How to start a nonprofit in Pennsylvania

Starting a nonprofit takes a lot of steps — some similar to starting a business — including document preparation, applying for licenses and tax exemptions, hiring leadership and staff and creating bylaws of the nonprofit. Prepare yourself for a long process, be patient along your journey and keep everything documented and organized.

Here is a 12-step process for making your nonprofit official and tax exempt in the eyes of the government, including useful tips from experts. This guide will cover major milestones in the process, but there are many other steps you can take outside this guide to improve your nonprofit.

A nonprofit is an organization with a purpose or mission that does not generate profit. Any income made through the organization isn’t paid out to members of the group — instead, all money goes back into the nonprofit to continue its mission. If the nonprofit were to close operations, any money left would be used to pay off any debts, and transferred to another nonprofit.

Nonprofits are not allowed to influence legislation or campaign on the behalf of political candidates. A nonprofit must serve a specific purpose. According to the IRS, this includes: charitable (social causes), religious, scientific, educational, literary or other specified purposes for the public good.

In order for a nonprofit to be tax exempt, meaning they won’t have to pay certain taxes like federal income and unemployment taxes, the organization has to meet standards set by the Internal Revenue Service (IRS). Same goes for state tax exemptions.

Starting a nonprofit is hard. Sometimes the best option is to see if there are better ways to help your community. For instance, there may already be a nonprofit in your area with a similar mission and client base — there are over 9,000 nonprofits in Philadelphia, after all.

According to Caitlin Seifritz, the nonprofit services supervisor at the Regional Foundation Center, instead of creating a new nonprofit that competes for the same (often scarce) grant funding, see if an established nonprofit will be your “fiscal sponsor.”

“The majority of people who come to me who say they want to start a nonprofit... they have a good idea for a program that could live within an existing nonprofit,” said Seifritz. “But, it’s not a fully thought-out nonprofit organization.”

A fiscal sponsorship allows one organization to use the nonprofit status of another tax exempt organization to receive funding. This means you can still achieve your goals without having to jump through as many hoops, compete for funding and, often times, fiscal sponsors will take care of your organization’s administrative work. You can also volunteer, work, or serve on the board of a nonprofit.

These steps are pretty straight forward but you’re probably going to need more personal help.

This should be your first step. According to Seifritz, you want to build an organization from the ground-up. Get experienced people on board first and create the nonprofit together. Leaders should have skills and experiences that are diverse and complement each other. The nonprofit needs creative, logistic, economic, and community skills — make sure that your leadership can bring them all to the table.

The IRS requires you to have three board members and Pennsylvania government requires you to have three nonprofit officers — president, secretary, and treasurer. One of these people or another person also needs to be the incorporator, the person who applies and signs all the documents.

Board members can be nonprofit officers, and any of these people can be the one to sign the articles of incorporation and apply for other exemptions. At the bare minimum, you need three people (including yourself if you want) to start a nonprofit.

What you need:

A nonprofit needs a unique name. Obviously, you can’t use the name of an already established nonprofit.

A registered agent is the person or entity that will receive legal notices on behalf of the nonprofit. The registered agent and their address will enter the public domain so people are able to officially serve lawsuits and other legal notices to your nonprofit. You’ll appoint a registered agent in your Articles of Incorporation with the state (more info in next section).

This is the first big paperwork step. The Articles of Incorporation is a multi-page document that officially recognizes an organization with the state BCCO. It’s like letting them know, “Hi, we’re officially starting an organization under this name. Here’s the names of leadership, our goals and mission, where we’ll operate and here’s how we plan to do it.”

Cost: $125

The state will review your Articles of Incorporation and if you filed correctly and aren’t infringing on any other organizations — like using their name or something similar — you will receive a certificate of confirmation.

Now you need to let the public know you formed a nonprofit. You have to publish the news that your organization has been incorporated in two local newspapers of general circulation (maybe The Inquirer?), one of them has to be a legal newspaper. Do this only after your articles of incorporation are approved. You do this by taking out a classified ad in the newspaper. It’s usually filed under “Legal Notices.”

Even if you don’t plan on hiring staff you need one. The Employer Identification Number (EIN) will be used as an identifying code for your nonprofit with the IRS (like a Social Security Number, but for organizations). You need an EIN before applying for federal tax exemption.

You can apply online for an EIN.

This is like a nonprofit’s constitution. It’s the governing document that outlines the duties, responsibilities, and key players of a nonprofit. It will detail the protocol in case a board member steps down, if the nonprofit must be dissolved, and any other official process that should be legally binding. You’ll need nonprofit bylaws in order to apply for 501(c)3 tax exemption.

You have an EIN with the IRS — that covers federal taxes. But, you’ll also need a tax number with the Pennsylvania state government. Especially, if you want to apply for state tax exemptions.

Visit pa100.state.pa.us to apply. This online registration tool provided by the state Department of Revenue will help you register your nonprofit with the state and apply for the tax accounts you’ll need. For example: If your nonprofit hires people, you’ll need employer withholding tax accounts. If your nonprofit sells a product or service, you’ll need sales tax accounts.

This can be a daunting and pricey task, but you only need a single form. Either Form 1023 or the streamlined version Form 1023-EZ (only if eligible). See if you are eligible for Form 1023-EZ, by completing their Eligibility Worksheet. If you answer “No” to all the questions on the worksheet, then you can apply with Form 1023-EZ. For everyone else, you have to complete Form 1023. Create an account to get started.

If your application is approved, the IRS will send you a Determination Letter notifying if you are accepted for tax exemption.

There’s more tax exemptions available for your nonprofit. If you already received your determination letter from the IRS, then you are automatically exempt from paying state corporate income tax. However, there may be more state tax exemptions available to you — like state sales tax.

To apply for state sales tax exemption:

You can’t apply for grant funding without 501(c)3 status, and you can’t receive any donations without registering your nonprofit with the state.

To register your nonprofit:

You should get insurance. Pennsylvania requires all nonprofits who hire employees — even part-time — to carry worker’s compensation insurance. This insurance protects you if your employees get hurt on the job. You can get this insurance from an agent or broker. If you can’t find a company to issue this insurance you can contact the State Workers’ Insurance Fund (SWIF).

It’s not required, but you should have Directors and Officers liability insurance (also known as D&O). This insurance protects your executive leadership in case the nonprofit or its leaders are sued. Of course, if you’re renting property or having employees do outreach in the community, there may be other insurance policies you’ll want.