// Formation
How to Start a Nonprofit (501(c)(3)): Formation, IRS Approval, and Compliance
Starting a nonprofit is not like starting a regular business. The IRS scrutinizes your application, you need a board of directors before you begin, your activities are restricted to your stated mission, and the compliance never stops. But if your goal is genuinely charitable, educational, or social — the 501(c)(3) designation gives you tax-exempt income, tax-deductible donations for supporters, and access to grants that for-profit businesses can't touch. Here's the real process.
Is a Nonprofit Right for You?
Before starting the process, be honest about these questions:
→ Is your primary purpose charitable, educational, religious, scientific, or literary? The IRS defines "charitable" broadly, but your mission must benefit the public — not you personally.
→ Are you okay with no ownership? Nobody "owns" a nonprofit. There are no shareholders, no equity, no dividends. If the nonprofit dissolves, assets go to another nonprofit — not to you.
→ Can you recruit a board of directors? Most states require 3+ board members. They must be genuinely independent — not all your family members.
→ Are you prepared for ongoing compliance? Annual IRS filings (Form 990), state reports, board meetings, and financial transparency are mandatory. Missing these can cost you tax-exempt status.
The Two-Phase Process
Starting a 501(c)(3) is a two-step process: first you incorporate at the state level, then you apply for federal tax-exempt status with the IRS. They're separate filings with separate requirements.
Phase 1: State Incorporation (2–6 weeks)
Step 1
Choose Your State
Incorporate in the state where you'll primarily operate. Unlike for-profit entities, there's minimal advantage to incorporating in Delaware or Wyoming for nonprofits.
Step 2
Recruit Your Board of Directors
Most states require at minimum 3 directors. They should be people who genuinely care about your mission and bring relevant expertise (financial, legal, operational, fundraising). The IRS looks favorably on diverse, independent boards.
Step 3
File Articles of Incorporation
File nonprofit Articles of Incorporation with your state. These MUST include specific IRS-required language:
→ A statement of exempt purpose (charitable, educational, etc.)
→ A dissolution clause directing assets to another 501(c)(3) upon dissolution
→ A prohibition on private benefit and inurement (no profits distributed to individuals)
Without this exact language, the IRS will reject your application. Use your state's nonprofit template or have an attorney draft it.
Step 4
Draft Bylaws
Bylaws govern how your nonprofit operates internally: board meeting frequency, officer roles, voting procedures, conflict of interest policy, and amendment process. The IRS requires bylaws with your application.
Step 5
Get Your EIN
Apply at IRS.gov for free — same process as any other entity. Select "other nonprofit" or "church" as your entity type. See our EIN guide.
Phase 2: IRS Tax-Exempt Application (3–12 months)
Step 6
Choose Your Form
| Form | Who Uses It | Cost | Timeline |
|---|---|---|---|
| Form 1023-EZ | Small nonprofits: projected annual revenue under $50K and assets under $250K | $275 | 2–4 weeks |
| Form 1023 | Larger nonprofits, or those that don't qualify for 1023-EZ | $600 | 3–12 months |
The 1023-EZ is dramatically simpler (3 pages vs 28+ pages) and faster. If you qualify, use it.
Step 7
Prepare Your Application
For the full Form 1023, you'll need: Articles of Incorporation (with required IRS language), bylaws, board member details, a narrative description of activities, financial projections for 3 years, conflict of interest policy, and compensation information for officers and key employees.
Step 8
Submit and Wait
Submit electronically through Pay.gov. The IRS may follow up with questions — respond promptly and thoroughly. Once approved, you'll receive a determination letter confirming your 501(c)(3) status.
The Real Cost Breakdown
| Item | DIY Cost | With Attorney |
|---|---|---|
| State incorporation filing | $0–$125 | $0–$125 |
| IRS application (1023-EZ) | $275 | $275 |
| IRS application (Full 1023) | $600 | $600 |
| Attorney fees | $0 | $1,500–$4,000 |
| Registered agent (if needed) | $0–$150/yr | $0–$150/yr |
| Total range | $275–$725 | $1,775–$5,000 |
Ongoing Compliance Requirements
Getting 501(c)(3) status is the beginning, not the end. Here's what's required annually:
→ Form 990 (or 990-EZ/990-N): Annual information return filed with the IRS. 990-N for nonprofits under $50K revenue, 990-EZ for $50K–$200K, full 990 for $200K+.
→ State annual reports: Most states require annual or biennial filings with the Secretary of State.
→ State charitable registration: If you solicit donations, many states require separate charitable solicitation registration (varies by state).
→ Board meetings: Hold and document regular board meetings (most bylaws require quarterly or annually).
→ Financial records: Maintain accurate books. Large nonprofits ($750K+ federal expenditure) need independent audits.
Revenue Options for Nonprofits
Nonprofits can and should generate revenue. Common sources:
→ Individual donations: Tax-deductible for donors. The backbone of most nonprofits.
→ Grants: Foundation, corporate, and government grants. Often $5K–$500K+. Require grant writing skills and reporting.
→ Program fees: Charge for services related to your mission (classes, events, memberships).
→ Earned revenue: Sell products or services related to your exempt purpose (thrift stores, publications, workshops).
→ Unrelated business income: Revenue from activities NOT related to your exempt purpose is subject to Unrelated Business Income Tax (UBIT). Keep this under 15–20% of total revenue to avoid scrutiny.
Nonprofit Needs Infrastructure Too
Your EIN, bank account, and bookkeeping matter just as much for nonprofits.
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Disclaimer: This guide is for informational purposes only and is not legal or tax advice. Nonprofit formation and IRS application requirements are complex and vary by state. Consult a qualified attorney specializing in nonprofit law for your specific situation.