7 Important Considerations Before Forming a Section 501(c)(3) Organization

Latham & Watkins LLP

Parties interested in forming a Section 501(c)(3) nonprofit entity face a number of compliance burdens -

Although Section 501(c)(3) status can be the right fit for many organizations, it also comes with a number of burdens that should be evaluated prior to forming a nonprofit entity and applying for federal income tax exemption. This guide highlights seven key challenges that come with Section 501(c)(3) status.

Forming a new entity, applying for exemption, and fundraising can be expensive -

In most cases, forming a Section 501(c)(3) organization involves incorporating a nonprofit entity in a state, registering to do business where necessary, and submitting applications for federal and state income tax exemption to the relevant tax authorities. The process involves incurring a number of fees, including those related to filing articles of incorporation, registering to do business, maintaining a registered agent, filing annual or biannual reports, and applying for federal and state income tax exemption. Most states require charities to register to solicit charitable contributions (i.e., engage in fundraising), and a simple “Donate Now” button on a website could trigger a registration requirement in several states. Overall, these “maintenance” obligations are time-consuming and expensive, and often necessitate hiring outside advisors. For example, most organizations need to hire an accounting firm to assist with federal and state tax return preparation and filing. Accounting firms do not typically offer accounting and audit services on a pro bono basis.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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