How to Start a 501(c)(3): The Nonprofit’s Guide (2025)

Wondering what a 501(c)(3) is and how to get that tax-exempt status to fuel your nonprofit? 

You need the right information and steps to file for a 501(c)(3) to ensure you get the crucial funding, tax perks, and credibility you need to grow. A 501(c)(3) is the most common type of nonprofit, and we'll help you start on the right foot to grow and scale.

Don't risk getting lost in the process. Let's dive into what a 501(c)(3) is, why it's a game-changer, and how to apply it so you can hit the ground running!

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Table of Contents

• What is 501(c)(3)?

• Nonprofit vs Tax-Exempt Organizations

• Types of 501(c)(3) Tax-Exempt Organizations

• Requirements of a 501(c)(3) Organization

• How to Apply for 501(c)(3) Status

• FAQs on 501(c)(3) Organizations

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What is 501(c)(3)?

Section 501(c)(3) is a specific tax category for a nonprofit corporation under the Internal Revenue Code (IRC), allowing tax exemptions for nonprofits. The IRC is the tax law issued by the United States Treasury through the IRS.

The IRS recognizes over 30 types of nonprofits, but only those with 501(c)(3) status can claim tax-deductible donations. 

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Organizations with 501(c)(3) status receive donations and nonprofit grants from the US federal government. As tax-exempt entities, they can apply for:

• Government and corporate funding

• Individual donations

• Foundation grants

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501(c)(3) organizations rely on private contributions, grants, and fundraising efforts to cover operational costs, such as administrative and program expenses. While they may charge fees for certain services or events, most revenue comes from donations and grants rather than earned income.

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They operate with a purpose recognized by the IRS for federal tax exemption, which includes:

• Charitable

• Religious

• Educational

• Scientific

• Human and civil rights

• Literary

• Social welfare organizations

• Testing for public safety

• Fostering national or international amateur sports competitions

• Preventing cruelty to children or animals

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What 501(c)(3) Organizations Can and Can’t Do (Rules + Restrictions)

501(c)(3) organizations, also known as charitable organizations, enjoy tax-exempt status granted by the IRS. However, this status comes with specific rules and restrictions that govern their activities. 

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What They Can Do:

• 1. Purpose Restrictions: Focus on charitable, educational, religious, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
  

• 2. Tax Exemption: Exemption from federal income tax on qualifying activities and donations.
  

• 3. Receive Tax-Deductible Contributions: Donors can deduct contributions made to 501(c)(3) organizations on their federal income tax returns.
  

• 4. Engage in Lobbying (within Limits): Allowed to engage in lobbying activities, but these activities must not constitute a substantial part of their overall activities.
  

• 5. Operate Related Businesses (with Limitations): Can operate unrelated businesses, but income generated from such activities may be subject to unrelated business income tax (UBIT).
  

• 6. Political Activity (Limited): Can engage in non-partisan educational activities related to public policy, but must refrain from endorsing or opposing political candidates.
  
  

What They Can’t Do:

• 1. Private Benefit: Cannot provide private benefits to individuals or groups that are not furthering their exempt purposes. Activities must primarily benefit the public or an appropriate charitable class.
  

• 2. Substantial Legislative or Political Activities: Cannot devote a substantial part of their activities to lobbying or political campaign activities.
  

• 3. Operate for Commercial Purposes: Cannot operate primarily for profit-making purposes.
  

• 4. Inurement of Net Earnings: Net earnings cannot benefit private shareholders or individuals.
  

• 5. Excessive Compensation: Cannot provide excessive compensation or private benefits to officers, directors, or insiders.
  

• 6. Activities Contrary to Public Policy: Activities must not violate public policy or engage in illegal or unethical practices.

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Nonprofit vs Organization With Tax Exempt Status

Tax-exempt organizations and nonprofits are often used interchangeably, but not all have tax-exemptions.  

Even with a tax exempt status, a nonprofit has to pay taxes. Organizations with federal tax-exempt status don't have to pay federal corporate income tax on any revenue arising from their purpose-related activities.

The organization must pay federal corporate income tax on an organization's net earnings from business activities other than tax-exempt purposes, termed unrelated business income tax (UBIT). The tax rate for unrelated business income is currently 21%.

Revenue from advertising is the most common form of UBIT. A tax-exempt organization is restricted in how much it can earn without compromising its exempt status.

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What is a 501(c)3 vs 501(c)4?

A 501(c)(3) and 501(c)(4) both qualify for tax exemption. Both tax-exempt organizations under the U.S. IRC, but they have some key differences:

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501(c)(3) organizations with tax exemption:

• Charitable purposes: Charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports, or preventing cruelty to children or animals.

• Tax deductibility: Donations are tax-deductible for donors.

• Political activity: Limited. Cannot engage in substantial lobbying or any political campaign activities.

• Disclosure: Must disclose donors of $5,000 or more to the IRS (though this information is not public).

• Examples: Libraries, religious organizations, etc.

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501(c)(4) organizations with tax exemption:

• Purpose: Social welfare or local associations of employees.

• Tax deductibility: Donations are generally not tax-deductible for donors.

• Political activity: They can engage in unlimited lobbying related to their mission and some political activities, as long as it's not their primary purpose.

• Disclosure: Donor information is not required to be disclosed to the IRS.

• Examples: social welfare groups and organizations, human and civil rights organizations/ organizations that ensure civil rights are secured, etc.

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Types of 501(c)(3) Charitable Organizations

1. Public Charity

Public charities are the primary type of 501(c)(3) organizations with tax exemption. These nonprofits have active programs and receive much of their funds from the government or the public.

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Examples include:

• Educational organizations

• Animal welfare agencies

• Medical research organizations

• Food banks

• Relief organizations

• Environmental organizations

• Human rights organizations

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According to federal law, to qualify as a public charity under 501(c)(3), nonprofit organizations must receive at least a third of their total support from the general public, including individuals, corporations, and other public charities. They center more around general welfare and public interest than to serve a private shareholder.

Individual donors can receive a tax deduction on donations covering up to 60% of their income, while tax deductions for corporations are usually limited to 25%.

The board of directors of public charities must comprise individuals unrelated by blood, marriage, or other business connections. 

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2. Private Foundation

A private foundation is referred to as a non-operating foundation, as they usually do not have any active programs. These organizations often support the programs of public charities for federal income tax purposes through grants. Donations to these nonprofits can be tax-deductible to individual donors up to 30% of their adjusted gross income. 

Private foundations must spend a certain amount of money or property for charity annually. Otherwise, they may see a 30% excise tax under section 4942 on all undistributed income.

The governance of a private foundation is also distinct from that of public charities and is more closely knit. For example, a family foundation is a private foundation run and managed by one family.

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Private Operating Foundations (POFs)

Private operating foundations have active programs like public charities with attributes similar to those of private foundations. 

The Internal Revenue Service defines a private operating foundation as: “any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities.”

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POFs must also meet one of the following tests:

• Assets test

• Endowment test

• Support test

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Unlike private foundations, private operating foundations are not liable to pay a 30% excise tax on failing to distribute income. Given that the institute does not manage them, they can also receive qualifying distributions from a private foundation.

This charitable organization has a close governance like private foundations and is usually considered hybrid. Tax deductibility on individual donations to these nonprofits is limited to 50% of an individual donor's adjusted gross income. 

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3. Churches and Religious Organizations

Organizations such as churches, religious schools, and other organizations are eligible to apply for 501(c)(3) tax-exempt status.

Churches and religious organizations do not require formal recognition or must file annual tax returns while submitting a 501(c)(3) application.

Church groups do not need to formalize their 501(c)(3) designations but must fulfill the exact requirements of other charitable organizations.

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Looking to learn more about different types of organizations? Check out our guides:

• 501(c)(6)

• 501(c)(5)

• 501(c)(7)

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Requirements of a 501(c)(3) Nonprofit Organizations

Apart from the purpose approved by the Internal Revenue Service, a charitable organization must fulfill other requirements to be credited as a 501(c)(3).

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A charitable organization must not serve any private interests to acquire tax exemption under section 501(c)(3). This includes the interests of:

• Founders

• Family of founders

• Shareholders

• Designated nonprofit members

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No amount from a nonprofit's revenue can benefit private shareholders. The money is solely for the charitable cause. 

A 501(c)(3) charity cannot influence legislation or participate in campaign activities that may support or oppose political candidates. Nonprofit organizations must pay their employees a reasonable salary based on fair market value (FMV). 

The 501(c)(3) status is valid till a nonprofit exists, given that it remains true to its purpose. A nonprofit must notify the Internal Revenue Service of any changes in its operations and mission.

Nonprofit organizations are exempt from federal corporate income taxes but must withhold the tax from their employees' salaries. They must also pay Social Security and Medicare taxes.

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Status/From Idea to IRS: The Complete 501(c)(3) Startup Timeline

1. Choose a Purpose for Your Nonprofit

Timeline: Week 1–2

Your nonprofit must pursue one of the purposes dictated by the federal tax laws. Ensure that the nonprofit is designed to benefit the public. 

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Ask questions like:

• Who will benefit from your nonprofit organization offerings?

• What is your nonprofit organization mission? Write down a mission statement to set clear goals. 

• Where will you accomplish your nonprofit organization goals? What is the scope of your initiatives? Is it a local, state, or regional project? Will it create an impact internationally?

• How will you accomplish your goals? What will be your fundraising plan?

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2. Form a Corporation

Timeline: Week 2–4

Corporations are established at the state level; find out about the regulations of the state in which your organization will be based. 

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The general steps will include:

• Naming the corporation: Select a unique name that reflects your nonprofit organization's mission. Check with the Secretary of State to see if it's available. Head to the US Department of Commerce website to ensure it's not trademarked. 

• Appointing a board of directors, ensuring:some text
  
  • One-third of the board members should be capable of fundraising on your behalf. 
  • One-third of the board members are finance, marketing, or legal experts.
  • One-third of the board members are connected with the community. They must have experience and expertise in your services to the community.

• Filing the articles of incorporation: Incorporate in the state you are planning to conduct your charitable activities. Filing fees may vary from state to state.

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Holding a board meeting to organize the documents and bylaws: The bylaws will include internal operational regulations of your organization regarding:

• Organizational structure

• Meeting procedures

• Elections

• Voting rights

• Other organizational policies

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3.  File for 501(c)(3) Federal Income Tax-Exemption with the IRS

Timeline: Week 5–8

After meeting state requirements for corporation establishment, apply for the 501(c)(3) tax exempt status.

• Apply for the federal employer identification number (EIN)

• Fill in and deposit Internal Revenue Service Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” of the IRC, and wait for the determination letter.

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Here are a few quick tips for applying for your 501(c)(3) EIN:

• You can apply for your EIN right after forming your nonprofit—there is no need to wait for 501(c)(3) approval! Get this done early to keep things moving.

• Skip the hassle and apply directly through the IRS website. It's quick and free, and you'll get your EIN instantly.

• Prepare your nonprofit's name, mailing address, and mission. You'll also need a “responsible party” (usually the founder or board member) to sign off.

• Be specific when describing your nonprofit's mission. The IRS wants to know precisely how your organization fits the charitable scope.

• Applying for an EIN is free, so avoid any service that tries to charge you for the process. It's one of the easiest things to do!

• While the EIN form is simple, having your foundational details (like bylaws and board members) in place will make it even smoother.

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Once you have your EIN, you're ready with applications and bank accounts and getting closer to your nonprofit's official journey.

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4. Meet All State and Local Requirements

Timeline: Week 8–10 (and ongoing)

After a federal tax exemption, you must be tax-exempt at the state and local levels. It will help you avoid paying state corporate income tax or property tax.

You will also need some other permits and licenses to operate. Be sure to take a close look at building codes and other rules that might apply locally. 

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Examples of state and local requirements:

• State registration: Some states require you to register your nonprofit with the state Attorney General or a similar office when you start.

• Charitable solicitation registration: If you're asking for donations, many states need you to register before you start fundraising.

• Sales tax exemption: If you're eligible, you'll need to apply to the state for sales tax exemptions on your purchases.

• Local business licenses: Your nonprofit may need a local business license to operate legally, depending on where you're located.

• Property tax exemption: Certain states and localities offer property tax exemptions for nonprofits, but you'll have to apply to get them.

• Employee-related taxes: If you hire staff, you'll need to comply with local payroll tax regulations, including unemployment and worker's compensation.

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5. Maintain Your Nonprofit Status

Timeline: Ongoing (Year 1 and beyond)

Maintaining a nonprofit tax exempt status is a persistent process. Failing to do so can result in the revocation of your 501(c)(3) registration.

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Here are some guidelines to keep the tax exempt status:

• Adhere to your purpose and operational structure.

• Hold regular board meetings and take notes of important matters.

• Comply with the annual requirements of the Internal Revenue Service to file Form 990 or Form 990-EZ.  You will report your activities, governances, assets, and expenses in these forms.

• Get adequate public funding as 501(c)(3) charitable organizations are essentially for the public. 

• Maintain spotless financial records to be ready for a sudden audit.

• Do not allow your organization to take part in any political campaigns.

• Do not support nonexempt purposes or illegal acts.

• Do not allow your organization's activities to influence legislation.

• Avoid earning UBI through your nonprofit organization. 

• If you have several employees, consider a qualified retirement plan for them. These are specialized plans for nonprofit organizations and closely resemble 401k plans. 

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6. Collect Donations

Timeline: After IRS approval

Once your organization secures its 501(c)(3) status, developing a fundraising strategy to start raising money through charitable contributions will kickstart your mission. This may include a mix of individual donations, grants, corporate sponsorships, and fundraising events. 

To streamline your fundraising efforts, consider partnering with a platform like Zeffy. This platform offers a range of tools to help nonprofits collect donations, manage events, and engage with supporters.

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FAQs

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