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Obtaining Nonprofit Status

Updated: Feb 15

From a formation standpoint, nonprofits are similar to for-profit corporations. The certificate (or articles) are filed with the state, the directors hold their initial meeting, adopt bylaws, apply for an employer identification number, set up bank accounts, etc.

However, nonprofits (no matter what type) must also apply for tax exemption to the appropriate federal and state agencies. This is key to obtaining and maintaining nonprofit status.

Incorporators often forget or overlook that final step, and especially when it comes to the requisite state agencies (most nonprofit incorporators don't forget to apply to the IRS). In my experience, this is the most common formation issue for would-be nonprofits.

Obviously, the first step is to seek nonprofit, tax exempt status from the federal Internal Revenue Service.

The next step is to apply to the appropriate state agency. In both California and Texas, it is often less complicated to wait to apply until you have your IRS determination letter (the letter confirms the entity's federal tax exempt status). Once you have the determination letter, then apply to the state agency.

In Texas, you must apply for nonprofit status to the Texas Comptroller of Public Accounts.

In California, you must (1) apply to the Franchise Tax Board, and (2) register with California's Registry of Charitable Trusts.

If your nonprofit fails to obtain nonprofit status, it will be treated the same as a for-profit corporation. This could mean substantial tax liability, and make it difficult to find donors (why would they donate to you if you're for-profit?). It also means potential veil piercing.

Summary: Do not forget to apply to your state agencies when forming a nonprofit; failure to do so could result in tax liability.

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