Most nonprofits are 501(c)(3) organizations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. To create a 501(c)(3) tax-exempt organization, first you need to form a Utah nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of Utah.
Common 501(c)(3) Rules and Regulations
The government recognizes that charitable and certain other types of organizations provide valuable community services that would be impossible for the government to provide using taxpayer funds. While the government can’t fully support nonprofit organizations, the 501(c)(3) codes of the IRS classify them as tax-exempt. Not having to pay taxes on donations and on the funds they raise stretches their dollars, making it easier for them to continue providing valuable services for the community. There are specific rules and regulations for starting a 501(c)(3), and there are rules for maintaining one. Failure to abide by those rules means losing tax-exempt status. The federal government also lists rules for dissolving charitable organizations. It’s important for organizations that qualify as tax-exempt to know and follow all applicable rules to avoid penalties and other liabilities.
Types of 501(c)(3) Organizations
The federal tax code lists several different types of organizations that don’t have to pay income taxes. Here are some of the basic categories:
• Religious organizations
• Educational institutions
• Scientific organizations
• Literary groups
• Groups that test for public safety
• Groups that foster national or international amateur sports competitions
• Anti-cruelty organizations for animals and children
The federal government also classifies private foundations as nonprofit organizations. These types of organizations are largely philanthropic in nature. Because they invest some percentage of their fundraising dollars, the federal government has different rules that they must abide by to maintain their status as a nonprofit organization. Organizations that receive more than one-third of their support from gross investment income are considered private foundations. The IRS requires private foundations to submit detailed tax returns.
Rules for 501(c)(3) Organizations
A 501(c)(3) organization typically begins when a group of people share a common goal of starting a nonprofit organization to fill a need within their community. After carefully choosing a name for the organization, the founders get to work writing the articles of incorporation. The articles of incorporation must include the corporation’s name, contact information, purpose, registered agent, founding directors and information about shares of stock, because once they are filed, they become public record. In most states, founders file the form for the articles of incorporation with the Secretary of State’s office. Organizations usually have to designate an “incorporator” who signs and files the articles of incorporation with the proper authorities and pays the appropriate filing fee. There may be separate forms for applying for federal or state tax-exempt status. Bylaws are separate and different from the articles of incorporation. The founding directors write the bylaws, which outline how the nonprofit runs, including the rights and responsibilities of officers and directors. Nonprofit organizations don’t have to file bylaws with the state, but they need to keep them in their files. The next step is usually to appoint a founding board of directors and to hold the first board meeting. After that, the board needs to follow up on obtaining all of the proper licenses and permits, and to open a bank account for the nonprofit’s funds.
How To Maintain 501(c)(3) Status
The government intends for nonprofit entities to remain nonprofit entities, so they set up some rules that tax-exempt organizations must obey in order to keep their tax-exempt status. Not knowing the rules isn’t an excuse for disobeying them. Those who try to blur or cross the line could end up with fines or face other legal consequences.
• Private benefit: Organizations that apply for tax-exempt status cannot serve the private interests, or private benefit, of any individual or organization besides itself past an insubstantial degree. Therefore, a nonprofit may not permit any of its income or assets to benefit insiders, such as board members, officers, directors and important employees.
• Nonprofits are not allowed to urge their members to support or oppose legislation. They may participate in a small amount of lobbying, but lobbying activities may not exceed a certain amount of the organization’s total expenses.
• Political campaign activity. A nonprofit organization may not financially support or endorse any political candidates verbally or in writing. They may not oppose candidates either. This rule applies to candidates at every level — local, state and federal.
• Unrelated business income. Nonprofit organizations aren’t allowed to generate too much income from a purpose that is unrelated to the nonprofit. An organization that regularly operates a trade or business that is unrelated to the nonprofit and makes significant contributions to the organization would need to pay taxes.
• Annual reporting obligation. Nonprofit corporations still have reporting responsibilities, like the Form 990. They may also be responsible for things like tax on unrelated income, employment tax, excise taxes, and certain state or local taxes. Churches and other church-related organizations don’t need to report income.
• Operate in accord with stated nonprofit purposes. An organization that makes a big shift from being unprofitable to making money needs to re-file as a for-profit entity and to pay the applicable taxes.
Dissolving a Nonprofit Organization
It’s much easier to start a nonprofit than it is to dissolve it, and nonprofits must obey certain rules in dissolving their organizations. The intent is to dissuade people from starting nonprofit organizations, shutting them down after a time and keeping the profits for themselves. There are certain steps related to dissolving a nonprofit, and it’s best to gain the help of an attorney or tax professional. A nonprofit may only distribute assets to another tax-exempt organization. The board may vote to dissolve the organization, file dissolution papers with the state and the IRS, and select another nonprofit organization to which to transfer any assets. The board will need to pay all contractual obligations and debts before dissolving the nonprofit. If there aren’t enough assets to pay remaining debts, the nonprofit may need to file bankruptcy. The board could be held liable for not properly dissolving a tax-exempt organization. It’s important to remember that the government values nonprofit organizations for their commitment and sacrifice. The nonprofit savings in tax dollars are intended to serve the public in their communities, not to profit individuals or groups of individuals. The rules and regulations are designed with the intent that nonprofits will start out strong and enjoy long-term sustainability. Nonprofits that decide to close their doors for whatever reason don’t get to pocket any remaining funds.
Your Utah Nonprofit Corporation Lawyer
First, you need to form a nonprofit corporation under Utah state law (the Utah Revised Nonprofit Corporation Act (“RNCA”)).
• Choose the initial directors for your nonprofit: In Utah, you must have at least three directors on your board. If you do not name initial directors in your articles of incorporation, you must provide their names to the state no later than the filing of your first annual report.
• Choose a name for your Utah nonprofit corporation: The name of your nonprofit must be distinguishable from the name of any domestic or foreign, nonprofit or for Profit Corporation, limited liability company, or limited partnership authorized or incorporated in the state, or any name reserved or registered or any trademark or assumed name on file with the Secretary of State. To see if your proposed name is available, you can check the online business name search on the Division of Corporations & Commercial Code website.
• Prepare and file your nonprofit articles of organization: You create your nonprofit entity by filing articles of incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. Your articles of incorporation must include basic information such as:
the name of your nonprofit
its purpose, including language required by the IRS for federal tax exemption
the number of shares the corporation is authorized to issue (see RNCA §16-6a-202 for more information)
a statement regarding whether the corporation will have voting members
the number of directors constituting the initial board
for non-commercial registered agents: the Utah street address of the business entity’s initial registered office and the name of its initial registered agent at that address
for commercial registered agents: the name of the commercial registered agent and the registration number
the name, street addresses, and verified signatures of each incorporator, and
the street address for the principal office (optional until first annual report).
To receive your federal tax exemption from the IRS, make sure you include the language required to obtain 501(c)(3) tax-exempt status. This includes:
• a statement of purpose that meets IRS requirements
• statements that your nonprofit will not engage in prohibited political or legislative activity, and
• a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution.
• Prepare bylaws for your Utah nonprofit corporation: Before you file your articles of incorporation, you’ll need to have bylaws that comply with Utah law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in Utah. Your bylaws do not need to be filed with the state; they are your internal operating manual.
• Hold a meeting of your board of directors: Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
approving the bylaws
setting an accounting period and tax year, and
approving initial transactions of the corporation, such as the opening of a corporate bank account. After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board. You should set up a corporate records binder for your nonprofit to hold important documents such as articles of incorporation, bylaws, and minutes of meetings.
• Apply for an Employer Identification Number (EIN): Apply for an EIN via the IRS website. An EIN is a unique tax number for your nonprofit, which you will use on your state and federal tax filings, exemption application, bank accounts, and other government filings. The application is free, and you will receive your EIN immediately after submission.
• Obtain business licenses and permits: Utah does not require nonprofits to obtain statewide business licenses. However, depending on your location and services, you might need one or more licenses or permits. Check with the licensing office in every town and county where your nonprofit will operate to determine what the requirements are for your organization.
• Submit an annual report/renewal form: Each year, you must submit an annual report/renewal form to keep your nonprofit in good standing with the state. You may renew your nonprofit online via the Division of Corporations and Commercial Code website. The state will send you a renewal reminder before the due date, which will be the end of the month of your initial registration.
Obtain Your Federal and State Tax Exemptions
Now that you have created your nonprofit corporation, you can obtain your federal and Utah state tax exemptions. Here are the steps you must take to obtain your tax-exempt status.
• File your Form 1023 federal tax exemption application; To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more.
• Obtain your Utah state tax exemptions: Once you obtain your federal 501(c)(3) tax-exempt status from the IRS, your nonprofit is eligible for certain state tax exemptions. Check the Utah State Tax Commission website for information and filing requirements for franchise, sales and use, and property tax exemptions.
• Other state reporting and registration requirements: Depending on your activities and the size of your organization, you may need to register with the state before doing any fundraising activities. Check the Utah Division of Consumer Protection website for information and rules about fundraising and registration requirements for nonprofits.
When you need legal help with a non-profit 501(c)(3) in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506