How to Start A Nonprofit in Nebraska
SEE ALSO: Types of Nonprofits
Provided as a service by the Funders’ Group of Lincoln and Lancaster County
Contents
Disclaimer
This publication is intended to provide general information only to groups who are considering becoming a nonprofit organization. It is not designed to provide legal or financial advice. Any questions you may have of a legal, financial or technical nature should be directed to an attorney, accountant, the Internal Revenue Service (IRS), Nebraska state government, or another professional with nonprofit experience.
Nonprofit Options
1. Become a Charitable Oragnization
Groups of people in Lincoln and across the state of Nebraska get together to conduct programs to benefit people in their community—to increase literacy rates, to feed and clothe the homeless, to rescue abandoned animals, to clean up the environment and to mentor youth.
These programs are “charitable” because their purpose is to serve the public good. But that doesn’t mean that these programs are “nonprofit.” Nonprofit status must be given by the Internal Revenue Service.
2. Incorporate As A Nonprofit with the State of Nebraska
Becoming a nonprofit organization is a form of incorporation. Organizations that incorporate as nonprofit exist for the public good rather than for the financial benefit of an individual (an owner) or stockholders.
A nonprofit corporation is a legal entity, usually a group of people that has a charter granting it certain legal powers generally given to individuals, to buy and sell property and enter into contracts. Since the corporation is nonprofit, it cannot sell shares of stock or distribute income to members or other private entities. The law does not prohibit a nonprofit from making a profit. However, the income that is generated by the corporation must be used to operate the organization or granted to other nonprofit organizations.
3. 501(c)(3) Federal Income Tax Exempt Status
Tax-exempt organizations do not have to pay state and/or federal income taxes. Tax-exempt status does not automatically follow from incorporating as a nonprofit. Not all nonprofit organizations file for tax-exempt status and the IRS is not required to grant that status to every organization that applies.
Tax-exempt status is granted to those organizations whose main activities are charitable, religious, educational or scientific. An organization designated as a nonprofit corporation under state law may not mean the organization is tax-exempt under federal law. To be tax-exempt under Federal law, the organization must be described in one of the sections specified in the Internal Revenue Code and apply for exemption by filing Form 1023 for 501(c)(3) status or Form 1024 for all others. The organization is exempted from paying federal income tax on its organizational income. The organization may still have to pay state sales tax.
There are several different types of tax-exempt, nonprofit organizations, each with its own code number. Most code numbers begin with “501 (c) and then a number. Most foundations are legally allowed to support only nonprofit organizations that are designated as “501(c)(3)” by the IRS. Most foundations and corporations cannot give charitable donations to groups designated “501 (c)(6).”
For example, being classified by the IRS as a 501(c)(6) means your group is considered a Chamber of Commerce or other business-related tax-exempt nonprofit organization—and these don’t always operate for purely charitable purposes. Getting an IRS designation of 501(c)(3) testifies that your group operates for purely charitable or educational purposes, and that donors to your organization may claim a full deduction.
To qualify as a 501(c)(3), the organization must be a corporation, community chest, fund, foundation or trust.
To receive recognition as a 501(c)(3) nonprofit tax-exempt charitable organization, you must complete Form 1023 (Application for Recognition of Exemption) and Form 8718 (User Fee for Exempt Organizations Determination Letter Request), available from the IRS. Many groups hire an attorney or a private consultant with experience to do this for them—and incur costs for this service.
The IRS charges $500 to apply for 501(c)(3) status.
Differences in Types of Organizations
SEE ALSO: Types of Nonprofits
| Type of Organization | Officers | Liability | Tax Deductions | Receiving Grants | Continuity & Structure | Fees | Other |
|---|---|---|---|---|---|---|---|
| Charitable Organization | Not required to install officers or hold regular meetings unless the organization’s members want to. | There is no liability imposed upon the organization except for those taken on by the individual members personally. | Individuals and corporations cannot take tax deductions for their donations to the organization. | Ineligible to receive grants directly from governmental agencies or most foundations. The organization may have to use a fiscal agent. | Not required to install officers or hold regular meetings, so the organization may lack continuity and structure; the organization may be more susceptible to failure because of the possible lack of support from members. | Little to no fees involved since the organization will not have to complete the paperwork that is necessary to become a nonprofit corporation or a 501(c)(3) organization. | |
| Incorporating as a Nonprofit Organization | Must hold regular meetings, elect a board of directors, write and observe its bylaws and give notice of meetings and changes to its articles of incorporation and bylaws to its members. | Members of the organization’s board may have some insulation from legal liability in relation to the organization’s debts. | Individuals and corporations may not be able to take full tax deductions for their donations to the organization. | The organization could receive grants that require the organization to be a legal entity. | Incorporation may give the organization some continuity and structure due to the requirements for a board of directors, regular meetings and incorporation documents. | Fees must be paid to the Nebraska Secretary of State’s office and report the names and addresses of members and officers every two years.
If changes are made to the articles of incorporation after the document has been filed with the Secretary of State, addition fees must be paid. |
The organization can own real estate and other large assets and apply for loans.
Corporation cannot pay income to its members or other individuals as dividends. Payment to individuals can only be made for services |
| 501(c)(3) Federal Tax Exempt Status
|
Must hold regular meetings, elect a board of directors, write and observe its bylaws, record official minutes and give notice of meetings and changes to its articles of incorporation and bylaws to its members. | Organization is not liable for federal income tax on its earnings unless the organization brings in substantial earnings not related to the tax-exempt purpose of the organization.
Directors, trustees, officers, employees and members of the nonprofit corporation as not personally liable for corporate debts or liabilities. Creditors can only go after the corporate assets in the nonprofit corporation. |
Donors may take a tax deduction for donations made to your organization to the extent allowed by law. | Organization may be able to apply for government, corporate and private grants limited to 501(c)(3) organizations. | Incorporation may give the organization some continuity and structure due to the requirements for a board of directors, regular meetings and incorporation documents. | Fees must be paid to the Nebraska Secretary of State’s office and report the names and addresses of members and officers every two years.
If changes are made to the articles of incorporation after the document has been filed with the Secretary of State, addition fees must be paid. Fees must be paid to the Internal Revenue Service to file for tax-exempt status. |
The tax-exemption application may require a lot of time to complete, especially with regard to budget matters (the organization will need to complete a 2-year budget).
The organization must keep detailed financial records. The organization will need to complete a From 990 Income Tax Return (Return of Organization Exempt from Income Tax) each year if more than $25,000 is earned in a year and if total assets at the end of the year are more than $250,000; if receipts are less than $25,000, the organization does not need to file a Form 990. The IRS requires a report on how earnings were spent at the end of the first two years of exemption. The IRS will then determine if the organization is qualified to continue as a 501(c)(3)organization after the initial two-year period. The organization cannot lobby for legislation or endorse any candidate for public office. If the organization dissolves, it must give its money to any other 501(c)(3) organization(s) of its choice. Fundraising may be easier to conduct because donors may be more inclined to give donations to organizations granted tax-exempt status by the IRS. The organization may be entitled to reduced postal rates. |
Other Considerations
Monetary Expenses
Deciding to become a nonprofit organization involves more than coming up with a name for your group or developing programs to benefit the community. It involves planning, thought, time and money. It is recommended that groups considering becoming a nonprofit organization, contact an attorney to assist them with the required paperwork, an accountant to complete their tax forms and an insurance agent to obtain proper insurance for their board of directors and officers, property, and worker’s compensation. If your organization intends to have a paid staff, you will need to obtain the necessary paperwork from the IRS and the state for employee withholding. You may wish to find professionals who will help your group complete the necessary paperwork to become a nonprofit on a pro-bono basis. Perhaps members of your group may have expertise in these areas. Local law colleges may also be able to provide assistance.
Seeking the assistance of professionals to help your group establish a nonprofit organization and maintain financial records can be quite expensiveIt is recommended that you contact attorneys, accountants and insurance agents for their fees.
Time Commitment
It is also important for your group to consider the time you may have to devote to completing the necessary paperwork for the IRS and the Secretary of State. The IRS estimates that the total average time to complete Form 1023 and its many schedules, to learn about the law and how to complete the form and the additional record keeping is 189 hours! This is just one form out of many that you will have to complete in order to establish your group as a nonprofit organization.
Community Need and Services Offered by Other 501(c)(3) Organizations
Meet with other groups in the area you expect to serve during the first year of operations. Consult with major local funders such as government entities, United Way, the arts council, etc., and learn about planning processes they may have completed.
In this manner, you can determine where the gaps are (which areas, geographically, are not being served or which needs, programmatic, are not being provided already by another group). Approach this research as if you were conducting a feasibility study on the viability of your program and organization.
SEE ALSO: MIDLANDS COMMUNITY COMPASS
Merging or Collaborating with An Existing Entity
SEE ALSO: STRATEGIC ALLIANCES
Perhaps your group should consider creating a project or program within another organization rather than spending time and energy to establish a whole new entity. There may be organizations already established that serve the same purpose and mission that your group wants to serve and perhaps they are operating more efficiently than your group could on its own. Working with another organization may help your group to absorb some of the administrative and operating costs as well. Your group may be able to contribute human resources and ideas to improve the impact of an existing program to those entities. Check with those organizations serving the area you wish to support and consider a possible collaboration.
Using a Fiscal Agent to Apply for Grant Funding
SEE ALSO: STRATEGIC ALLIANCES
Your group may not have the time, money or human resources to devote to becoming a 501(c)(3) organization, however you may still want to apply for grant funding from the government or private entities. Contemplate using an existing 501(c)(3) organization as your fiscal agent. A fiscal agent is an organization that agrees to accept and be responsible for grant monies on your behalf. Fiscal agents are usually nonprofit organizations that accept funds without tax liability. The IRS has held that a 501(c)(3) organization can distribute funds to organizations which have not themselves received 501(c)(3) status. However certain steps must be taken to insure that the funds are used only for charitable, education or other 501(c)(3) purposes (Revenue Ruling 68-489,1969-2 C.B. 210). The funds must be used for specific projects in furtherance of the sponsor’s own exempt purposes, the sponsoring organization must retain control and discretion as to how the funds are used, and the sponsoring organization must maintain records establishing that that the funds were used for 501(c)(3) purposes.
In a typical arrangement, the non-exempt organization solicits grants or donations, donors and grantors make their checks to the tax-exempt sponsor and the sponsor pays expenses on behalf of or makes a grant to the non-exempt organization, sometimes taking a percentage of the donation as a fee. The sponsor may also take care of reporting for the non-exempt organization’s employees, allow the use of its bulk-mailing permit and/or provide office space, use of office equipment or clerical help.
Sustainability
Determine the sustainability of your organization. Is there support (monetary, volunteerism, time, talent and treasure) from the members of your group to keep the organization up and running? Are there funding sources to keep your programs operational? If your organization does not receive outside financial support, how will your programs be sustained? Many people have a lot of enthusiasm for an idea initially and you can use this momentum to develop a program(s) that will impact your community for the long-term. You want to build an organization that has a purpose to serve and a unique ability to deliver services over time—in other words, an organization that will last. Develop a business plan that will help your organization determine its mission, purpose and future direction.
Next Steps
- Read the different sections of the Guidelines & Principles as outlined on the left column.
- Read the Full Legal Compliance Checklist
- Read pages 9-17 of How to Create a Nonprofit in Nebraska
Resources & Further Reading
Lincoln Community Foundation: How to Start A Nonprofit
Guidelines & Principles: Full Legal Compliance List
Guidelines & Principles: Types of Nonprofits
Nebraska.gov: One-Stop Business Registration Information System
