Basic Steps and Sequences of Nonprofit Formation

1. Establish the purpose and mission of the organization

A nonprofit organization’s purpose is not to make a profit and must include a statement to the effect that the earnings of the nonprofit are expressly dedicated and exclusively devoted to the support of the benevolent purpose or goals as stated in the Articles of Incorporation. It is advisable that the statement describing the specific nature of the organization's activities and goals should be preceded by a pro forma statement indicating that this purpose and these activities fall within the provision of the IRS Code, Section 501 (c) (3).

2. Private Operating Foundation or Public Charity?

Public Charity: an organization that normally receives a substantial portion of its total income directly or indirectly from the general public or from the government (1/3 or more of total support from government. and/or general public). Private Operating Foundation: Lacks broad general public support of the public charity yet it devotes most of its earnings and assets directly to its tax-exempt purposes.

3. Establish your Board of Directors

According to Alabama law, there must be a minimum of three people on a nonprofit organization Board of Directors. In many cases, the original incorporators named in the Articles of Incorporation make up the initial Board of Directors. Even all-volunteer organizations, those with few or no staff, are required by Alabama law to have a minimum of three board members. The board is ultimately responsible for setting the direction of the organization, ensuring that the organization has appropriate and adequate resources; and providing oversight.

4. Reserve the organization's name

Reserve the corporate name of the organization by contacting the Secretary of State.

5. File Articles of Incorporation

To file the Articles of Incorporation, call the Judge of Probate in the county in which the organization will be incorporated. Check on the required attachments and filing fee (they may vary from county to county). Usually an original and two copies are required, and there will be a fee (approximately $25) for the Probate Court. Within 10 days of filing, the Probate Office will send a copy of the Certificate of Incorporation together with the Articles, attachment and an additional fee (approximately $20) to the Secretary of State in Montgomery.

6. Apply for the Federal Employer Identification Number

Order Internal Revenue Service (I.R.S.) Application SS-4, "Applying for the Employer ID Number." This number is similar to a social security number for the organization.

7. Prepare organization bylaws

Bylaws are an organization’s rulebook. They state the organization’s purpose, how it is organized, and where authority resides. They determine how the organization is structured. They also determine who has rights to participate in programs and services. They state rights of the various stakeholders and constituencies, for example, members. They govern most of the internal affairs, they determine who has power and how that power works, they give structure to an organization, and they set the parameters for fiscal management. Bylaws outline how the Board of Directors will operate, specifying the size of the board, the selection and tenure of members, the number of board meetings, the officers and committees, the financial and legal procedures, and the purpose of the organization.

8. Conduct an initial meeting of the board of directors and prepare minutes for the meeting

Replace the nominee directors with elected directors, appoint officers, ratify Articles of Incorporation, adopt bylaws, discuss opening a bank account and indemnify directors.

9. Apply for Federal Tax-Exempt Status

Order I.R.S. forms and apply within 15 months of the date you filed your articles of incorporation. To apply for Federal Tax-exempt Status with the IRS, call (800-829-3676) and request copies of IRS publication #557 "Tax Exempt Status For Your Organization", IRS Form #1023 "Application for Tax Exempt Status", and Form #8718 - User Fee for Tax Exempt Organization Determination Letter.

* No. 557-"Tax-Exempt Status for Your Organization"

* No. 1023 (for 501(c)(3)'s)-"Application for Recognition of Exemption"

* No. 1024 (for 501(c)(4) or (6)'s)-"Application for Recognition of Exemption"

* No. 8718-"User Fee Application"

Contact the I.R.S. Forms Distribution Center at 800-829-3676 or at http://www.irs.ustreas.gov/. The application fee is $150 (if organization anticipates annual Gross receipts of less than $10,000 each year for the first 4 years) or $500 (if the organization anticipates annual gross receipts of more than $10,000 in the first year).

The I.R.S. estimates 70 hours to complete form 1023 or 1024, and 120 days for the application to be processed. Process time begins when no additional questions are requested of the applicant by the I.R.S.

If an organization has a question regarding: the application for recognition of exempt status; the advanced ruling period; completing an exempt organization tax return; or the status of the exempt organization, contact the I.R.S.'s toll free Tax-Exempt helpline at 877-829-5500.

10. State Charitable Registration

Alabama's Charity Registration Law

All 501 (c) (3) organizations that solicit contributions in or from the state of Alabama are required to register with the Office of the Attorney General. This legislation, The Alabama Charity Registration law, was passed and signed into law by Gov. Fob James in May of 1996.

The exemptions to the law requiring nonprofits to register are:

* Educational institutions and their related foundations

* Religious organizations

* Political organization

* Fraternal, social, education, alumni, health care foundation, historical and civil rights organizations

* Any charitable organization that does not intend to solicit and receive and does not actually receive contributions in excess of $25,000 during the fiscal year, provided all of its fundraising functions are carried out by volunteers

* Veterans organizations - provided all fundraising activities are carried out by volunteers

There is an initial and annual fee of $25 for registering. Make checks payable to the "Office of the Attorney General." Registration is good indefinitely, but financial reports must be filed annually, due within 90 days of the close of the organization's fiscal year. Also any information that changes from the initial information must be updated within 10 days of the change. Both the initial Charitable Registration form and the annual renewal form can be obtained from the Attorney General's Office.