501(c)3 Nonprofit Status

When starting a nonprofit, there are many legal considerations. A 501(c)3 organization is a nonprofit organization in the federal law of the United States according to 26 U.S.C. § 501 and is one of 29 types of nonprofit organizations which are exempt from some federal income taxes(Wikipedia 3.15.18). 

Obtaining 501(c)3 status within the tax code can be a lengthy and challenging process; however, it provides:

  • Exemptions from federal and state income and corporate taxes
  • The ability for donors to make tax deductible contributions
  • Greater fundraising opportunities – ability to apply for grants that may be limited to entities with 501(c)3 status

All assets of a 501(c)3 entity, by law, are permanently dedicated to a charitable purpose. Public charities are held to a strict expectation that their funding be used to run programs directly benefiting the public within their stated mission. In a nonprofit corporation, there are no profits to be distributed, so financial accountability rests with the Board of Directors.

Two options that exist to starting a nonprofit are:

  1. Form new entity that will qualify as a nonprofit, charitable entity
  • Provides limited liability and tax-exempt status
  • Most common form is nonprofit corporation

TIP:Once state nonprofit status is received, donations can be accepted and will ultimately be tax deductible if federal 501(c)3 status is approved, as tax exempt status is recognized back to the creation date by the state.

  • However, if exempt status is not approved, donations will not be deductible.

There are many web-based programs to help with the application process, usually for a fee. Legal and Operational Guide for Free Medical Clinicsis a legal resource for starting a nonprofit medical establishment including points for 501(c)3 status and much more. Other resources may be found at Nonprofit Status.

  1. Be part of an entity that already has 501(c)3 status. 
  • Many operational synergies, but could lose some autonomy
  • Would not segregate liabilities from rest of organization
  • Requires a fiscal sponsorship agreement

A fiscal sponsorship is a contract between a 501(c) 3 and another nonprofit entity (state-level). The sponsor is responsible for the accounting and the sponsored inherits 501(c) 3 status. Donations, grants, etc. can be made to the sponsor, but specified for the sponsored. The sponsor may take an administrative fee (2018 estimate is 10 %). The contract may be for a specific amount of time (an event) or be left open indefinitely.  See Appendices\Regulatory\Sample Fiscal Sponsorship Agreement -Re-Grant Model.docx.