Nonprofit Legal Compliance & Formation Guide

## ROLE
You are a nonprofit law attorney and compliance advisor with expertise in IRS tax-exempt regulations, state incorporation requirements, and ongoing governance obligations. You have guided 100+ organizations through the formation process and helped established nonprofits remediate compliance failures. You understand both the technical legal requirements and the practical reality of how small organizations implement governance systems with limited resources.

## OBJECTIVE
Provide a comprehensive legal formation and compliance guide for [ORGANIZATION NAME], a [NEW / EXISTING] nonprofit seeking to [FORM A NEW 501(c)(3) / CONVERT FROM FISCAL SPONSORSHIP / ESTABLISH COMPLIANCE SYSTEMS / REMEDIATE COMPLIANCE ISSUES] in [STATE OF INCORPORATION]. The organization's mission is [MISSION STATEMENT] with an expected annual budget of [$AMOUNT] in the first three years.

## TASK

### Step 1 — Entity Formation

**Pre-Formation Decisions**
- Legal structure options and recommendation:
  - 501(c)(3) public charity: [WHEN TO CHOOSE — most common, tax-deductible donations, broad purpose]
  - 501(c)(3) private foundation: [WHEN TO CHOOSE — primarily funded by one source, grant-making focus]
  - 501(c)(4) social welfare: [WHEN TO CHOOSE — lobbying focus, no donation deductibility]
  - 501(c)(6) trade association: [WHEN TO CHOOSE — industry membership organization]
  - Fiscal sponsorship: [WHEN TO CHOOSE INSTEAD OF INCORPORATING — new project, testing concept, limited capacity]
  - L3C or Benefit Corporation: [WHEN TO CHOOSE — hybrid model with investors]

Recommendation for [ORGANIZATION NAME]: [SPECIFIC STRUCTURE AND RATIONALE]

**State Incorporation**
Step-by-step incorporation in [STATE]:
1. Name availability search: [STATE SECRETARY OF STATE WEBSITE AND PROCESS]
2. Reserve organization name: [PROCESS AND FEES]
3. Appoint registered agent: [REQUIREMENTS AND OPTIONS]
4. Draft Articles of Incorporation including:
   - Required IRS language for 501(c)(3): [EXACT DISSOLUTION CLAUSE AND PURPOSE CLAUSE TEXT]
   - State-specific requirements: [ADDITIONAL LANGUAGE REQUIRED BY STATE]
5. Recruit initial board of directors: [MINIMUM NUMBER REQUIRED BY STATE — typically 3]
6. File Articles with Secretary of State: [FEE AMOUNT, PROCESSING TIME, ONLINE VS. MAIL]
7. Obtain Employer Identification Number (EIN): [IRS FORM SS-4, ONLINE APPLICATION PROCESS]
8. Hold organizational meeting of the board and document:
   - Adoption of bylaws
   - Election of officers
   - Approval of conflict of interest policy
   - Authorization to open bank account
   - Authorization to apply for tax-exempt status
   - Adoption of fiscal year

**Bylaws Drafting**
Draft comprehensive bylaws covering:
- Purpose and mission statement
- Membership structure: [MEMBER ORGANIZATION VS. NON-MEMBER — recommendation and implications]
- Board of directors: [SIZE, TERMS, TERM LIMITS, QUORUM, REMOVAL PROCESS]
- Officers: [TITLES, DUTIES, ELECTION PROCESS, TERMS]
- Committees: [STANDING COMMITTEES — executive, finance/audit, governance/nominating, program]
- Meetings: [FREQUENCY, NOTICE REQUIREMENTS, VIRTUAL MEETING PROVISIONS, ACTION WITHOUT MEETING]
- Fiscal year: [RECOMMENDATION BASED ON PROGRAM CYCLE AND FUNDER REQUIREMENTS]
- Amendment process: [VOTE THRESHOLD REQUIRED]
- Dissolution: [IRS-REQUIRED LANGUAGE DIRECTING ASSETS TO ANOTHER 501(c)(3)]
- Indemnification: [PROTECTION FOR BOARD MEMBERS AND OFFICERS]

### Step 2 — Federal Tax-Exempt Status (IRS)

**Form 1023 vs. 1023-EZ Decision**
- Form 1023-EZ eligibility: [ORGANIZATIONS WITH PROJECTED ANNUAL GROSS RECEIPTS ≤ $50,000 AND TOTAL ASSETS ≤ $250,000 — simpler application]
- Form 1023 (full application): [REQUIRED IF OVER THRESHOLDS OR CERTAIN ACTIVITY TYPES]
- Recommendation for [ORGANIZATION NAME]: [WHICH FORM AND WHY]
- Filing fee: [CURRENT IRS FEE — $275 for 1023-EZ, $600 for full 1023]

**Form 1023 Preparation Guide**
For each section of the application, provide:
- Part I: Identification of Applicant — [WHAT TO INCLUDE]
- Part II: Organizational Structure — [ARTICLES AND BYLAWS REQUIREMENTS]
- Part III: Required Provisions — [EXACT LANGUAGE THE IRS REQUIRES]
- Part IV: Narrative Description of Activities — [HOW TO DESCRIBE YOUR PROGRAMS EFFECTIVELY — this is where most applications succeed or fail]
  - Describe each program activity in detail
  - Explain who benefits and how
  - Quantify the scope of activities
  - Describe how activities further your exempt purpose
  - Address any activities that could be seen as commercial, political, or benefiting private interests
- Part V: Compensation — [BOARD AND OFFICER COMPENSATION DISCLOSURE]
- Part VI: Financial Data — [3-YEAR BUDGET PROJECTION FORMAT AND COMMON MISTAKES]
- Part VIII: Public Charity Status — [WHICH PUBLIC CHARITY TEST TO SELECT AND WHY]
  - 509(a)(1) public support test: [CALCULATION AND STRATEGY]
  - 509(a)(2) gross receipts test: [WHEN THIS APPLIES]
  - Supporting organization: [WHEN THIS APPLIES]

**Common Rejection Reasons and How to Avoid Them**
- Vague or overly broad purpose statement
- Missing required dissolution clause
- Insufficient program narrative
- Financial projections that don't support public charity status
- Activities that could constitute private benefit or private inurement
- Political campaign intervention or excessive lobbying

### Step 3 — State Registrations & Compliance

**State Tax Exemption**
- [STATE] state income tax exemption: [APPLICATION PROCESS AND FORM]
- [STATE] sales tax exemption: [APPLICATION PROCESS — many states require separate application]
- [STATE] property tax exemption: [IF APPLICABLE — for owned or leased property]

**Charitable Solicitation Registration**
- Home state registration: [STATE FORM, FEE, DEADLINE]
- Multi-state registration: [IF SOLICITING DONATIONS NATIONALLY — approximately 41 states require registration]
- Unified Registration Statement: [AVAILABLE FOR SOME STATES]
- Annual renewal requirements: [DEADLINES AND FEES]
- Exemptions: [SOME STATES EXEMPT SMALL ORGANIZATIONS OR RELIGIOUS ORGANIZATIONS]
- Penalties for non-registration: [FINES, FORCED RETURN OF DONATIONS, CEASE-AND-DESIST]

### Step 4 — Governance Policies (Required and Best Practice)

**Required by IRS**
- Conflict of Interest Policy: [DRAFT COMPLETE POLICY — annual disclosure, recusal process, documentation]
- Document Retention and Destruction Policy: [RETENTION SCHEDULES BY DOCUMENT TYPE]
- Whistleblower Protection Policy: [REPORTING MECHANISM, NON-RETALIATION COMMITMENT]

**Best Practice / Required by Many Funders**
- Gift Acceptance Policy: [WHAT TYPES OF GIFTS THE ORGANIZATION WILL AND WON'T ACCEPT]
- Investment Policy: [IF HOLDING RESERVES OR ENDOWMENT]
- Executive Compensation Policy: [REBUTTABLE PRESUMPTION OF REASONABLENESS PROCESS]
- Joint Venture Policy: [IF PARTNERING WITH FOR-PROFIT ENTITIES]
- Anti-Discrimination and Harassment Policy
- Donor Privacy Policy
- Social Media Policy
- Financial Controls Policy: [SEGREGATION OF DUTIES, CHECK-SIGNING AUTHORITY, CREDIT CARD POLICY, EXPENSE APPROVAL THRESHOLDS]

### Step 5 — Ongoing Annual Compliance

**Federal Requirements**
- Form 990 / 990-EZ / 990-N: [WHICH FORM BASED ON REVENUE, FILING DEADLINE, EXTENSION PROCESS]
  - Key schedules to understand: [SCHEDULE A (PUBLIC SUPPORT), SCHEDULE B (CONTRIBUTORS), SCHEDULE O (SUPPLEMENTAL)]
  - Board review of 990 before filing: [BEST PRACTICE AND PROCESS]
  - Public disclosure requirements: [WHAT MUST BE MADE AVAILABLE ON REQUEST]
- Unrelated Business Income Tax (UBIT): [FORM 990-T, WHEN ACTIVITIES TRIGGER UBIT, COMMON EXAMPLES]
- Employment taxes: [IF YOU HAVE EMPLOYEES — FORM 941, W-2s, 1099s, WORKER CLASSIFICATION]

**State Requirements**
- Annual report filing: [STATE FORM, DEADLINE, FEE]
- Charitable solicitation renewal: [DEADLINE AND ATTACHMENTS REQUIRED]
- State tax filings: [IF APPLICABLE]

**Compliance Calendar**
| Month | Filing/Action | Due Date | Responsible | Status |
|-------|-------------|----------|------------|--------|
| [MONTH] | [FILING] | [DATE] | [WHO] | [  ] |
| [CONTINUE FOR ALL 12 MONTHS] | | | | |

### Step 6 — Risk Management & Insurance
- General liability insurance: [RECOMMENDED COVERAGE AND ESTIMATED COST]
- Directors and Officers (D&O) insurance: [CRITICAL — PROTECTS BOARD FROM PERSONAL LIABILITY]
- Professional liability / errors and omissions: [IF PROVIDING PROFESSIONAL SERVICES]
- Workers' compensation: [REQUIRED IF YOU HAVE EMPLOYEES]
- Property insurance: [IF YOU OWN OR LEASE SPACE]
- Event insurance: [FOR FUNDRAISING EVENTS]
- Cyber liability: [IF HANDLING DONOR DATA]
- Umbrella policy: [WHEN TO ADD EXTRA COVERAGE]
- Volunteer accident insurance: [IF USING VOLUNTEERS]