There are several things to consider when you start a nonprofit, especially if you plan to form a 501(c)(3) organization. Virginia recognizes several types of nonprofits, including educational, charitable, scientific, religious, healthcare and veteran organizations. None are automatically entitled to tax-exempt status. To achieve this status, nonprofits must complete a filing for nonprofit status using Form 1023, an Application for Recognition of Exemption, with the IRS.
Starting A Nonprofit In Virginia
The Virginia nonprofit filing requirements start by incorporating a nonprofit entity with the State Corporation Commission(SCC), or as it’s called in Virginia, forming a nonstock corporation. Most nonstock corporations in Virginia are formed for nonprofit purposes, such as charitable and religious organizations, clubs, rescue squads and other organizations.
Similar to any other business entity you would form, you’ll want to carefully choose the organization's name when you get started. It’s how you will establish your brand; it should be unique and engaging. Check online before settling to make sure you won’t be confused with an existing company.
You will need to name directors of the company. The board of directors will help govern the nonprofit, provide guidance, expertise and potentially access to networks that can be beneficial. Virginia only requires one director, but ideally you would have a few more. Look for individuals who have diverse backgrounds both personally and professionally, and can fill the needs you have, whether that be fundraising, outreach, public speaking or some other area.
Once you have filed the information with the SCC and received confirmation that the company has been approved, you’ll need to get an EIN from the IRS. You’ll need it to identify the company on tax documents, apply for tax exempt status and open a bank account. You should also check with your city or county to see what, if any, the requirements are for a business license.
The next step is to hold an organizational meeting, it’s the first meeting of the board of directors. It’s a chance to bring everyone together, elect additional directors if needed and appoint any officers and/or an executive director to oversee the day to day operations of the organization. During this meeting you should at a minimum draft the bylaws if they haven’t already been put together and if they have they should be ratified by the board. Bylaws are extremely important; they are the governing document for the company and should be in compliance with the appropriate Virginia code section. Make sure to state the purpose of the nonprofit, any board regulations and how decisions are made, meeting requirements, what happens on dissolution and any other high level topics that are important to the board and organization.
You’re also going to need to put in place a conflict of interest policy for the directors. This policy outlines how to handle a situation where an individual who has a key role in the company has a competing interest that might come in front of the nonprofit. For example, you want to be on the lookout for situations where a board member has a company that competes with the nonprofit, or a board member has a company that supplies services needed by the nonprofit (or a relationship with a company that does so) and the normal process of obtaining those services is bypassed. This policy lets the board of directors know the expectation is that they will act in the best interest of the company.
If you qualify for tax exempt status with the IRS, the next step is to file the appropriate paperwork. To do this you’ll need to file IRS form 1023, or 1023 EZ. Most organizations are looking for tax exempt status under section 501(c)(3) of the Internal Revenue Code. Organizations that qualify as exempt under this section are organizations operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. An exempt purpose under section 501(c)(3) is one that is charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. A lot of organizations can fall under one of those categories.
Form 1023 is long and detailed, asks for a lot of information and may be burdensome for smaller nonprofits who are just starting out. You’ll have to include information about the organization, its history, finances, organizational structure, operations, activities, governance policies and a list of other criteria. Smaller nonprofits may be eligible to file under form 1023 EZ, which is a streamlined application for tax exemption. It’s easier, faster and cheaper to use 1023 EZ, so it’s worthwhile to check out whether or not your organization would qualify to file a 1023 EZ.
If you plan to solicit charitable donations or contributions for your organization in Virginia you’ll need to register with the Office of Charitable and Regulatory Programs. You do this by filing form 102 with the state, and then annually renewing the registration.
Nonprofit vs. Tax Exempt And Misconceptions
Nonprofits and tax-exempt organizations, while often used interchangeably, are not the same thing. This can often lead to some confusion, so it’s useful to clarify those terms. Nonprofit status refers to incorporation status under state law; tax-exempt status refers to federal income tax exemption under the Internal Revenue Code. A nonprofit organization does not have to be, and isn't necessarily, tax exempt.
Another common misconception is that nonprofit organizations may not earn profits since they are “nonprofit” companies. This is not correct. Even though an organization may be a nonprofit, they are still permitted to generate revenue in excess of their expenses without jeopardizing the nonprofit status. What nonprofits are prohibited from doing is distributing any net profits to the individuals who control the organization. Any earnings must be dedicated to furthering the purpose of the company, there are no shareholders to pay dividends, and all the earnings are reinvested into the organization.
Have questions about setting up or running a nonprofit, tax exempt organization in Virginia? Contact us for a free consultation.