Lesson 2 of 11
Nonprofit vs tax exempt
Confusing these two is the most common and most expensive mistake in nonprofit setup.
Step one: state incorporation
You file nonprofit articles of incorporation with a state agency. This creates the legal entity, gives it a name and limited liability, and lets it open a bank account.
Step two: federal exemption
You apply to the IRS for recognition of exemption, usually under section 501(c)(3). Approval means the organisation is exempt from federal income tax on its exempt activities and, for most 501(c)(3) organisations, that donors can deduct contributions.
State tax exemption is separate again
Some states grant state income, sales or property tax exemption automatically once the IRS approves; others require their own application. Check your state before assuming.
Do not tell donors that gifts are tax deductible until the IRS has recognised your exemption or you understand how the retroactive effective date rules apply to you.
Want help with the paperwork?
You can incorporate and apply for exemption yourself using the steps in this course. If you would rather have support, Gullia Filing prepares and files your nonprofit incorporation, supplies compliant bylaws and conflict of interest policy, and obtains your EIN.