes on those mandatory things that all businesses have to pay on.
(07:03):
If you exceed the amount of revenue that you bring in in support of your mission, meaning if the advertising funds, if the marketing funds exceeds 49% of your revenue in support of your mission, then you will have to pay taxes on that. It's called unrelated business income tax, and your accountant will let you know. That's why it's important for you to understand that the revenue that you generate has to support your emission, otherwise it's taxable. So I have people saying all the time, "Why am I paying taxes? I thought it was a nonprofit." The tax exempt part is on the revenue that you generate in support of your mission. So let's recap. To start a nonprofit, you have to file with the secretary of state first, on the state level, be approved as a nonprofit functioning within your state. The second part is then you get approval from the IRS.
(08:03):
They say yes. What you've submitted, it seems like it's going to benefit the public good, right? It's going to function in a way that's going to help a majority of people, not just you, not just your board. Okay. We're going to give you tax exempt status. Once you have tax exempt status, now people can write that off. Now, it's important for me to also say, be careful when you say in your advertisement, anything you donate is you can write it off because that's not true. The IRS has very strict rules on what you can write off. If you have a gala and you're selling tickets, you cannot say, "Please support this gala." The cost of the ticket can be written off. It's not true. The IRS has a very specific rule on what you can write off. It's a portion of the ticket because some of it goes for wait staff, some of it goes for the meals, some of it, and there's only a portion, like 40% that can be written off.
(09:12):
So in your promotion of your nonprofit, do not come out and just say that everything is ... It can be written off because it's not true. And it is your responsibility to know that. Okay? So that is the legal steps for actually starting a nonprofit. When we come back, I want to talk to you about what is actually required at the state and federal levels and how to find trustworthy nonprofit filing services when we return. A nonprofit is a business governed by agencies on the local, state, and federal levels. Authorized to revoke a nonprofit's tax exempt status for non-compliance. Don't put your funding in jeopardy. Get the nonprofit compliance checklist to make sure you don't forget to file required forms to the agencies that can derail your operations for months. Compliance is 50% of a nonprofit's funding strategy. Getting the grant is half the work, but keeping it and getting it renewed is the other half.
(10:17):
Don't spend hours writing grants only to have them rejected because your tax exempt status has been revoked. Keep your organization active and in good standing. Order your copy today. Hey fam, we're back. And today we're talking about the first step in legally starting your nonprofit, right? Because there's two things. You can start a nonprofit and you can start a nonprofit. When we're talking about that first step, it's forming a legal entity. And that requires you notifying the state and the IRS that you have formed a business. A 501 the C stands for a corporation and a corporation is a business. Now I have people say to me all the time, "Well, I lost my tax exempt status. Does that mean I can't get a grant?" No, you're still a business. You're still operating as a nonprofit so you can get a grant. It is up to the funder to determine whether or not they want to give you the grant because they will not be able to get the tax write off.You're still a public charity.
(11:17):
You just no longer have that tax exempt status. So can you fundraise? Yes. You just need to let the funders know, yes, I'm a nonprofit, however, we don't have the tax exempt status. What I will tell you is most people, when they donate to a nonprofit, it's with the understanding that they'll be able to write it off. With all of these new laws and everything, it may not even make a difference and people are giving just because they want to give. But for some people they give because yes, they want to give and they want that tax benefit. So if you lose your tax exempt status nine times out of 10, if they are a funder, they're going to do their due diligence and they're going to run your tax ID number and find out whether or not your tax exempt status is active or not.
(12:03):
But if they don't and you know that your tax exempt status has been revoked, then you want to let them know. And then it's up to them, whether they can, because it may be in their charter that they can only give to a nonprofit with tax exempt status, but just be upfront and let them know. Now, what is required? Because your nonprofit is managed by the state, the federal and the local levels, you are required to file with these agencies. So the Secretary of State, you have to file what's called a statement of information and that's due every year. And you have to file with the tax franchise board if you have employees so that they know that they're getting the payroll taxes, right? You have to file your, what's called 990s. Those are your business taxes. You've got to file those every year. If you don't file your 990s every year, if you miss three years in a row, the IRS is going to snatch your tax exempt status because they need to know that you're functioning as a viable nonprofit.
(13:13):
And the only way that they can know that is if you file your 990s. Same thing with the Secretary of State. If you're not filing your statement of information, how do they know that you're functioning as a viable nonprofit? So these are checks and balances that are put in by the authorized agencies that are overseeing your nonprofit from whatever different perspective that they have. So you are required to file. I'm going to drop in the bio a link to my compliance worksheet so that you can see which agencies your nonprofit is being managed by and you know which forms you need to file, whether that's every year, biannually, it's important because you also need to register with the attorney general. If you are fundraising by law, you're supposed to let your attorney general know. If you don't register, if you're not a part of their charitable registry, they too can snatch your tax exempt status.
(14:13):
So when you start a nonprofit, you are starting a business that is governed by authorized agencies on three different levels. And it's important for you to know that because you put in all of this work, getting this organization started, and before you know it, you're not getting your grants and you don't know why. When I was writing grants, the very first thing that I do is run the nonprofits tax ID number. Why am I going to write you a grant when it's not going to be funded? Because your tax exempt status has been snatched. So you want to check regularly to make sure that your tax exempt status has not been snatched by any of those authorized agencies. All right. So the last thing I wanted to cover is filing for your nonprofit status. I have people say, "Oh, I have an attorney who's going to do that.
(14:59):
" Don't go to an attorney. Attorney's going to charge you attorney fees, right? There are credible nonprofit filing services out there. They're going to charge you anywhere between 500 to $2,000. I think as a point of reference, 900 to 1200 is the going rate. And how do you find them? I say that you get referrals. People that you trust and you know, you can hit me up, I'll give you the information for the person that I refer all my nonprofits to, but basically you want to ask around and say, "Hey, do not use those online legal platforms." Because it is a bait and switch, in my opinion. They're like, "Hey, start your nonprofit for $49." So you get the $49, but it was just for the articles of incorporation. Then they come back and say, "Hey, you need to file with the state." And then that's an additional 900.
(16:03):
And they're like, "Oh, now you need to file with the ... " They lure you in by thinking you can do it for $49 and then there's another level. And by the time you finished, it's like $2,000, right? And then they give you boilerplate information. It's not customized to what it is that you do. They give you a boilerplate bylaws. Your bylaws is the Bible. So I just like when my nonprofits work with local filing services so that they can get that customization because it's going to impact you in the long run. I've had people have challenges with getting board members off the board because they had bylaws that were just boilerplate, standardized, and it just didn't fit what it was they were trying to do. And they didn't know. So just take that into consideration and know that in order for you to start a nonprofit, it is a legal process by which you have to get approval on the state level and then also on the federal level.
(17:05):
Now we're going to move into the episode where you get to ask Amber your question. Listen, I'm in a nonprofit sector for 30 years. I can talk, right? But I want to make sure that the information that I'm providing to my audience is something that they want to hear and they need to hear. And maybe I just don't know the question. So you have an opportunity to ask your question, hit me up on any of my socials, DM me, email me. Today's question comes from Shelly from Sara Cruz. Shelly, what's your question?
Speaker 3 (17:36):
Hey there, Amber. My name is Shelly. I'm finally ready to start my nonprofit. I'm so excited. My question is, should I do the paperwork myself, hire a lawyer, use LegalZoom? I'm pretty smart. I just graduated with my MBA from Syracuse, so I'm pretty sure I can figure it out. But what are your thoughts?
Speaker 1 (17:58):
Well, isn't that timely? No, I don't think you should do the paperwork yourself. Is it hard to do? No, it's not. But here's the thing. When you file for your nonprofit, there are certain questions that a regular preparer knows how to answer, right? You may think it's not a big deal to say that your nonprofit is providing said service in a certain way, but when the reviewer on the IRS reads it, they're going to be like, "That sounds like a conflict of interest." So I've had people do it themselves and they've gotten approved. I've had more people do it themselves and it's gotten rejected and they've had to go back and back and back until they get the wording right. So I would not necessarily ... For my nonprofit, I did not file it on my own. So I wanted to make sure that the person who filed my paperwork, they knew what they were doing.
(18:55):
I don't have to worry about it. So ask for referrals. Other people who have nonprofits say, who filed yours? Are you happy with them? How many times did it take until you got approved? How long did it take? Sometimes that has nothing to do with the preparer. It has to do if there's a backlog with the IRS, but ask the question. I do not recommend using a lawyer because the lawyer's not going to do the work. They're going to give it to a paralegal. They're going to charge you their attorney fees, but they're going to have the paralegal do it. Why not just go to someone who's going to charge you reasonable prices, get it done and approved. Okay? So Shelly, thank you so much for your question. If you have a question for me, like I said before, hit me up on any of my socials and I'll be happy to answer your question.
(19:43):
Now we're moving into my favorite time of the show, Nonprofit Spotlight. It's when I put the spotlight on the most amazing people in the universe. My nonprofit leaders, they're doing the work to make this world a better place. We are on part two of my interview with Shanise Hart, Three Hart Connection. And remember, if you would like to be a part of the nonprofit Spotlight, you can hit me up on any of my socials and I'd love to feature you as well. You can also go over to YouTube and watch the full episode, but let's go ahead and listen to part two of my interview with Three Hart Connection.
Speaker 4 (20:35):
Violence or domestic violence and 18 plus women of color we come and meet. We have a support group and we also have the mentorship. As I was saying, the mentorship is essentially it's taking the book club format where we're meeting anywhere between four to six weeks, reading a book that is, it's focused in healing and growth because we're not trying to keep people just stuck in their trauma. Yeah, these things happen, but what's next? Right? Because ultimately we have that self-accountability and anyway, so we're reading and using the literature to help them learn facilitation. So we started off and then the following weeks they will follow the, excuse me, they will begin facilitating based off of what we taught them in speaking or excuse me, public speaking, storytelling, and creating a curriculum.
Speaker 1 (21:42):
So what I'm hearing with both of your programs, it's not just, "Hey, you were in this horrible situation. Come over here. Let's do some case management. Let's point out what an unhealthy relationship, like what happened? Let's tie it back to your childhood." What I'm hearing is the programs that you are providing, you're bringing your people in, like the youth, like, "Hey, we're going to give you some soft skills. We're going to teach you how to ... " And then kind of incorporating. And the same thing with the book club format, it's not like you're coming into this stigma. It's you're getting community and you're learning public speaking skills. And I'm saying it may not be your words, but you're kind of like sliding in the other stuff.
Speaker 4 (22:28):
Yes. Yeah. There's an old saying where you put the medicine inside the candy, right? So trying to do that. And we've had some really, really great times, especially with the current group of thrivers that we're serving in our adult programming. These ladies have put on fashion shows. These ladies have done public speaking external to Three Hart Connection.
Speaker 1 (22:54):
They've gone alongside me on different ventures in the county, gone down south in LA and really just to hear some of them who were in such an isolated space to be where they're at now and publicly speaking and wanting to now give back to the same community that at one time they felt that burdened them. It's awesome.
Speaker 1 (23:18):
And is that your goal? In part, my ignorance, right? Is like one of the results of being in a domestic violence situation that you don't speak. And so now the goal is to reclaim your power by, okay, talk to us a little bit more about that.
Speaker 4 (23:36):
Exactly. Reclaiming your power. I love that. And that feeds into the terminology for thriver. So with that, reclaiming and taking your power back, and many times we're silenced, right? So what does your voice even sound like? I'll even speak from a personal anecdote. I have struggled, and even to this day, public speaking, I experienced relationships where I literally was not allowed to talk. Right. My opinions were nothing. My voice literally was nothing. So working with these ladies who've had the exact same experience or similar, and then to see this transformation, it is amazing.
Speaker 1 (24:24):
To
Speaker 4 (24:24):
See them through movement, through dance, through volunteering, just everything. It is amazing just to see them reclaim their power and to take on opportunities that before they may have felt like, "Well, I'm not qualified." No, this thing that you think that disqualifies you is exactly what
Speaker 1 (24:45):
Qualifies you. It qualifies you. I love it. So how do they find you?
Speaker 4 (24:52):
They find us through referrals. We have really great partners. We are part of Alliance AV. We are a part of LA County's Violence Prevention Coalition or social media, right? But by going through our website, that is where everything exists, all of our points of contact. So if anyone is looking for any resources or to learn more about any of our programs, they can find us at threeheartconnection.org and three is spelled out T-H-R-E-E. Hart is H-A-R-Tconnection.org.
Speaker 1 (25:30):
Yeah. And we're going to post all of your information after the interview. Welcome back. Today we have been talking about step one, the legal basics of a nonprofit startup. We just finished up episode two of my conversation with Shanise Hart. And when you're out there doing the work, making a difference in your community, it's important for not only your potential constituents to see you, but also potential funders, and that's what this part of the episode is about. So if you want to see the full episode, you can go watch that on YouTube. Otherwise, hang out with me for the next couple of weeks and you'll finish hearing the episode three and four with my interview with Shanise Hart. All right, fam, that's all I got for you today. I hope that you found this information helpful. If you did, be sure to like, subscribe and share within your network.
(26:39):
And I will see you next week, but until then, take care of yourself like you take care of your community. See you next week.
Speaker 2 (26:45):
Thanks for listening. If you enjoyed this episode, subscribe and leave a review on iTunes. Head over to www.amberwynn.net/podcast for the links and resources mentioned in today's podcast. See you next time.
