Individuals and families may establish a 501c3 tax-exempt charitable organization to accomplish substantive philanthropy while receiving very favorable tax treatment. The degree of maintenance such an organization requires depends whether the organization can be classified as a public charity or is instead a private or family foundation.
Either way, forming a 501c3 is a three-step process.
Step One: Form the Organization
A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which the organization is required to use be able to qualify for tax-exempt status. Special provisions must be included in the Articles of Formation.
Formation of a nonprofit corporation in Texas is less expensive than formation of a business corporation. To register the entity with the state, the filing fee is only $25.
Step Two: Obtain Federal Tax-Exempt Status from the IRS
Formation as a nonprofit organization does not automatically make the organization tax-exempt. For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur. The organization must file for tax-exempt status with the IRS. The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired. Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.
Step Three: Obtain State Tax-Exempt Status from the State of Formation
After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status. Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.
For a consultation on forming or administering a nonprofit organization or charitable foundation, contact Liza Farrow-Gillespie.
Liza Farrow-Gillespie serves as legal counsel to nonprofit organizations throughout North Texas. Ms. Farrow-Gillespie has been named to the list of Texas Super Lawyers (a Thomson Reuters service) and to the list of Best Lawyers in Dallas by D Magazine in every year since 2013.