ChangeServant: March 2023

Launching a 501c3 Non-Profit in Virginia

Answers to Some Questions by Claire Guthrie Gastañaga[1]

Should I start a new non-profit and, if so, what kind?

Before you start, look at this flow chart published by the Minnesota Council of Nonprofits and ask yourself if starting a non-profit is really necessary or are you able to pursue your goals by investing your time, talent and treasure in an existing organization? Once you’ve asked yourself those questions, ask whether the organization is to be charitable, educational or scientific or a social welfare/advocacy organization. If the latter, you would want to organize as a 501c4 rather than as a 501c3 (that's a topic for another day).

Is a 501c3 nonprofit a corporation?

A nonprofit is an organization first. It can be an unincorporated association but generally the first step is to form a corporation. That establishes some limits to individual liability. To form a corporation and do it in a way that means the IRS will affirm the organization’s status as a 501c3 tax-exempt non-profit organization, requires the organizer(s) to start with a clear purpose that will meet the definition of a public charity that is operated exclusively for an exempt purpose.

Here's how the IRS defines exempt purposes: “The exempt purposes set forth in Internal Revenue Code section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Once you have your exempt purpose clearly in mind and you’ve satisfied yourself that there is no better alternative, you are ready to develop and file articles of incorporation with the State Corporation Commission, write by-laws, ask the IRS for an employer tax ID number, and register with the Virginia Department of Agriculture and Consumer Services so you can solicit funds. After that, you’ll want to file the paperwork to get the IRS to recognize your status as a tax-exempt 501c3 organization.

Can we raise funds before the IRS has recognized our tax-exempt status as a 501c3?

You can raise funds once you’ve got your paperwork in order and it is clear your organization is operated exclusively for an exempt purpose. Nonetheless, some donors who want to be able to take tax deductions for their contributions are hesitant to give before you’ve received your recognition letter from the IRS. This is particularly true of foundations. Note, however, that 86% of taxpayers now take the standard deduction and don't itemize, so they may not care about whether their contribution is tax deductible.

You should have an attorney review your paperwork before any filing with any state or federal agency. Dunlap Law, where I'm a partner, offers flat fee and subscription services for non-profits. Fill out the firm's Vital Signs Checkup to get started. The Greater Richmond Bar Foundation matches non-profits with pro bono attorneys. https://grbf.org

Who does the work when we first get the non-profit organized?

A start-up organization usually doesn’t have paid staff but rather has a board of directors that is responsible for both operating the organization (i.e., doing the staff work to provide services, etc.) and governing it. This is called a “working board.”

Sadly, at this stage, it is often difficult to do both jobs well, and the failure to address governance issues can keep the organization from ever gaining stability and outgrowing the start-up phase of the non-profit life cycle.

Can we hire paid staff?

The most important step toward becoming a mature organization is hiring staff to do the day-to-day work, allowing the board to focus on longer-term strategy and truly be purpose-driven.

Here is a link to a publication on the 6 competencies a non-profit executive director should have: https://boardsource.org/ceo-core-competencies/?utm_campaign=Resources&utm_content=221689229&utm_medium=social&utm_source=linkedin&hss_channel=lcp-30636

Can charitable 501c3 profits advocate for issues? Can they lobby legislators and executive branch officials for policy change directly or through their members?

YES! And YES!

But there are limits and requirements. Key resource: Bolder Advocacy, https://bolderadvocacy.org/advocacy-defined/

Resources

Handbook for Starting a Nonprofit

https://www.minnesotanonprofits.org/resources-tools/publication-detail/handbook-for-starting-a-successful-nonprofit

Alternatives to Starting a Nonprofit (flow chart)

https://www.minnesotanonprofits.org/resources-tools/starting-a-nonprofit/alternatives-to-starting-a-nonprofit

Working Board vs. Governing Board

https://www.nmblstrategies.com/blog/key-differences-board-of-directors

What’s the difference between a working board and a governing board?

https://www.youtube.com/watch?v=gtWIoQLbPAg

https://www.compasspoint.org/board-cafe/working-board-vs-governing-board