This tool, created by our Harm Reduction Futures Fund team, is intended to help guide harm reduction groups with the decision-making process around obtaining tax-exempt 501(c)(3) status or fiscal sponsorship. In this resource, we will describe what the federal process entails to become a 501(c)(3) and provide resources to access state-level processes. This guide is not all-inclusive and is not legal advice.
Questions to Consider
On becoming a 501(c)(3):- What are your future goals, and can a fiscal sponsor support those goals? Are your goals better aligned with becoming a 501(c)(3)? Consider future organizational structure such as staffing, building considerations, grant opportunities, partnerships and fundraising plans.
- Will you need an attorney to help you through the process? Take into consideration the costs of an attorney in addition to filing fees. Talk with other organizations in your area to see if they have a recommendation for an attorney. Most attorneys specialize in specific states for non-profit status. Attorneys can help ensure your bylaws meet all federal and state laws as well as accurate filing of your paperwork, among other services.
- What is your organizational capacity? Do you have the capacity to maintain the organizational administrative work, including accounting? Are you able to file taxes yourself or would you need to hire a professional?
- What are your funding goals, including current funding and potential future funding? Keep in mind that the more funds you are currently receiving, the more challenging the application process and tax filing. It may be better to apply for 501(c)(3) exemption early if you know you are ultimately going to apply.
- If you currently have a fiscal sponsor, has your organizational budget outgrown its capacity to support you? Does it have the array of services you want or need? Would your organization benefit from more financial freedom around fundraising and grants?
- What fees are you willing and/or able to pay? Consider any administrative fees the fiscal sponsor requires and how they relate to the services they are providing. These fees can range widely from no cost up to 25% of overall funds. The most common admin fee is 10-15% of total income.
- What type of fiscal sponsorship are you looking for? What type of support and services do you need? There are a wide range of services offered by fiscal sponsors, and each has their own requirements for organizations they sponsor. Services offered can include administrative support, accounting, office space, grant writing, payroll and technical support.
- Do you want a fiscal sponsor who has a mission aligned with yours? Or do you want one who focuses on providing fiscal sponsorship? Some organizations offer fiscal sponsorship in addition to their own programs and sponsor groups that have similar missions, while other fiscal sponsors are larger organizations that exist to act as a fiscal sponsor. For more information on how to choose a fiscal sponsor check out this blog from the Nonprofit Law Blog or this memo from the Bar Association of San Francisco.
- What does fundraising look like? Can you hold events and/or collect individual donations? What does that process look like for donors? Will it be challenging for individuals to donate and receive records for tax purposes? Is there support to collect online donations?
- Are there any limits to the amounts and type of funds you can receive? Does the fiscal sponsor allow for all types of grant applications (foundation, state, federal)?
- What type of access do you have to your budget? How often is it updated?
- How do you access your funds? What are the timelines for requests and payment processes? What sort of documentation and reporting do you need to provide?
- Does your prospective fiscal sponsor require you to maintain a minimum budget? If so, can you reliably meet that threshold?
Federal Process to Apply for 501(c)(3) Tax-Exempt Status
The following steps are to guide you through the general process of federal 501(c)(3) process. Depending on your state, there are other steps that need to be taken in conjunction with the federal process. Please see the links provided at the end of this document for your State for more information. Before you start the exempt status process, review the information provided by the Internal Revenue Service.- Choose a name.
- Write a mission statement. Try to keep it open-ended to allow for growth and change while also being specific about your intentions.
- Form a board. Check with your state for the minimum number of members and required positions (chair, secretary, treasurer, etc.). This can be your first step before you form a name and mission statement if you haven’t decided on those yet.
- Appoint directors.
- You might consider including: an attorney, someone with financial/budgeting experience to act as treasurer, a physician, professionals with relevant experience, people with lived experience or those with donor connections.
- Hold a meeting and keep minutes. Be sure to file these for future records.
- Write bylaws. Check with your state regulations around 501(c)(3)s for what specifics to include. If you are considering hiring an attorney, you will want them to help with this step.
- Contact us if you need help finding an example from your state.
- This step may be completed after steps five and six but must be completed before step seven.
- File your articles of incorporation with the state.
- Articles of incorporation are a legal document filed with your state that officially registers your organization and provides specific details about structure (name, board, address, purpose and other information dependent on state requirements). You will need this to obtain your employer identification number.
- Obtain your employer identification number from the IRS.
- EINs are provided immediately and free of charge.
- File for IRS 501(c)(3) tax-exemption.
- File for state tax exemption (see links to state guidelines and resources on page XX).
- Obtain any other licenses required by state, county and city (business license, zoning permit, sales tax permit, etc.). See state links at the end of this document for more information and be sure to check relevant county and city regulations and requirements.
