Legal Steps You Can’t Afford to Skip When Starting a Nonprofit

Starting a nonprofit often begins with a mission and a desire to serve. What many founders underestimate is how many legal steps sit between an idea and a compliant organization that can fundraise, apply for grants, and operate long term.

Skipping or rushing legal setup can lead to delays, rejected filings, loss of tax-exempt status, or ongoing compliance problems. This guide walks through the core legal steps involved in starting a nonprofit, from state formation through federal filings and ongoing obligations.

Step 1: Meet State Formation Requirements

Most nonprofits begin by forming a nonprofit corporation at the state level. This step creates a legal entity separate from the individuals involved.

State formation generally includes:

• Choosing a compliant nonprofit name
  
• Filing Articles of Incorporation with required nonprofit language
  
• Appointing a registered agent
  
• Naming an initial board of directors

State rules vary. Some states have additional requirements, such as publication notices or specific wording tied to charitable purposes. Formation documents are often reviewed later by the IRS, so alignment between state filings and federal expectations matters.

Step 2: Obtain a Federal Employer Identification Number (EIN)

After incorporation, nonprofits typically apply for an Employer Identification Number (EIN) from the IRS.

An EIN is used to:

• open a bank account
  
• file federal tax forms
  
• submit a 501(c)(3) or other exemption application
  
• hire employees or pay contractors
  

Even if the organization does not plan to hire staff immediately, an EIN is required for most formal nonprofit activities.

Step 3: Draft Bylaws and Organizational Policies

Bylaws act as the nonprofit’s internal operating rules. While bylaws are not usually filed with the state, they are often requested by banks, funders, and the IRS.

Bylaws typically address:

• board structure and voting rules
  
• officer roles
  
• meeting procedures
  
• conflict management
  
• how decisions are approved
  

Many organizations also adopt initial policies at this stage, including recordkeeping and governance-related procedures. These documents help demonstrate that the nonprofit is structured and operated separately from its founders.

Step 4: Adopt a Conflict of Interest Policy

The IRS expects many nonprofits—especially those applying under 501(c)(3)—to adopt a conflict of interest policy. This policy outlines how the organization:

• Identifies conflicts
• Discloses financial interests
• Manages transactions involving insiders

A conflict of interest policy does not prevent board members from having outside businesses or relationships. Instead, it documents how the organization handles those situations transparently.

Step 5: Prepare and File IRS Form 1023 (or Applicable Exemption Filing)

Organizations seeking federal tax-exempt status must apply to the IRS under the appropriate classification. For charitable organizations, this often involves Form 1023 or Form 1023-EZ, depending on eligibility.

The IRS application typically reviews:

• the organization’s purpose and planned activities
  
• formation documents and bylaws
  
• financial projections
  
• board structure and compensation
  
• conflict of interest policies
  

Errors or inconsistencies between state filings, bylaws, and the IRS application are a common source of delays and follow-up questions.

Chisholm Law Firm works with organizations across nonprofit classifications and has reported a high approval rate for IRS exemption filings, though outcomes always depend on the organization’s facts and the accuracy of submitted materials.

Step 6: Register for State and Local Fundraising Requirements

Many states regulate charitable solicitation. If a nonprofit plans to raise funds from residents of a state—through events, online donations, or campaigns—it may need to register before soliciting.

Fundraising compliance may include:

• initial registration filings
  
• annual renewals
  
• financial disclosures
  
• bonding or fee requirements
  

Online fundraising can trigger registration obligations in multiple states, even for small organizations. This step is often overlooked during formation.

Step 7: Open a Nonprofit Bank Account

Once incorporation and EIN steps are complete, nonprofits typically open a bank account in the organization’s name.

Banks commonly request:

• Articles of Incorporation
  
• EIN confirmation
  
• bylaws
  
• board resolutions authorizing the account
  

Keeping nonprofit funds separate from personal accounts is a key compliance practice and helps demonstrate proper governance.

Step 8: Understand Annual and Ongoing Compliance Requirements

Legal setup does not end once tax-exempt status is approved. Most nonprofits have ongoing obligations at both the federal and state levels.

Common annual requirements include:

• filing Form 990, 990-EZ, or 990-N with the IRS
  
• renewing state charitable registrations
  
• submitting annual reports to the state
  
• maintaining accurate corporate records
  

Failure to meet filing deadlines can lead to penalties or loss of tax-exempt status.

Nonprofit Formation Legal Checklist

Each step builds on the one before it, which is why skipping early steps can complicate later filings.

How Long Does Nonprofit Legal Setup Take?

Timelines vary based on:

• State processing times
  
• IRS review timelines
  
• Complexity of activities and funding plans
  

State incorporation may take days or weeks. IRS exemption review can take longer, depending on filing type and whether additional information is requested.

Planning for these timelines can help founders set realistic expectations for fundraising and program launch.

FAQs

Ready to Start Your Nonprofit the Right Way?

Navigating the legal maze of nonprofit formation can be overwhelming. Chisholm Law Firm has a 100% success rate in helping our clients obtain IRS 501(c)(3) approval. We handle the paperwork, filings, and legal details so you can focus on your mission with confidence.