Creating a Tax Exempt Organization

There are many organizations in Missouri doing great things for their communities.  Some are doing things on a large scale, building community centers, retail developments, housing projects and other projects with major local impacts.  For most of these groups the decision to form a 501 © 3 tax exempt organization was fairly simple and straightforward.  They may need this exemption to handle the money they raise and apply for certain grant programs. 

For other groups the decision is not so simple.  There are several reasons that a group might decide not to seek this designation.   It may not take many resources to run a smaller program so the advantage may not be so great for some.  Organizations on a tight budget may not want to expend the funds to obtain the status.  The application will cost over $500 and again the benefit may not be worth the cost.

What is a 501 © 3?

A 501 © 3 is a type of organization that is recognized by the federal government as an organization whose purpose is educational, religious or charitable.  The general purpose of a 501 © 3 seems pretty simple and is not very complicated.  However the IRS has a rigorous process to determine if an applicant qualifies as educational, religious or charitable.  There are three primary benefits; the group can be exempt from federal taxes, can become eligible for various grant programs and can offer tax deductions to contributors. 

Some organizations will start the incorporation process and even submit the application without really considering fully if they really need to be a 501 © 3.  This decision is unique to each group and depends on; their resources, what they want to accomplish and how formal an organization they wish to be.

Groups need to know that most not for profit organizations with budgets of less than $5,000 are automatically exempt from federal income taxes already and do not need a 501© 3 status.  If all an organization needs is to be exempt from taxes than they simply need to file with the state as a not for profit. 

The tax deduction for donors is different.  Businesses and individuals contribute billions of dollars each year to not for profits and in return they get to deduct their contributions from their annual income tax.  These contributions can be the very life blood for many groups so that makes this one of the most important features of a 501 © 3.

Grant programs are often an important revenue source for non profits and these often require a 501 © 3 to be eligible for funding.  Sometimes this is a legal requirement and sometimes it is just to make the funders life easier as they are required to fund religious, charitable or educational programs and this ensures that to be the case.  However there is nothing that requires they only fund 501 © 3s.  It might be a good idea to ask the funder beforehand if they require this designation.  It is also possible to have an already established 501 © 3 be the financial applicant for your project. 

In view of all these issues groups need to carefully think through what they want to accomplish.  There is no one best way for a group and no two groups may want to be organized the same way even if they have the same goals.   It depends on what you want to accomplish and how formal you want to be.  An organizational structure should reflect the decision making styles and needs of the members.  As the membership, goals and leadership change this structure may need to change.  So it is important for group structures to be flexible.