This article summarizes the steps involved in starting a 501(c)(3) nonprofit organization in Minnesota.
There are two stages to consider when creating a nonprofit organization in Minnesota: first, drafting and filing the legal documents required to create a nonprofit organization, and second, applying to the IRS for 501(c)(3) status, if desired.
Stage 1: Form a Minnesota Nonprofit Organization
Articles of Incorporation
To create a Minnesota nonprofit organization, you need to file Articles of Incorporation with the Minnesota Secretary of State. Please note that if you intend to seek 501(c)(3) status with the IRS, there is specific language that you need to use in your Articles of Incorporation to comply with IRS requirements, and that language is not included in the standard form provided by the Minnesota Secretary of State. The exact required language will depend on the type of organization and its mission.
A nonprofit organization is also required to have Bylaws. Our laws are essentially the rules inside the organization and often cover issues like the election of directors, who can be a member of the organization, how officers are selected, the role of the president of the nonprofit, and other principles under which the Minnesota nonprofit will operate.
Stage 2: File Reports with the Minnesota Attorney General
In general, nonprofit organizations soliciting contributions must file an “Initial Registration / Annual Report Form” and an annual report with the Office of Minnesota Attorney General. You can find these forms here: Minnesota Nonprofit and Charity Forms. This is required by Minnesota Statutes section 309.53. However, there are exceptions for small organizations that meet the exemptions (exclusions) noted in Minnesota Statutes section 309.515.
Stage 3: Apply for 501(c)(3) Status (Optional)
Once you have formed a Minnesota nonprofit organization, the next step is to determine whether you want to apply for 501(c)(3) status. Obtaining 501(c)(3) status provides a number of benefits including being able to receive donations from other 501(c)(3) organizations and individual donors being able to receive a charitable tax deduction for their donation to your organization.
The application for seeking 501(c)(3) status is IRS form 1023. Most people who look at IRS form 1023 are overwhelmed by the daunting amount of information required. Our law firm has received many calls from people who attended who apply for 501(c)(3) status on their own and later sought the help of a Minnesota nonprofit attorney because they couldn’t figure out the application or the IRS rejected their application due to problems in the application. If you want to apply for 501(c)(3) status on your own, the IRS provides some guidance: 501(c)(3) application process.
Very small nonprofit organizations may want to consider whether it is worth obtaining 501(c)(3) status in light of the work and attorney’s fees associated with the process. For small nonprofit organizations, the cost to form a nonprofit organization and get legal guidance in completing the form to seek 501(c)(3) status is often $1,500 to 3,000, depending on the complexity of the organization and the time the organization’s staff are willing to spend (versus delegating the work to the attorney).
How Much Does It Cost?
The federal application fee (filing fee for IRS Form 1023) is generally under $1,000.
Attorneys’ fees can vary depending on the firm you select and the complexity of your nonprofit organization. For example, a small poverty organization would be on the low end, and a hospital would be on the high end.
My firm offers a low fixed fee to form a standard (minimal customizations) Minnesota nonprofit organization in compliance with federal tax law while remaining available to assist with preparing IRS Form 1023 at the usual hourly rates (depending on the complexity of the matter). Usually clients
- hire me for one hour to instruct them on how they can complete Form 1023 themselves,
- do most of the work on Form 1023 themselves, then
- hire me to review their nearly completed form, draft sections they could not complete, and make a few revisions.
To learn more about the costs, see How Much Does It Cost to Set Up a 501(c)(3) Nonprofit Organization?
If you are considering starting a Minnesota nonprofit organization, the first step is to talk to people who are interested in the cause. A Minnesota nonprofit organization needs at least three people to serve on the Board of Directors. The law permits you to serve on the Board of Directors and the president and director of the organization at the same time, so you will need at least two others to serve on the Board of Directors.
Although many people who were on nonprofit organizations consider it their organization, from a legal perspective, the organization is owned by the public and merely in trust to you under your control. This means you must keep your personal finances separate from the organization’s finances, you will never receive profit from the organization except a fair market value compensation for your services as a wage, and when the nonprofit ends, everything it owns (its assets) must be donated to other nonprofit organizations in accordance with the law.
What is the process of starting a 501(c)(3) nonprofit organization? That’s a question I’m answering today. I’m Aaron Hall, an attorney in Minnesota. In order to start a nonprofit organization, you first form a nonprofit corporation in the state where you reside. For example, here in Minnesota, you would file articles of incorporation and they would specifically say you are under the Nonprofit Act. Or the corporation is choosing to be governed under the Nonprofit Act. It’s a nonprofit corporation.
Once that corporation is filed, then you apply to the IRS to be recognized as a 501 organization. That gives you some advantages. First, you can accept funds from other 501(c)(3) organizations or more accurately, they can give funds to you because once money is in a 501(c)(3) organization, it can only be
used to advance the purpose of that 501(c)(3) organization.
The second and perhaps the most important advantage of being recognized as a 501(c)(3) organization is those individuals who give you donations can get a charitable deduction on their income tax return. That’s a pretty big deal. So if an individual donates $1,000 to your nonprofit organization, as long as you are recognized by the IRS as a 501(c)(3) organization, that individual can get a $1,000 tax deduction usually on their income taxes.
So what are the steps to having a nonprofit organization that is a 501(c)(3)? Step one. Form the nonprofit organization in your state. Step two. Apply to the IRS to be recognized as a 501(c)(3) organization. In my experience, that can take six to nine months to get that recognition back.
A couple of other notes, there may be other requirements. For example, in Minnesota, if you plan to solicit money, you also need to register with the Minnesota Attorney General’s office and then there may be other state and federal registration requirements. For a 501(c)(3) organization, it’s best to work with an attorney who is experienced in this area because there are a lot of pitfalls and mistakes you can make that can end up coming back with some pretty expensive legal problems down the road. I’m Aaron Hall. To learn more, visit aaronhall.com.