Starting an unincorporated association or non-profit

What is an Unincorporated Association?

A non-profit unincorporated association is any grouping of persons (i.e. a collective, an activist organization, etc.) uniting together for some special purpose or business other than making a profit. Most states will grant tax-exempt status to an unincorporated association or club, you will have to contact your state government to get information about applying for it. However, if you just take out a non-interest bearing account at a bank or credit union (i.e. a checking account) you will not have to file taxes for your association and, therefore, you can avoid dealing with the government at all. The main differences between an unincorporated association and a non-profit corporation is that the members of an unincorporated association can be held directly liable if someone were to sue the association and it is problematic for unincorporated associations to have paid employees.

In contrast, non-profit corporations, in just about every sense, are corporations, with the exception of making a profit and have the legal protection of limited liability, which protects the corporation's directors from being held legally responsible for any legal action directed at the corporation itself.

Five alternatives to starting a nonprofit

1. Study the list of nonprofits already active in the same area and join their efforts as a volunteer, a board member or even as staff.

2. Analyze the list of nonprofits already active in the same area, identify the three most compatible with your ideas, and meet with them to explore creating a special project or initiative -- and negotiate your involvement.

3. Explore the list of national organizations in the area of your interest, and see if a local chapter is needed in your geographic area.

4. If your effort will be quite local and small, consider forming an unincorporated association or club -- have meetings and activities but skip the reporting requirements (an option for groups with annual budgets under $25,000).

5. If you are considering creation of a group to finance activities or needs of others (scholarships, family emergency funds for a specific population, etc.), explore sponsorship of the fund by a community foundation or other organization.


Steps to Forming a Non-Profit Organization in the US

1. Determine the purpose of the organization. Every organization should develop a mission statement that describes their reason for existing. This can be developed by meeting with potential clients, constituents, board members and other interested parties.

2. Determine the structure of the organization. This stage should include determining the type of organization that you will form (e.g., a charitable corporation under § 501 (c)(3) or another kind of non-profit: member or not, corporation or unincorporated, association, or trust). Do you want to be a membership organization or governed by a board of directors who elect their own successors? What interests or constituencies should be on the Board?

3. Choose your board of directors. Unfortunately an incorporated non-profit organization must legally have a board of directors in most states. Most state law requires that every non-profit corporation have a President, Treasurer, and Secretary (i.e. officers who perform comparable duties), also most states allow a single person may hold all three offices.

4. Write bylaws. Your bylaws will guide your organization's day to day operations. These should be drafted carefully and may require the assistance of an attorney experienced in nonprofit law.

5. File Articles of Incorporation the state you wish your organization to be incorporated in. For organizations that plan to be incorporated, this is a key step. If you expect to seek exemption as a charitable organization under Section 501 (c)(3), be sure to include the language required by the Internal Revenue Service.

6. Develop strategic and fundraising plans. A strategic plan will help you outline the steps needed to fulfill your organization's goals, determine your staff needs, and establish operational priorities for the upcoming year and beyond. The strategic plan should determine your budget priorities, identify potential donors, establish bookkeeping practices, and delineate fundraising activities (e.g., mailings, dinner-dance, silent auction, etc.).

7. Establish a system for record keeping and accounting. A protocol should be established for keeping all your organization's official records (such as board meeting minutes and financial reports) and records should be preserved for the life of the organization.

8. Obtain a Taxpayer Identification Number from the IRS. You'll need this number to open a bank account, file informational returns with the IRS and withhold your employees' income tax. You can obtain a Taxpayer Identification Number (also called an Employer Identification Number.EIN) by filling out an SS-4 form. Contact the IRS at 1-800-829-FORM or for an SS-4 form or more information. In most cases, you must also apply for tax-exempt status in the state you are incorporated in.

9. Request recognition of tax-exempt status from the IRS. Without a "determination letter" from the IRS, donors who want an income tax deduction may not make gifts to your charity. Nonprofit corporations that are charities and meet the definitions in IRC §501 (c)(3) may request recognition of their tax-exempt status. To receive §501 (c)(3) tax-exempt status from the IRS, you must fill out an IRS 1023 form and attach your proposed budget, Articles of Incorporation (certified), and bylaws (a true copy). Resumes of your board members are helpful as well. This application should be filed within the first 15 months of your organization's existence. Contact the IRS at 1-800-829-FORM or to receive a copy of this form. There are other non-profits that are not charities, such as Chambers of Commerce, etc. Different IRS forms are required for these.

10. Obtain a non-profit bulk mail permit from the U.S. Post Office. If your organization will be doing any large mailings, you may want to obtain an imprint authorization for bulk mailing. The permit provides a discount on the cost of mailing, if you are sending at least 200 pieces, and the mailing is sorted and processed within the regulations of the Postal Service. There is a one-time imprint fee and the permits must be renewed annually. Certain nonprofit organizations may qualify for reduced rates. For more information on bulk mailing call, 1-800-238-3150 or visit the web site.

11. Register for unemployment compensation. All nonprofit organizations that have paid employees must participate in an unemployment compensation program in their states that they operate in.

12. Be sure to withhold employment taxes for the IRS. Employers are required to withhold their employees' wage income and FICA taxes and submit these to the IRS regularly. Failure to do so can result in significant fines and potential personal liability for the responsible officers. Contact the IRS at 1-800-829-3676 or to receive appropriate forms. The state and some local governments also require withholding.

13. Obtain liability insurance for your organization. Like for-profit business, non-profits are exposed tolegal risks. You should obtain general liability insurance, and possibly directors and officers liability insurance, and general professional liability coverage.

[Excerpted from "Tips on How to Become a Nonprofit Organization in Pennsylvania"]

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