Legacy Law Blog

If you’re thinking about starting a nonprofit, one of your first major milestones is obtaining 501(c)(3) status from the Internal Revenue Service (IRS).

This allows donors to claim tax-deductible contributions and lets your organization avoid federal income tax on its exempt activities. This guide will help you understand what’s involved so you can decide when to do it yourself and when to bring in a professional.

What 501(c)(3) Status Really Means

A 501(c)(3) organization is a nonprofit organized and operated exclusively for exempt purposes under federal law. The most common purposes for a 501(c)(3) include charitable, religious, educational or scientific activities. A 501(c)(3) cannot be run for private profit and has strict limits on lobbying and political activity.

The key benefits of 501(c)(3) status include:

• Exemption from federal income tax on related activities
• Tax-deductible contributions for donors
• Eligibility for grants and institutional funding (many funders require 501(c)(3) status)
• A credible, separate platform for philanthropy (especially valuable for businesses creating a charitable arm)

Choosing Between Form 1023 & Form 1023‑EZ

To be recognized as a 501(c)(3), you must file an application with the IRS using one of the Form 1023 series: the standard Form 1023 or the streamlined Form 1023‑EZ. Both are filed electronically through Pay.gov, but they are used by very different applicants.

Form 1023 is the full application. It asks for detailed descriptions of your activities, governance and financial history or projections. It is often the better fit for nonprofits with complex structures, larger budgets or significant fee‑for‑service activities.

Form 1023‑EZ is an abbreviated, online-only application for smaller, simpler organizations meeting specific eligibility criteria. While the form is short, you’re attesting to a long list of assumptions about your structure. It’s easy to underestimate how much legal content sits behind these questions.

Choosing between the two is not just a paperwork decision. Filing the wrong form can lead to delays or adverse determinations. The decision regarding which form is appropriate is one of the first points where talking to a tax professional can be helpful.

State Formation & Governance

Before filing with the IRS, you’ll need to create a legal entity at the state level. This typically takes the form of a registered nonprofit corporation at the state.

To create the legal entity, you will need to choose a name and file articles of incorporation with your state. Keep in mind that recognition of the entity as nonprofit at the state is not binding at the IRS. Founders should not assume that recognition of the entity as a nonprofit by the state will mean that the IRS will reach the same conclusion.

The articles of incorporation must contain specific IRS-required language restricting the activities of the new entity to 501(c)(3) charitable purposes. The articles must also dedicate assets to another exempt organization if the entity dissolves.

You’ll also need to establish your governance structure:

• Board of Directors – The IRS pays close attention to board composition, especially when family members or business partners are involved.
• Bylaws – Describe how the board functions, how decisions are made and how officers are elected.
• Conflict-of-Interest Policy – Expected by the IRS and ties into concerns about private benefit and insider transactions.
• EIN (Employer Identification Number) – Your organization’s tax ID, needed for the exemption application, bank accounts and virtually every financial interaction.

This early governance work sometimes feels abstract, but sloppy or incomplete documents can lead to frustrating delays at the IRS and the need to submit additional documents or information later.

Telling Your Story: Programs, Activities & Finances

When you file the exemption application, especially Form 1023, you shift from building the entity to explaining it. The IRS wants to understand what you do, who you serve and how your activities advance your exempt purposes.

You’ll describe your programs in plain language explaining how they work and who benefits. The IRS will determine whether your core activities are genuinely charitable or educational, rather than commercial for-profit activity dressed up with charitable language.

The financial portion of the application supports this story. The IRS reviews your budget projections or historical data to evaluate your funding model and spot potential issues, such as:

• Heavy reliance on transactions with insiders
• Unusually high compensation relative to organization size
• Significant unrelated business income

For founders who also own related for‑profit businesses, the IRS will look closely at how the nonprofit and for-profit business interact. Shared space, staff, service contracts and other arrangements can be legitimate but need careful structuring to avoid private benefit concerns.

Submitting Your Application Through Pay.gov

The IRS requires Form 1023 and Form 1023‑EZ to be filed electronically through Pay.gov. You’ll upload your articles of incorporation, bylaws, financial statements or projections, and any additional explanations of the entity’s charitable activities. An application fee must be paid when the application is submitted.

After submission, the IRS may approve the application or request additional information. How well your application anticipates the IRS’ questions often determines whether this stage is quick or drawn out.

How Long the Process Takes

Straightforward applications sometimes move through in a few months. More complicated applications, especially those involving unusual activities or significant related‑party transactions, can take considerably longer.

Plan for the process to take months, not weeks, when you budget time to form the entity, draft documents and prepare your 501(C)(3) application in addition to IRS review time.

Life After Approval: Keeping Your Status

When the IRS approves your application, it issues a determination letter confirming your 501(c)(3) status. It is important to retain this letter for future use. You’ll use it constantly with donors, grant makers, banks and for other purposes.

Approval isn’t the end of your IRS interaction. Most 501(c)(3)s must file an annual return (Form 990, 990‑EZ, or 990-N). Missing filings for multiple years can result in automatic revocation. Many states also require periodic corporate filings and charitable solicitation registrations.

Creating a compliance calendar from the start is one of the simplest ways to protect 501(c)(3) status.

When Professional Help Makes Sense

Many founders start by downloading forms and reading IRS instructions, and some successfully navigate the process on their own. But the exemption application is a legal and tax document, not just a questionnaire. It is very easy to underestimate what is required to obtain tax-exempt status with the IRS and then what must be done to maintain the status.

An experienced advisor can help you choose the right form, design your structure with IRS expectations in mind, prepare compelling narratives and financials, handle the filing and follow-up, and set up practical compliance systems for the long term.

Final Thoughts

Establishing a 501(c)(3) is about more than filling out a form – it’s about aligning your mission, governance and operations with the Internal Revenue Code. With some planning and the right support, the process is manageable and the application process can be completed quickly and efficiently.

Ready to get started? Schedule a strategy consultation to clarify whether 501(c)(3) is the right vehicle for you, how to structure things properly, and what timeline and costs to expect.