In my post yesterday about The Extraordinary Give, I mentioned that each participating organization must be a 501(c)(3) organization. If you’re anything like me, you may have wondered – how did those organizations get to be a 501(c)(3)?
I’m glad you asked: here’s an overview of the typical process of starting a community benefit organization in Pennsylvania.
The first step is determining the type of entity that is best for accomplishing your goals. In Pennsylvania, most nonprofit organizations are organized as nonprofit corporations, however the changes in Pennsylvania’s Act 170 now permits limited liability companies (LLCs) and limited partnerships to have nonprofit purposes.
As an additional option, you could create a benefit corporation or benefit company, which allows the entity to be for-profit but also have a stated purpose of a general public benefit. These organizations would not qualify for tax exempt status under the Internal Revenue Code, but depending on your goals, may be a better fit for your new organization. Take note of specific requirements to the type of entity you choose – for example, in order to create a nonprofit corporation or a benefit corporation, you are required to advertise the formation of the entity in two newspapers of general circulation.
Once you’ve decided on a type of entity, the next step is to draft the appropriate organizational documents for the entity, which includes preparation of the formation documents to be filed with the Pennsylvania Department of State and the internal rules of the organization – bylaws for a nonprofit corporation, an operating agreement for an LLC or a limited partnership agreement for (you guessed it) a limited partnership. Regardless of the type of organization, you’ll also need to obtain an Employer Identification Number (EIN) from the IRS.
After formation of the entity with the Commonwealth of Pennsylvania and obtaining your EIN, assuming you have a qualifying entity, the next step is to pursue tax exempt status with the IRS. Depending on the purpose of the organization, you may qualify for a 501(c)(3) status, which applies to charitable, religious, educational or scientific organizations, or another tax exempt organization, such as a 501(c)(4) civic league or social welfare organization, a 501(c)(6) business league, or one of the other 27 types recognized by the IRS.
The application for federal tax exempt status is accomplished by filing Form 1023. This step often requires assistance from both your attorney and your accountant. Further, in order to obtain an exemption from paying sales tax, you must apply for that status from the Pennsylvania Department of Revenue using Form Rev-72. Finally, if your organization will be soliciting contributions from Pennsylvania residents, unless you qualify for an exemption, an additional registration is required from the Pennsylvania Bureau of Charitable Organizations prior to soliciting those contributions.
Have more questions about formation of community benefit organizations? Feel free to contact us.
Matt Landis is an attorney at Russell, Krafft & Gruber, LLP, in Lancaster, Pennsylvania. He received his law degree from Widener University Commonwealth School of Law and works regularly with business owners, entrepreneurs and community benefit organizations.