Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do:

Choice of Entity - In forming a nonprofit organization, the first decision, that will become the basis for all future transactions, is the choice of entity. A nonprofit organization is required to define the organization as unincorporated, incorporated or as a limited liability company. This decision may be based on the future expectations of the organization.

An unincorporated nonprofit organization includes the sole solicitation of contributions or the dissemination of information. This description could include a charitable trust. The incorporated nonprofit organization or nonprofit LLC should be considered if the organization will acquire assets such as buildings, equipment or vehicles to be used in the delivery of services or if it will be necessary to hire employees to render services.

Clarify your mission, vision, and goals - The purpose of a charitable nonprofit must be for the public interest and common good. It should establish a single mission and a set of goals and programs that will accomplish that mission. This is a step where a new nonprofit should analyze what it wants to do, who it wants to reach, and how it wants to impact society.

Recruit board members - The initial board of directors assumes much of the responsibility in starting a new nonprofit. They will determine the direction and goals of the organization and set precedents for future board members.

Check for organization name availability - Before you take any steps to form your organization, it is crucial that you check to make sure that the name your have selected for your organization is available

Write the articles of incorporation - The founders of the organization should write the articles of incorporation. This document formally names the entity, its location, and its purpose. This document is the legal record of how the organization is to be managed. It is necessary to write and file the articles of incorporation prior to applying for tax-exempt status from the Internal Revenue Service.

Create a business plan with a budget - A business plan and budget are required as part of the narrative section of IRS Form 1023, Application for Tax-Exempt Status. A plan should include what the organization’s goals are, what programs it will operate, where it will get funding, will it conduct events, will the organization have staff, volunteers, and more. It should also include a budget plan. Where will funding come from? Will programs rely on grants, individual donations, state or federal contracts? What expenses will the organization incur?

Incorporate as a nonprofit organization - Filing articles of incorporation with Secretary of State’s Office establishes your organization as a nonprofit under State law; however, this does not make the organization a nonprofit, tax exempt charitable organization under Federal law. Depending on the goals of your organization, it may be necessary to take the next step and file the required forms to be a federally recognized nonprofit.

Draft the corporate bylaws - The bylaws will serve as the rule book for the nonprofit. There is substantial flexibility to writing the organizational bylaws to fit the uniqueness of an organization. They are flexible and relatively easy to amend as the organization changes and grows.

Liability Insurance - Nonprofit organizations are not immune from being sued. A nonprofit organization has entered into a legally binding contract just as any other entity. Therefore, the organization is liable for its officers, trustees, employees and organization as a whole. Liability insurance is available to nonprofit organizations. Insurance can be purchased to cover officers, trustees, employees and volunteers. If providing services to the public, liability insurance is a must. All activities should be thoughtfully planned in consultation with an insurance agent.

Hold first meeting of the board - The first official meeting should consist of the initial board members or incorporators.  At the first meeting of the board, the initial board members must approve the drafted bylaws and adopt its principles. The new organization will also vote on new board members and officers as it is called for in its bylaws. Once these activities are accomplished, the board should begin tackling the mission and start the process of obtaining tax-exempt status.

Apply for Federal Employer ID Number (EIN) – SS4 - Nonprofit organizations should have an EIN, often referred to as a Federal Employer ID Number, even if it has no employees. The EIN is a nine-digit number used for tax filing and reporting purposes; it is usually required to open a bank account or in other fiscal operations. Nonprofit organization must use IRS Form SS-4 — Application for Employer Identification Number (EIN). Organizations must be incorporated prior to applying for an EIN. Organizations must receive their EIN before filing Form 1023.

Obtain income tax exempt status from the IRS - Once the organization's articles of incorporation have been filed and the bylaws have been approved by the initial board of directors, the next step for a new nonprofit is applying for federal tax exemption from the Internal Revenue Service.  There are several steps and filing requirements an organization needs to complete before receiving exemption. And even then, not all organizations qualify for the same exemptions. The following applies for 501(c)(3) status from the IRS, the most common type of tax-exempt organization.

First, obtain IRS Publication 557 — Tax-Exempt Status for Your Organization. This document includes no forms to file, but lays out the federal laws regulating tax-exempt organizations. It is available free and serves as a useful reference guide for filing requirements, employment issues, lobbying expenditures, and many other complex nonprofit issues regulated by IRS codes.

Second, get a copy of  IRS Form 1023 and instructions — Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code. Form 1023 applies for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3).

Annual Filing Requirements - Annual reporting ensures nonprofits are held accountable for their charitable fundraising and annual expenditures. Even though a nonprofit organization may be tax exempt, it must file an annual tax return with the Internal Revenue Service. Generally, charities with more than $100,000 in gross revenues and more than $250,000 in total assets must file the Form 990; smaller charities may file the EZ Form.

It is the most complete documentation of an organization’s financial history and is often used to hold the organization accountable for its past actions and future decisions. Recent rulings by the Internal Revenue Service state that nonprofit organizations must make their Form 990 and applications for tax-exempt status widely accessible and available to anyone who requests.