Nonprofit organizations exist to provide resources, goods, and services to meet community needs. Additionally, they are not dedicated to financial or private gain and exist solely for public interest advancement.
Nonprofits are a result of unfulfilled needs in the community and are designed to improve the quality of life for people on all levels, be it community, local, national, and even the global level.
Some benefits of starting a nonprofit include:
- Tax exemption status on state and federal income tax
- Nonprofit credibility
- Access to grants
- Limited liability protection
After applying, it may take approximately three to six months for the IRS to get back to you. This is provided all the necessary forms are completed with the correct and required information. If not, there could be further delays.
Alabama has a total of approximately 14,000 nonprofit organizations, and some of the most popular nonprofits in the state include Steel Magnolias Breast Cancer Support Group Inc., Prodisee Pantry Inc., and Still Serving Veterans.
1. Select a name for your organization
Once you’ve identified the unfulfilled need in your community, it’s time to start thinking of a name for your nonprofit organization. The name needs to meet Alabama naming requirements and should not be used by any other organization or business entity in the state.
Check the availability of your corporation name in the state by heading over to the Alabama Business and Nonprofit Entities Code.
Additionally, all nonprofits in Alabama are required by state law to obtain a name reservation. The name reservation request form needs to be completed and then submitted to the Alabama Secretary of State.
The state of Alabama will then provide you with a Name Reservation Certificate, which you must submit with your Certificate of Formation.
2. Nominate an Alabama registered agent
A registered agent is an essential and compulsory part of a nonprofit organization. This is because the agent is the designated point of contact for a nonprofit when it comes to receiving official mail and documents on behalf of the organization.
Additionally, when it comes to receiving legal notices and court documents, the registered agent will need to accept them on behalf of the nonprofit.
The organization may choose to nominate anyone as a registered agent; however, the individual must meet the following requirements:
- Physically located in Alabama: The registered agent must be an Alabama resident and at least 18 years of age.
- Have an office: The registered agent must be available at the listed address.
- Remain available during office hours: The registered agent should remain available during working hours to receive legal documents and court summons on the nonprofit’s behalf.
3. Recruit your board members
The board of directors is the body of the organization. These individuals are tasked with overseeing the nonprofit’s activities, including providing financial support, attending meetings, being involved in committee work, and ensuring that the nonprofit has enough resources to continue its mission.
When choosing directors and officers for your nonprofit, you need to know Internal Revenue Service and residency requirements:
- Directors in the state of Alabama must be at least 18 years old
- Residency or membership is not required
- The board must consist of a minimum of three members to serve the positions of President, secretary, and treasurer
- The positions of secretary and treasurer may not be held by the President of the board
4. Consent to bylaws and conflict of interest policy
Recognition of Exemption under section 501(c)(3) of the Internal Revenue Code is required to complete your Alabama nonprofit organization application. Use form 1023 to start the process.
You’ll need to apply for and have two documents for a successful outcome:
- The first is a Bylaws document which acts as your organization’s operating manual, outlining operating procedures and so on.
- The second is a Conflict of Interest Policy, a collection of rules put in place to ensure that all decisions ultimately benefit the nonprofit’s purpose and not the nonprofit members’ personal agenda.
These two documents must be compiled during the board’s first organizational meeting.
A copy of the bylaws does not need to be filed with the state. They are the nonprofit’s internal records and are meant for the organization’s documentation.
5. Select an Alabama nonprofit startup corporation structure
There are four corporate structures for nonprofits in Alabama as follows:
- Public benefit corporations: These nonprofits are created for charity purposes, act as a social welfare organization or civic league.
- Religious corporations: These nonprofits are solely for religious purposes, such as a church.
- Mutual benefit corporations: These nonprofits may or may not pursue state and IRS tax-exemptions.
- Mutual benefit common interest development corporations: These nonprofits are created under the Davis Stirling Common Interest Development Act to oversee common interest development, such as a homeowner’s association.
6. Prepare and file nonprofit Articles of Incorporation
Your organization’s Articles of Incorporation, also referred to as Certificate of Formation in Alabama, properly mark the creation of your nonprofit. Consequently, it documents when and where the nonprofit was formed and captures the necessary information to verify the existence of your organization.
That said, the IRS will look for a few introductory provisions when vetting your 501(c)(3) tax exemption application, so you must meet both the state of Alabama’s requirements and IRS requirements to avoid unnecessary amendments or your application declined.
Here’s what your Certificate of Formation should state explicitly:
1. Purpose
Your nonprofit must be limited to one or more of the following categories:
- Religious
- Charitable
- Scientific
- Literary
- Educational
- Testing for public safety
- Preventing cruelty to children or animals
2. Dissolution
Here you’ll need to state the purpose of the organizations’ assets and the consequences of dissolved assets
- The name of the organization
- The type or structure of the organization
- If the organization is to have no members, this must be stated
- The period of duration of the nonprofit
- The registered agent’s name, including the street and mailing address (you may not submit P.O. Box addresses) of the registered office of the filing entity
- The number of directors on the board, including their names and addresses
Go to the Alabama Secretary of State website to download, complete and file the Certificate of Formation form. Alternatively, submit the articles of incorporation to the office of the Judge of Probate in the county where the nonprofit’s initial registered office is based. You must submit the original articles as well as two copies along with the Certificate of Name Reservation.
Please also be aware that the Certificate of Formation form does not contain the language needed by the IRS to qualify for 501(c)(3) federal tax-exempt status.
For further details on IRS requirements pertaining to tax exemption in Alabama, including sample language, refer to the IRS Publication 557, found on the Internal Revenue Service website. Your Certificate of Formation must contain the tax-exempt language called for by the IRS.
To avoid unnecessary delays in your application, please refer to the Code of Alabama for guidance.
7. File an initial report
The requirements for filing an initial report for a nonprofit vary from state to state; however, an initial report is not required in Alabama.
8. Secure an EIN (Employer Identification Number)
An Employer Identification Number is also commonly known as a Federal Tax Identification Number or Federal Employer Identification Number. The purpose of this nine-digit number assigned by the IRS is to identify a nonprofit.
Irrespective of which state you are based in or where you plan to operate your nonprofits, your organization will need to apply for an EIN number.
Complete the IRS form SS-4 online, via mail, fax, or phone to apply for this identification number.
The ETA when using the online or phone method is almost instantaneous, while the fax option will take four working days, and the mail option will have you waiting anywhere between 4-5 weeks.
The Understanding Your EIN document is available for further guidance.
9. Apply for federal tax exemption
While the process of applying for 501(c)(3) tax exemption may seem daunting, to say the least, the advantages that come along with obtaining tax exemption are numerous.
501(c)(3) compliance benefits:
- Having recognition, and credibility for your nonprofit
- Being exempt from IRS income, federal, sales, payroll, and property taxes (more information can be found on the Alabama Department of Revenue website)
- Eligibility for grants on local, state, and federal levels. Lots of funders will only consider an application if you are registered as a 501(c)(3) entity and have your 501(c)(3) certificate to prove this.
- Allows you to give tax deductions to donors when they donate to your nonprofit
- A nonprofit or exempt organization in Alabama may qualify for nonprofit mailing privileges, such as discounted postage rates.
- Media outlets are also inclined to give discounted and even free announcements and press releases for nonprofits. Simply show them your 501(c)(3) certificate or tell them that you are 501(c)(3) compliant, and they will gladly make a public service announcement on your behalf.
These are just some of the benefits of being 501(c)(3) certified, and it is in your organization’s best interest to find out how this compliance can help your nonprofit save money and grow from strength to strength.
Here are the prerequisites for federal tax exemption eligibility:
- The nomination of 3 directors, unrelated to each other
- Adopt bylaws and conflict of interest policy
- File the Certificate of Formation
- Have an EIN
Once you’ve fulfilled the filing requirements mentioned above, you may go ahead and file the 1023 form and apply for your nonprofit’s 501(c)(3) tax-exempt status. However, if you plan on running a smaller organization or expect your nonprofit’s gross income to be under $50,000 over the next three years, you can fill out the form 1023-EZ instead.
A determination letter will be sent to you stating the outcome of the application for exemption from federal taxes.
10. Apply for Alabama state tax exemption
The nonprofit organization needs a state tax account number or State tax ID from the Alabama Department of Revenue. In order to register for it, simply go to the “My Alabama Taxes” page at the Alabama Department of Revenue website.
The application does not cost anything, but it will take between three to five days to receive your sales tax ID. This number is necessary to apply for Alabama state tax exemptions.
While nonprofits are automatically exempt from state sales taxes, after obtaining a 501(c)(3) recognition from the IRS, organizations in Alabama are not one of them. In order for state sales tax exemption to be granted in Alabama, you must file a separate application.
This allows your nonprofit in Alabama to dedicate more funds towards the cause when making taxable purchases or sales. The process of applying for state sales tax exemption takes anywhere between four to eight weeks.
If your application is missing any relevant information, it will likely be declined and returned, which will lead to further delays and costs. So ensure that you complete your application with all the necessary information to speed up the process.
11. Other applicable permits and licenses
Other applicable licenses and permits will need to be secured in order to legally operate a nonprofit in Alabama. Since the process of filing according to Alabama federal, state, and local requirements are extensive, you should peruse the permit and license lookup tool for your locality and nonprofit type.
An occupational business license will be required in Alabama, and local business tax receipts will be provided to you annually by the county government. Not all counties located in Alabama require this, while some of them insist you lodge your new nonprofit with them.
Contact your local Alabama Department of Revenue in order to learn more about the requirements on permits and to license in the state of Alabama.
Additional state registration and reporting requirements
You may or may not be required to register with the state of Alabama before carrying out any fundraising. This depends on the size of your nonprofit as well as your activities.
Feel free to contact the Alabama Attorney General about fundraising requirements and forms in the state of Alabama.
12. Submit an annual report
While the state of Alabama does not require nonprofits to submit a yearly report at the end of each financial or calendar year to the Alabama Secretary of State, it’s still a great way to show donors how your nonprofit has reached its goals.
Alabama does, however, require nonprofits to comply with charitable solicitation registration requirements. Nonprofits from various states are required to register with the state before accepting donations from individuals or companies in that state, irrespective of whether they are paid professionals, fundraising counsels, or consultants hired to assist the organization with fundraising activities. All charitable organizations in Alabama must file annually or within three months of the close of the fiscal year. More information can be found on Alabama’s Attorney General’s Office website.
Costs of starting a new nonprofit in Alabama
The costs of starting a nonprofit will vary from state to state. Below are the listed costs of starting a 501(c)(3) in the state of Alabama:
- Name reservation: $28
- Incorporation: $100 state filing fee + min $50 county filing fee
- Application for recognition of exemption or 501(c)(3): $275 or $600 IRS fee
- Alabama charitable organization registration: $25 ($0 if exempt)
Next steps
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
Obtain insurance
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
FAQs
A nonprofit organization may not earn a taxable profit. However, the people that run it may receive a taxable income or salary. When you create a nonprofit organization, you can decide the position you want to hold within the nonprofit along with a salary you set. In a nutshell, you can pay yourself a salary as long as it is disclosed to the IRS on Form 990.
There are many benefits to starting a nonprofit organization, including the satisfaction of identifying a need in your community and fulfilling it. Some other benefits include social entrepreneurship, tax benefits, and limited liability. You will also receive access to grants, US Postal service discounts, and credibility as a registered and compliant nonprofit organization.
Yes, it is possible to start a nonprofit from your home if you have a goal to serve the community. However, lots of paperwork is involved in order to have a successful home-based nonprofit. And once you’re up and running, you’ll need to continue to comply with state laws to ensure that your organization remains open for as long as it is needed.
Yes, you can. While you may not have money, if you put together a business plan to share your vision with others, you will likely reach potential donors who will invest in your nonprofit. This may cover the fees owed to the government, but you cannot participate in any fundraising until you receive tax-exempt and nonprofit status.
“Nonprofit” is a term used in the United States to describe nonprofit organizations of corporations. An “NGO,” also known as a non-governmental organization, refers to charitable nonprofits operating outside the United States. The two entities are very similar as they are both independent of government influence and not used for personal profit.
