Forming a not-for-profit organization in Connecticut

This document details the requirements for forming a not-for-profit organization in Connecticut.

STARTING A SMALL BUSINESS IN CONNECTICUT

FORMING A NOT-FOR-PROFIT ORGANIZATION

BACKGROUND

Forming a not-for-profit organization is allowed under Section 501 (c) of the Internal Revenue code and must follow some strict guidelines. There are two general categories of not-for-profits:

  • Section 5Ol(c)(3) organizations include those that benefit the general public formed for charitable, literary, educational, religious, scientific, product safety and other such purposes. These can receive tax deductible contributions under most circumstances.
  • Other Section 5Ol(c) organizations can be tax exempt other than receiving tax deductible charitable contributions. These include such organizations as labor organizations, chambers of commerce, social clubs and employee associations.

The following are sources of information for a complete coverage of the process for starting a not-for profit enterprise. The purpose of this document is to alert the reader to some key aspects and not to repeat or paraphrase already existing documentation.

  •  A concise summary of this topic is found in the book STARTING A SMALL BUSINESS IN CONNECTICUT. This book is published by Community Accounting Aid Services, Inc. (CAAS ). The book can be purchased on-line at http://ctaccountingaid.org/. The cost is $41.69. Refer to Chapter 14, "Starting a Not-For-Profit Organization" for a relatively thorough comparison of the legal and tax implications for this option.
  • Refer to IRS Publication 557, TAX-EXEMPT STATUS FOR YOUR ORGANIZATION, and IRS Publication 4220, APPLYING FOR 501(c)3  TAX EXEMPT STATUS. Both publications can be downloaded from the internet from www.irs.gov under the "More Forms and Publications" page, then choosing under "Download Forms & Publications". Additional information is also available at the IRS website under "Charities & NonProfits" on the home page.

The following is not meant to recommend any specific type of non-profit organization nor does it offer any legal interpretations. The purpose is to inform the reader of some of the options available for those starting a business and to provide some sources of information for the prospective business owners to evaluate pertinent options.

START-UP STEPS FOR NOT-FOR-PROFIT ORGANIZATIONS

1. Develop a Charter - This is a document that defines the organization, also known as a constitution or articles of incorporation, usually prepared by an attorney experienced in setting up not-for-profit organizations. Detailed guidance for preparing the charter is found in IRS Publication No. 557, Tax-Exempt Status for Your Organization. In order to be granted tax-exempt status by the IRS, the Charter must include the following:

• A Mission Statement that clearly and succinctly defines why the organization will exist. Along with a statement of the goals, it includes a description of what activities the organization will carry out to accomplish those goals. /

• Use of Funds - private individuals must specifically be prohibited from benefiting from the net earnings (or "surplus") of the organization.

• Limits of Power - the organization is limited to tax-exempt activities specified in its Mission Statement.

• Legislative Activities - in general the organization is prohibited from influencing or working for political candidates or for/against legislation.

• Dissolution - The law requires that if the organization goes out of business the assets must be distributed to another tax-exempt organization or government agency for a public purpose.

2. Develop By-Laws - Written by-laws must be developed for the operation of the organization under the Charter.

3. INCORPORATE - Once the organizational documentation is developed, the organization then incorporates by registering with the Connecticut Secretary of State (www.sots.ct.gov) as a not-for-profit, non-stock corporation and paying the requisite fees.

4. Obtain a Federal Employer Identification Number (EIN) - This is required whether or not the organization has, or plans to have, employees. Use IRS Form SS-4.

5. Obtain a State of Connecticut Tax Registration Number - All corporations in Connecticut must have one. Apply at the State Department of Revenue Services www.ct.gov/drs.

6. Qualify as a Not-for-Profit Organization - To become a not-for-profit, the organization must apply to and be recognized as such by the Internal Revenue Service. For guidance, refer to the IRS Publication 4220, Applying for 5Ol(c)3 Tax-Exempt Status noted on the previous page. The State of Connecticut will recognize the organization's tax-exempt status upon receipt of a copy of the IRS 501 (c)(3) ruling letter.

SOME KEY FORMS

Form 1023Application for Recognition of Exemption Under Section 501(c)3 Of the Internal Revenue Code, and its Instructions for Form 1023

Form 1024 - Application for Recognition of Exemption Under Section 501 (a) and its Instructions (Other Section 501(c) organizations)

Form SS-4 - Application for Employer Identification Number

State of Connecticut Tax Registration application is on line at www.ct.gov/drs.


This article was prepared by the Northwest Connecticut chapter of SCORE.