How to Get a Nonprofit Designation: 501(c) Categories and Filing Steps

To get a nonprofit designation, you incorporate your organization under state law, obtain an Employer Identification Number from the IRS, and then apply to the IRS for recognition of tax-exempt status under one of the categories in 26 U.S.C. § 501(c) — most commonly Section 501(c)(3) for charities, using Form 1023 or the streamlined Form 1023-EZ. The designation itself is federal recognition that your organization qualifies for exemption from federal income tax, and the path to it depends on which 501(c) category fits what you actually plan to do.

Choose the Right 501(c) Category First

Section 501(c) of the Internal Revenue Code contains more than two dozen exemption categories, and the one you pick controls how you can raise money, whether donors get a tax deduction, and how much political and legislative activity you can undertake. A few categories cover most new organizations:

501(c)(3) covers charitable, religious, educational, and scientific organizations. It is the only major category where contributions are tax-deductible for the donor. Political campaign activity is prohibited entirely, and lobbying must stay limited.¹
501(c)(4) covers social welfare organizations. These groups may lobby and engage in some political campaign activity as long as social welfare remains their primary purpose. Donations are generally not deductible.¹
501(c)(5) covers labor and agricultural organizations such as unions and farm bureaus.
501(c)(6) covers business leagues and chambers of commerce that promote a shared industry interest. Member dues may be deductible as a business expense but not as a charitable contribution.
501(c)(7) covers social and recreational clubs funded mainly by member dues, where substantially all activity must serve the club’s recreational purpose.¹

If you want the public to donate and receive a deduction, you almost certainly need 501(c)(3). If your plan centers on lobbying or political advocacy, 501(c)(4) fits better, even though you give up donor deductibility. Choosing the wrong category at the outset means refiling with the IRS or losing donors who expected a deduction.

Public Charity or Private Foundation

Inside 501(c)(3), every organization is further classified as either a public charity or a private foundation. The IRS presumes a new 501(c)(3) is a private foundation unless the application shows otherwise, so this classification is something you address in the paperwork.

Public charities draw funding from a broad base: individual donors, grants, government sources, and events. To keep the classification, the organization has to pass a public support test that generally requires at least one-third of total support to come from public sources. Slip below that, and the IRS can reclassify the organization as a private foundation.

Private foundations are typically funded by a single family, individual, or corporate endowment, and they carry heavier regulation:

They must distribute roughly 5 percent of investment assets each year, or face an excise tax on the shortfall.²
They owe a 1.39 percent excise tax on net investment income each year, a cost public charities avoid.³
Self-dealing between the foundation and its founders, officers, major donors, or their families is heavily restricted. Even a fair-market-value transaction can trigger a 10 percent excise tax on the insider and 5 percent on any foundation manager who knowingly approved it. If the transaction isn’t corrected, the penalty on the insider rises to 200 percent of the amount involved.⁴
They must file Form 990-PF every year, with no streamlined option based on size.

Most groups forming to serve a broad community purpose aim for public charity status. Private foundation status suits a single donor or family that wants to run a grantmaking entity and accept the extra rules that come with it.

The Order of Steps

The sequence matters. The IRS is explicit that you should not apply for an EIN until your organization is legally formed under state law.⁵

Incorporate with your state. File articles of incorporation (or a trust instrument or articles of association, depending on the entity type) with the state business filing office. State incorporation fees typically run from $25 to $75, though some states charge more. The articles must contain specific language to satisfy the IRS organizational test, so get the wording right before filing.
Adopt bylaws and governance policies. The board should approve bylaws covering meetings, officer roles, and voting, along with a conflict of interest policy. The IRS asks about these on the application.
Obtain an EIN. Once the entity legally exists at the state level, apply to the IRS for a nine-digit Employer Identification Number. This is the organization’s taxpayer ID for every federal filing.
Apply for federal tax-exempt status. Submit the appropriate IRS form with the user fee.

Jumping straight to the EIN application before state incorporation is the most common early mistake. The IRS starts a clock when you get an EIN, and if the entity doesn’t yet exist, you create administrative problems that a few days of patience would have avoided.⁵

What Your Founding Documents Must Say

For 501(c)(3) status, the IRS applies an organizational test that examines your articles, not your activities. The articles must limit the organization’s purposes to exempt purposes under Section 501(c)(3) and must not empower it to engage in non-exempt activities except as an insubstantial part of its work.⁶ You can meet this either by referencing Section 501(c)(3) directly or by spelling out the exempt purposes.

The articles also need a dissolution clause. If the organization ever winds down, remaining assets must go to another 501(c)(3), to the federal government, or to a state or local government for a public purpose. If you name a specific recipient, the articles must require that recipient to hold 501(c)(3) status at the time of distribution.⁶ Without this language, founders could walk away with the assets, and the IRS won’t approve an application that leaves that possibility open.

What Your Operations Must Look Like

The operational test looks at what the organization actually does. Activities must primarily further the exempt purpose. Side revenue is allowed and common, but if commercial activity starts to dominate, the exemption comes into question.

No part of net earnings can flow to insiders — officers, directors, founders, or anyone with a personal stake.⁷ Paying staff is fine; the pay just has to be reasonable for the work.

For 501(c)(3) organizations, political campaign activity is prohibited outright. Endorsing or opposing a candidate, funding a campaign, or distributing statements for or against candidates can cost the exemption entirely.¹ Lobbying is different: some is permitted, but it cannot make up a substantial part of the organization’s activities. Groups that want more certainty about the lobbying limit can file Form 5768 to make a 501(h) election, which replaces the vague “substantial part” standard with an objective expenditure test. Churches and private foundations aren’t eligible for that election.

The Application Itself

Which form you file depends on which exemption you’re seeking and, for 501(c)(3), how large the organization is.

Form 1023 or 1023-EZ for 501(c)(3)

Form 1023-EZ is available to smaller organizations: annual gross receipts of $50,000 or less (both historically and projected) and total assets of $250,000 or less. Churches, schools, hospitals, and organizations previously revoked for reasons other than a filing failure must use the full Form 1023 regardless of size.⁸ Everyone else seeking 501(c)(3) status uses the full Form 1023.⁹

Form 1024 for Other 501(c) Categories

Organizations seeking exemption under sections other than 501(c)(3) — such as 501(c)(4) social welfare groups or 501(c)(6) business leagues — file Form 1024 instead.¹⁰

What You’ll Have to Provide

The full Form 1023 is a substantial document. Expect to include:

A narrative describing every program the organization runs or plans to run, including where activities take place and who does the work.
Financial data. New organizations submit three-year revenue and expense projections; established organizations submit actual financial records covering their operating history.
Compensation details for officers, directors, and highly compensated employees. The private inurement analysis starts here.
Governance policies, including a conflict of interest policy with disclosure, recusal, and annual compliance provisions.
Fundraising methods, and disclosure of any professional fundraisers used.

Fees and Timing

All forms are submitted electronically through Pay.gov, with a non-refundable user fee due at submission.⁹ The IRS sets fee amounts annually by revenue procedure. In recent years the fee has been $275 for Form 1023-EZ and $600 for Form 1023. Confirm the current amount on the IRS user fees page before you file.¹¹

The IRS reports that about 80 percent of Form 1023 determinations are issued within 191 days.¹² Complicated applications, especially those involving unusual activities, foreign operations, or large financial arrangements, take longer. The IRS may mail follow-up questions, and slow responses stretch the review further. A successful review produces a determination letter, which is the organization’s official proof of tax-exempt status.

Keeping the Designation

Getting the letter is not the finish line. Most tax-exempt organizations must file an annual information return, and which version depends on size:¹³

Form 990-N (the e-Postcard) for organizations with gross receipts normally $50,000 or less.¹⁴
Form 990-EZ for organizations with gross receipts under $200,000 and total assets under $500,000.
The full Form 990 when gross receipts reach $200,000 or total assets reach $500,000.

Returns are due by the 15th day of the 5th month after the fiscal year ends — May 15 for a calendar-year organization.¹⁴ Churches and certain small religious or charitable organizations with gross receipts normally $5,000 or less are exempt from filing.¹⁵

Missing three consecutive years of required returns triggers automatic revocation. The exemption is gone as of the due date of the third unfiled return, and the organization’s name goes onto a public IRS list of revoked entities.¹⁶ Getting reinstated requires a new application, a new user fee, and, in most cases, meeting one of the paths set out in Revenue Procedure 2014-11.¹⁷

Register With Your State Before You Fundraise

Federal recognition doesn’t cover state obligations, and the state piece surprises many new nonprofits. Approximately 40 states require nonprofits to register before soliciting donations from residents, and most require annual renewal filings. The registration requirement applies whether or not the organization has a physical presence in the state; mail, online, and phone solicitation aimed at a state’s residents can trigger it. Exemptions exist in many states for churches, educational institutions, and organizations that solicit only their own members, but the specifics vary.

Some states also impose their own annual reporting requirement on nonprofits, sometimes with a separate state-level information return in addition to Form 990. If you plan to fundraise in more than one state, review each state’s rules before you solicit, because failing to register can bring penalties, cease-and-desist orders, and lasting damage to the organization’s ability to raise money.

1
Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
2
Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
3
Office of the Law Revision Counsel. 26 USC 4940 – Excise Tax Based on Investment Income
4
Office of the Law Revision Counsel. 26 U.S. Code 4941 – Taxes on Self-Dealing
5
Internal Revenue Service. Obtaining an Employer Identification Number for an Exempt Organization
6
Internal Revenue Service. Organizational Test – Internal Revenue Code Section 501(c)(3)
7
Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations
8
Internal Revenue Service. Instructions for Form 1023-EZ
9
Internal Revenue Service. About Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
10
Internal Revenue Service. About Form 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code
11
Internal Revenue Service. User Fees for Tax Exempt and Government Entities Division
12
Internal Revenue Service. Where’s My Application for Tax-Exempt Status?
13
Internal Revenue Service. Form 990 Series – Which Forms Do Exempt Organizations File
14
Internal Revenue Service. Annual Form 990 Filing Requirements for Tax-Exempt Organizations
15
Office of the Law Revision Counsel. 26 USC 6033 – Returns by Exempt Organizations
16
Internal Revenue Service. Annual Filing and Forms
17
Internal Revenue Service. Automatic Revocation – How to Have Your Tax-Exempt Status Reinstated