To start a 501(c)(3) nonprofit, form a nonprofit corporation under state law with a charitable purpose clause and a dissolution clause, seat a board, adopt bylaws and a conflict of interest policy, get an EIN, and then apply to the IRS for recognition of tax-exempt status on Form 1023, or the shorter Form 1023-EZ if you’re small enough. State registrations and annual filings follow. Expect the whole process to cost more and take far longer than forming a company, because the IRS application is a major project. No one owns a nonprofit, so if you want to raise equity or build something you can sell, a public benefit corporation or a hybrid structure is usually the better fit.
Key takeaways
- Starting a 501(c)(3) takes two filings, one with the state and one with the IRS. The IRS application often runs 50 pages or more, can take months to prepare and up to a year to come back.
- A nonprofit has no owners. Founders can be paid reasonable compensation but can’t hold equity or share in profits.
- Form 1023 costs $600 and Form 1023-EZ costs $275, both filed online. File within 27 months of formation and IRS recognition generally reaches back to the formation date.
- Start with at least three directors, most of them unrelated to each other and not paid by the organization.
- Adopt a conflict of interest policy before you apply. Form 1023 asks about it, and some states require one.
- Missing the annual Form 990 filing three years in a row automatically revokes your exemption.
How long does it take to start a 501(c)(3)?
Starting a 501(c)(3) is a two-part process. First, you form a nonprofit corporation under state law. Second, you apply to the IRS for recognition of tax-exempt status. The state filing looks a lot like forming any corporation. The IRS application is where the work is.
That application is far more involved than a typical corporate filing. A complete Form 1023 submission often runs 50 pages or more once you add a detailed narrative of every program, multi-year budgets, compensation and the relationships among your directors and officers, your fundraising plans, and your formation documents and policies. Most of that information has to come from the founder, and pulling it together takes real work. It’s not uncommon to spend a few months gathering everything the application needs.
Then you wait. The IRS reports that it issues 80% of Form 1023 determinations within about six months, but applications that draw questions from an IRS agent take longer, and in our experience a year from filing to a determination letter is common. Add it all up and a nonprofit costs more and takes much longer to set up than a company.
None of this is a reason not to do it, but go in with open eyes. Starting a 501(c)(3) isn’t simple, quick or for the faint of heart. The IRS makes you earn that tax exemption. If you file within 27 months of forming, recognition generally reaches back to your formation date, so donations received while you wait can be deductible once you’re approved. If you need to accept tax-deductible donations with more certainty in the meantime, consider a fiscal sponsor (see below).
Should I start a nonprofit or a company?
Start with the business model, not the mission. Both structures can pursue a mission. The question is who will pay for the work.
| 501(c)(3) nonprofit | Public benefit corporation | Hybrid: company plus nonprofit | |
| Owners | None | Stockholders | Stockholders own the company; no one owns the nonprofit |
| Main funding | Donations, grants, program revenue | Revenue and equity investment | Each entity funds itself from its own sources |
| Donations tax-deductible | Yes | No | Only to the nonprofit |
| Founder upside | Reasonable salary only | Equity | Equity in the company |
| Mission protection | Required by law and enforced by the state attorney general | Written into the charter; directors must balance it with profit | Depends on how the two are tied together |
| Can it be sold? | No. Assets stay dedicated to charitable purposes | Yes | The company, yes |
A nonprofit fits work that depends on donations and grants and has no business model that could pay investors back: research grants, community programs, advocacy, free services. A public benefit corporation fits a mission-driven business that sells something and may raise venture capital. See our Founder’s Guide to Public Benefit Corporations.
Hybrids pair the two, such as a company with an affiliated foundation, or a nonprofit that owns a taxable subsidiary to run a business line. They work, but the entities must deal with each other at arm’s length, keep separate books and decisions, and never let charitable money subsidize private owners. Converting a nonprofit into a company later is hard, because its assets must stay dedicated to charitable purposes. OpenAI’s 2025 restructuring, which left its nonprofit in control of a new public benefit corporation, followed about a year of talks with the California and Delaware attorneys general. Decide on the structure before you take money.
How do I form the nonprofit?
Choose the state. Unlike a venture-backed startup, a nonprofit usually incorporates in the state where it will operate, because it will have to register with that state’s charity regulator and qualify to do business there anyway. Delaware adds little for most nonprofits.
File articles (or a certificate) of incorporation with two clauses the IRS looks for: a purpose clause limiting the organization to 501(c)(3) purposes, and a dissolution clause sending any remaining assets to another 501(c)(3) or a government body if it closes. Most new nonprofits have no voting members, so the board elects its own successors, which keeps governance simple.
Then hold an organizational meeting or sign a written board consent that adopts bylaws, elects officers (usually a president, secretary and treasurer), adopts a conflict of interest policy, sets the fiscal year, opens a bank account and authorizes the IRS application. Get an EIN as soon as the corporation exists. It’s free, it’s needed for the bank account and the IRS application, and to apply online, the responsible party must be an individual with a Social Security number or ITIN (otherwise, apply by fax or mail). See How Do I Get an EIN?
If you need to raise tax-deductible money right away, consider a fiscal sponsor, an existing 501(c)(3) that accepts donations for your project under a written agreement and typically keeps a percentage as a fee. Some projects use a sponsor while their application is pending. Others stay sponsored for good.
Should we file Form 1023 or Form 1023-EZ?
You can use Form 1023-EZ only if your gross receipts were $50,000 or less in each of the past three years and are projected to stay at or below $50,000 in each of the next three, your total assets are $250,000 or less, and you pass the rest of the IRS eligibility worksheet. Churches, schools, hospitals and several other types of organizations can’t use it.
| Form 1023 | Form 1023-EZ | |
| IRS fee | $600 | $275 |
| What you submit | Detailed narrative of activities, budgets, compensation and governance | Mostly checkboxes and attestations |
| IRS processing (mid-2026) | 80% of determinations within 191 days | 80% within 22 days |
| How grantmakers see it | The standard | Some foundations and state regulators are wary, because the IRS reviews so little |
If you plan to seek foundation grants or expect to outgrow $50,000 in revenue soon, file the full Form 1023 even if you qualify for the EZ. It takes longer, but it forces you to plan your programs, budget and governance, and it gives grantmakers more comfort.
Either way, the IRS will also classify you as a public charity or a private foundation. Private foundations face stricter rules and an excise tax on investment income, so most founders want public charity status. The most common test asks whether at least one-third of your support comes from the public over a five-year period, and each donor’s gifts count only up to 2% of your total support. A new organization is generally treated as a public charity for its first five years if it reasonably expects to meet the test.
Example. Over five years, a nonprofit raises $900,000: $600,000 from its founder and $300,000 from 200 smaller donors, none of whom gives more than 2% of the total ($18,000). Only $18,000 of the founder’s gifts counts as public support, so public support is $318,000, or about 35% of the total, and the organization passes. If the founder had given $800,000 and the small donors $100,000, public support would be about 13%, well short of one-third, and the organization would have to rely on a harder facts-and-circumstances test or be classified as a private foundation. Grants from government and other public charities are counted differently, so model your own numbers with your accountant.
How big should the board be, and who should be on it?
State law sets the floor. New York requires at least three directors, while Delaware allows one. The IRS sets no minimum, but Form 1023 asks about family and business relationships among your directors and officers and about compensation, and a board controlled by one family or by paid staff invites questions. Three to seven directors, ideally an odd number, works for most new nonprofits.
Aim for a majority of directors who are neither paid by the organization nor related to anyone who is. California caps “interested persons,” meaning anyone the corporation has paid for services in the past 12 months and their close relatives, at 49% of the board. Founders often serve as both executive director and a director, which is fine, but a founder shouldn’t vote on their own pay.
Recruit people who bring expertise, fundraising reach or community ties, and who will actually show up to oversee finances and management. Put any giving or fundraising expectation in writing before someone joins. Add and remove directors exactly as your bylaws provide, and record it in the minutes, so you always know who can vote. See How Do I Build an Early-Stage Startup Board? and How Do I Take Board Meeting Minutes?
What committees and policies do we need?
Most new nonprofits need no committees. A board of three to seven can act as a whole. As you grow, a board committee can act with delegated authority, but only directors can serve on it, and state law keeps certain decisions for the full board, typically electing directors, amending the bylaws, and approving mergers or dissolution. Advisory committees can include non-directors but have no authority. Audit requirements arrive with size: California requires charities with $2 million or more in gross revenue (not counting government grants that require their own accounting) to have an independent audit, and charitable corporations of that size to have an audit committee, and New York requires independent directors to oversee the audit of charities that must file one, with added duties above $1 million in revenue.
The conflict of interest policy matters from day one. The IRS publishes a sample policy in the Form 1023 instructions, Form 1023 and the annual Form 990 both ask whether you have one, and New York requires one by statute. A good policy requires directors and officers to disclose conflicts, keeps the conflicted person out of the vote, and records how the board decided. When the board sets pay for a founder or executive, have unconflicted directors approve it based on comparable pay data and document the decision at the time. Under the federal excess benefit rules, that process shifts the burden to the IRS to show the pay was unreasonable. Form 990 also asks about whistleblower and document retention policies, so adopt those early too.
What comes after the IRS approves us?
Most states require charities to register before asking for donations, and some require a separate application for state tax exemption. Each year, file Form 990-N if your gross receipts are normally $50,000 or less, Form 990-EZ if your gross receipts are under $200,000 and total assets under $500,000, and the full Form 990 otherwise. All are due by the 15th day of the fifth month after your fiscal year ends. Give donors a written acknowledgment for any gift of $250 or more, stay out of political campaigns, and keep lobbying limited.
For related topics, see What Legal Structure Is Best for Your Startup?, C Corp vs LLC, Fiduciary Duties of Startup Founders and, if a mission-driven company is the better fit, our Benefit Corporation Startup Package.
If you’re ready to form a nonprofit, see our Non-profit Startup Package or contact us.
