6 Legal Considerations for Starting a Nonprofit
Every nonprofit starts with a spark – a desire to solve a problem, help a community, or change the world. But passion alone does not protect your nonprofit. A strong nonprofit legal structure and clear compliance steps do.
Step 1: Selecting a compliant name
Before you file a single document, you must choose a name that is legally available and compliant with state rules. A name that sounds perfect in a brainstorming session may already be in use or restricted.
- State availability search: Search your Secretary of State’s business database to confirm the name is not “deceptively similar” to an existing organization, or your Articles of Incorporation may be rejected.
- Naming restrictions: Many states restrict certain words (e.g., “Bank,” “Trust,” “Engineering,” government references) and may require a corporate ending such as “Inc.,” “Corp.,” or “Ltd.”
Pro Tip: Once you confirm that the name is available, consider reserving it with the state while you prepare your Articles, bylaws, and other filings so no one else can claim it in the meantime.
Step 2: Drafting Articles of Incorporation (Required Clauses)
If you plan to apply for 501(c)(3) status, your Articles must also satisfy IRS requirements. Many founders make the mistake of using a generic business template. This can create serious problems for your 501(c)(3) application and may force you to amend your Articles later.
At a minimum, the IRS looks for two key clauses in your Articles for 501(c)(3) recognition:
1. Purpose clause
You must clearly limit your organization’s purposes to one or more exempt purposes in section 501(c)(3) (such as charitable, religious, educational, or scientific).
Sample Purpose Clause (for illustration only):
“The corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.”
2. Dissolution clause
You must also state what happens to the nonprofit’s assets if it dissolves. Those assets must be dedicated to another 501(c)(3) or to a governmental entity for a public purpose – not to founders, directors, or private individuals.
Sample Dissolution Clause (for illustration only):
“Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code… or shall be distributed to the federal government, or to a state or local government, for a public purpose.”
If these clauses are missing or incomplete, the IRS may require you to amend your Articles before granting tax-exempt status.
For a broader look at the formation paperwork beyond Articles, see our guide on Key Legal Documents You Need to Set Up a Nonprofit.
Legal Note: These sample clauses are only examples. Your exact language should be tailored to your state and your organization’s purpose with guidance from a qualified attorney.
Step 3: Creating IRS-Compliant Bylaws
Your Articles create the legal entity, but your bylaws explain how it is governed and help show the IRS that your nonprofit operates for the public good. Whether you file the full Form 1023 or qualify for Form 1023-EZ, you still need adopted bylaws that cover basics like board structure and terms, voting and quorum rules, officer duties, and how board meetings are called.
For a closer look at how Articles and bylaws work together, see our article Bylaws and Articles of Incorporation – Key Documents for Forming a 501(c)(3).
Step 4: Conflict-of-Interest Policy
The IRS wants to see that your nonprofit’s assets do not unfairly benefit insiders, so it expects you to adopt a written Conflict of Interest Policy. On Form 1023, you must indicate whether you have this policy in place, and answering “No” can trigger follow-up questions and closer review.
A strong Conflict of Interest Policy usually covers:
- Duty to disclose: Board members and officers must disclose financial or personal interests in any transaction involving the nonprofit.
- Recusal: The interested person leaves the room during discussion and does not vote on the matter.
- Review and approval: Disinterested board members determine whether the transaction is fair and in the best interest of the organization.
Putting this policy in place early helps protect your board, your reputation, and your 501(c)(3) status.
Step 5: Form 1023 or 1023-EZ Filing Considerations
Applying for 501(c)(3) status is one of the most important nonprofit compliance steps you will take. You will file either Form 1023 (standard application) or Form 1023-EZ (streamlined application, when eligible).
Comparison: Form 1023-EZ vs. Standard Form 1023
| Feature | Form 1023-EZ (Streamlined) | Form 1023 (Standard) |
|---|---|---|
| Who is it for? | Smaller organizations | Larger or more complex organizations |
| Gross Receipts Limit | Must project < $50,000/year for next 3 years | No limit |
| Total Assets Limit | Must have < $250,000 | No limit |
| Ineligible Types | Churches, schools, hospitals cannot use this form | Any 501(c)(3) organization |
| Application Requirements | Shorter online attestation | Narrative descriptions, 3-year financials, copies of Articles & Bylaws |
The IRS closely compares your narrative description of activities with your financial projections. If they do not match, your application can be delayed or questioned.For common reasons applications are denied or delayed, see our article 7 Reasons 501(c)(3) Applications Get Rejected by the IRS.
Step 6: State-Level Registrations
Receiving your 501(c)(3) determination letter from the IRS is a major milestone, but it is not the final compliance step.
- Charitable solicitation registration: Many states require you to register with the state charity official (often the Attorney General or Secretary of State) before asking the public for donations, and fundraising in multiple states (including online) may mean registering in each of those states.
- State tax exemptions: Federal tax-exempt status does not automatically cover state corporate income or sales tax, so you may need to file additional state applications to receive those exemptions.
Keeping up with both IRS rules and state requirements is essential to staying compliant long term.
The Startup Compliance Checklist
Common Founder Mistakes
Even well-intentioned founders can run into trouble if they overlook key legal requirements for starting a nonprofit. Common pitfalls include:
- Founder control issues:
Treating the nonprofit as personal property. A nonprofit is not owned by the founder; it is organized for the public’s benefit and governed by a Board of Directors. - Family-only boards:
Filling the entire board with relatives. This raises conflict-of-interest concerns and may draw extra scrutiny from regulators and donors. - Commingling funds:
Mixing personal and nonprofit finances instead of opening a dedicated bank account right away. - Ignoring annual filings:
Failing to file Form 990, 990-EZ, or 990-N for three consecutive years will cause the IRS to automatically revoke your tax-exempt status.
Avoiding these mistakes early can save your organization time, money, and credibility.
When to Hire a Nonprofit Attorney
Can you start a nonprofit on your own? Technically, yes. But DIY filings often contain small errors, especially in Articles, bylaws, or Form 1023, that can be expensive to fix later.
Consider hiring a nonprofit attorney if:
- You want Articles and bylaws tailored to your mission instead of generic templates
- You are unsure whether you qualify for Form 1023-EZ or should file the long Form 1023
- You want a clear roadmap for nonprofit compliance steps from formation through first-year operations
- You want to minimize the risk of IRS delays or rejection
Chisholm Law Firm works with founders nationwide on nonprofit formation. Our clients’ 501(c)(3) applications have received IRS approval 100% of the time since 2010. (Disclaimer: Past results do not guarantee future outcomes.)
We focus on creating a strong legal structure, from Articles and bylaws to your IRS filing, so you can focus on serving your community.
Ready to Start Your Nonprofit the Right Way?
Legal paperwork should not stand between you and your mission. Chisholm Law Firm can:
- Form your nonprofit corporation
- Draft IRS-ready Articles of Incorporation and bylaws
- Prepare and file your Form 1023 or 1023-EZ
- Help you navigate state registrations and ongoing compliance
FAQs
What legal documents do nonprofits need?
At a minimum, you typically need Articles of Incorporation (filed with the state), bylaws (internal governance rules), a Conflict of Interest Policy, an EIN (Employer Identification Number), and minutes from your first board meeting. To receive 501(c)(3) status, you also need to file Form 1023 or Form 1023-EZ with the IRS and keep up with required state registrations.
Do bylaws need to be submitted to the IRS?
Yes. If you file the full Form 1023, you must attach a copy of your adopted bylaws. If you file Form 1023-EZ, you do not upload them, but you attest that they exist and the IRS can request them at any time.
What is required in Articles of Incorporation?
Your Articles must include your nonprofit’s legal name, registered agent, and principal address, along with the incorporator’s information. For 501(c)(3) status, they should also include a compliant purpose clause limiting the organization to IRS-recognized exempt purposes and a dissolution clause dedicating assets to charity or government if the nonprofit closes.
Can I start a nonprofit without an attorney?
It is possible to file on your own, but the process is detailed. Errors in your purpose clause, financial projections, or governance documents can lead to delays, follow-up questions, or even denial of your application. Working with an attorney can help you avoid these issues and start on a stronger footing.
What is the difference between state and IRS requirements?
State agencies handle creation of the entity (incorporation) and regulate charitable solicitation. The IRS decides whether your organization qualifies for federal tax-exempt status under section 501(c)(3). To operate properly and accept tax-deductible donations, you must comply with both state and IRS requirements.