Here is our comprehensive guide to starting a 501(c)(3) nonprofit NGO in New York. The path to 501(c)(3) can be overwhelming, involving review at both the federal (U.S.) and state levels. We hope this guide will be of help to you in navigating the complexities involved in the state process — incorporating a nonprofit NGO under New York law — and the federal process — being recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (the U.S. tax law).
How to Form a 501(c)(3) Nonprofit NGO in New York (12 steps):
- Put together a team;
- Create a 501(c)(3) business plan;
- Choose a name for New York nonprofit NGO;
- Draft certificate of incorporation for New York not-for-profit corporation;
- File nonprofit certificate of incorporation with New York department of state;
- Draft nonprofit bylaws;
- Draft nonprofit policies;
- Hold organization meeting of initial nonprofit directors;
- Obtain a Federal Employment Identification Number (EIN) for NGO;
- Prepare and file application for New York Nonprofit NGO to be recognized as a Section 501(c)(3) tax-exempt organization;
- Register 501(c)(3) nonprofit NGO as a New York charity; and
- Obtain New York State tax exemptions available to 501(c)(3) nonprofits.
Difference Between the Terms “501(c)(3),” “Nonprofit” and “NGO” in the U.S.
Before we get started, a note on terminology:
- “Nonprofit,” also known as a “nonprofit organization” or “NPO,” refers to an organization formed for a primary reason other than profit-making, whether the reason is charitable, religious, recreational, social or otherwise.
- “NGO” or “Non-Governmental Organization” refers a nonprofit that is not controlled by government, and is also commonly called a “civil society organization” or “CSO.”
- “501(c)(3)” refers to section 501(c)(3) of the Internal Revenue Code, which describes nonprofits formed exclusively for “charitable, religious, educational, scientific, literary . . .” or other specific 501(c)(3) purposes.
- In the U.S. “NGO” is not a legally defined status. The term “NGO” is often idiomatically used to describe a nonprofit that has received recognition as a 501(c)(3) organization, and that is not government controlled.
For more information about the difference between the terms “Nonprofit,” “501(c)(3)” and “NGO,” please refer to this post: Nonprofit, NGO & 501(c)(3) – What’s the Difference?.
Now that we’re clear, this guide is aimed at forming a New York organization that fits the criteria of 501(c)(3), nonprofit and NGO. Specifically, it is focused on forming a New York nonprofit corporation, under the New York not-for-profit corporation law, with 501(c)(3) status.
Put Together your New York 501(c)(3) Nonprofit NGO Team
New York law requires nonprofit corporations incorporated under the New York not-for-profit corporation law to have a minimum of three directors. While some states will allow fewer directors, the recognition of 501(c)(3) tax-exempt status is granted by the United States Internal Revenue Service (IRS) and not any particular state. While not technically a legal requirement, the IRS very strongly prefers a nonprofit to have at least three directors, and a majority of directors who are not related by blood or business. For more information about 501(c)(3) director requirements, for nonprofits created inside and outside New York, please refer to this post: How Many Directors are Needed on a Nonprofit/501(c)(3) Board?.
To fit into the customary definition of “NGO,” it is also imperative for the New York nonprofit corporation not to be controlled by government. This means that a majority of the directors on the board of the nonprofit cannot be government officials, serving in their official capacities on the board. Further, if the nonprofit is a membership nonprofit (which is normally not recommended for most 501(c)(3) organizations), less than a majority of the voting membership should be comprised of government entities or government officials, serving in their official capacities as members of the organization.
In addition to directors, you will also need to decide who will serve as officers. New York nonprofits need to have, at minimum, a President, Secretary and Treasurer. Many nonprofits also will appoint an Executive Director, who functions as the Chief-Executive-Officer (CEO) of the organization. Under the New York not-for-profit corporation law, a person can hold multiple officer positions, except that the President cannot also be the Secretary, and an officer can also serve in the capacity as a director.
Lastly, you will need to think of who will serve as good resource persons. These are people who can help with brainstorming, fundraising, raising awareness, and planning and implementing the activities of the nonprofit.
Create a 501(c)(3) Business Plan
Nonprofits are mission driven. Obtaining 501(c)(3) status means demonstrating to the IRS that your New York Nonprofit NGO is an organization described in section 501(c)(3) of the Internal Revenue Code. While a full-blown business plan may not always be necessary, at minimum, you need to clarify what the mission and vision of the nonprofit will be; articulate what activities, services and programs the nonprofit will engage in to achieve its mission and vision; and describe how these activities, services and programs will be managed and funded.
In articulating the mission and vision for the nonprofit, it may be helpful to refer to the following guidance from the IRS with respect to permissible 501(c)(3) purposes:
The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. — IRS, Exempt Purposes – Internal Revenue Code Section 501(c)(3)
In determining your New York nonprofit’s activities, services and programs, and how they will advance the nonprofit’s mission and vision, it is also important to recognize the 501(c)(3) restrictions and prohibitions. IRS guidance is as follows:
A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. — IRS, Inurement/Private Benefit – Charitable Organizations
501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. — IRS, The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations
[N]o organization may qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying). A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks loss of tax-exempt status. — IRS, Lobbying
Lastly, an important component for the “business plan” of your New York nonprofit is financial projections of income and expenditures for at least 3 years. This information will be needed to apply for recognition of 501(c)(3) status.
Choose a name for your New York Nonprofit NGO
Before forming a New York nonprofit, you will need to decide on a name for it. There are a number of rules with respect to choosing a name: first, unless an exception applies, the name of a New York not-for-profit corporation must end with “incorporated,” “corporation,” “limited,” “inc.,” “corp.,” or “ltd.”; second, certain words and phrases are prohibited or can only be used if permission is obtained from an appropriate government official; and third, the name needs to be unique enough to distinguish it from other New York entities, both non-profit and for-profit.
In order to determine if a word or phrase in the name of your nonprofit is prohibited or restricted, Section 301 of the New York Not-For-Profit Corporation Law, together with Section 404 of the same, provides guidance on prohibited and restricted terms.
In order to determine if the name you’ve chosen for your nonprofit is unique enough, you’ll need to check to see if the name or a similar name has already been used. The quickest way to do so is to use New York’s Corporation and Business Entity Database. Be aware that the database is not always updated, and also there are special rules with respect to determining uniqueness. For example, singular and plural nouns are considered the same, spaces and certain other punctuation marks are disregarded, and the entity indicator is disregarded. You can also request a current name search from the Department of State for $5, but doing so is often not practical since it needs to be requested by mail or fax.
If there is a concern that the name you want will be taken before the Certificate of Incorporation for your New York nonprofit is submitted, you can request the New York Department of State to reserve the name for 60 days by filing an Application for Reservation of Name.
Draft New York Not-for-Profit Corporation Certificate of Incorporation
Now that you are clear on the purpose of your New York nonprofit, determined the identities of its directors, and have chosen a name for it, it is time to prepare the nonprofit certificate of incorporation.
A free New York not-for-profit corporation certificate of incorporation form may be obtained from the website of the New York department of state. The form provides all the language required to form a New York not-for-profit corporation, but you should be aware that it does not contain all the optional provisions that are available under New York law, and does not contain the required provisions for 501(c)(3) status.
Whether you decide to use the form provided by the department of state, or a document that you have created, in order to ensure that your nonprofit NGO is eligible for 501(c)(3) status, you must ensure that the certificate of incorporation includes the necessary 501(c)(3) language. The sample articles of organization on the IRS website can be used as a guideline.
A 501(c)(3) may be subclassified as a public charity or a private foundation. Private foundations have more restrictions, and is less advantageous from a tax perspective, than a public charity. If there is a chance that your New York nonprofit NGO will be subclassified as a private foundation, you will need to ensure that the certificate of incorporation includes the necessary private foundation language. Sample required provisions for private foundations can also be found on the IRS website.
A registered agent is not required in New York, since in New York the Secretary of State must be designated as agent for service of process. However, if having a registered agent is desirable for your New York not-for-profit corporation, the name and address of the registered agent should be specified in the in the certificate of incorporation.
File Nonprofit Certificate of Incorporation with the New York Department of State
Nonprofit corporations are restricted from engaging in certain activities or having certain purposes under Section 404 of the New York Not-for-Profit Corporation Law. If your nonprofit NGO will engage in any activity, or has any purpose, described in that section, special approvals will be required before it can be incorporated. The process for getting each approval is different.
If no approvals are needed, or when all approvals have been received, the certificate of incorporation for your New York nonprofit NGO is ready for filing. This is done by mailing the signed certificate of incorporation, along with a check for the filing fee ($75 at the time of this posting) made payable to the “Department of State” to Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231.
It normally takes about one to two weeks from the date of receipt for the New York department of State to file the certificate of incorporation. However, by paying an additional $25, it will be filed within 24 hours of receipt. To request expedited filing, you send a separate check for the expedite fee (which is non-refundable) and a cover letter requesting that the process be expedited, along with the certificate of incorporation to be filed. You will also want to add “Attn: Expedited Processing” to the envelope.
You will need at least one certified copy of your nonprofit’s certificate of incorporation, and should request it along with the filing of the certificate. The certified copy should be in your nonprofit’s corporate file, and will be used to open a bank account and complete various applications. New York charges $10 per certified copy. Like the expedite request, the copy should also be requested through the filing cover letter.
Once the certificate of incorporation for your nonprofit has been received by the New York department of state, it will be checked for compliance with thew New York not-for-profit corporations law, and for name validity. Hopefully, at the end of all this, you will receive a filing receipt and certified copy by mail. Congratulations! At this point you have officially set up a New York nonprofit NGO, and have come a long way on your journey towards 501(c)(3)!
Draft Bylaws for your New York Nonprofit
Great! New York has approved the formation of your not-for-profit corporation. You’ve cleared the hardest part at the state level. Now it’s time to start working towards the 501(c)(3) status. The first step on this next leg of the journey is preparing the bylaws for your nonprofit.
The bylaws is a document that articulates the internal rules and regulations of the your New York nonprofit, especially concerning the nonprofit itself, its directors and officers, and members (if any). Below is a list of some items you may wish to consider in drafting bylaws for your nonprofit:
- Directors: How will directors be elected? What qualifications do they need to have? How many will there be? How long will they serve? What happens if they need to be removed? What rights and obligations do they have?
- Officers: How will officers be elected or appointed? What qualifications do they need to have? What are their duties? What are their titles? How long will they serve? What happens if they need to be removed? What rights and obligations do they have?
- Members: Will the organization have members? What is required in order to become a member? Are there different levels of membership with different privileges and obligations? What is the role of members in decision making?
- Committees: What types of committees will the nonprofit have? What is required for additional committees to be formed? What is the composition of committees? What role do committees play in decision making? What are their responsibilities? What are they prohibited from doing?
- Decision Making: Where and when will meetings be held (a New York nonprofit must hold at least one annual meeting of directors, and in the case of nonprofits with voting members, one annual meeting of members)? How much notice must be given before a meeting? Who can call a meeting? What other procedures are necessary to call a meeting? How many must be present for decisions at a meeting to be valid (quorum)? Can decisions be made without a meeting? What number of votes are needed to make a decision at a meeting (or by written consent)? Are there different votes required for different decisions? What happens if there is a deadlock in voting? Can directors (or members) vote by proxy?
- Controls: Who is authorized to sign contracts? Who is authorized to sign checks? Who is authorized to exercise the nonprofit’s right to vote as a shareholder? If there are members, what are the procedures necessary for a member to exercise the right to inspect the nonprofit’s books and records?
Draft Appropriate NGO Policies
A New York not-for-profit corporation is required to have a conflict of interest policy. The IRS also very strongly suggests that 501(c)(3) nonprofits adopt a conflict of interest policy, and has provided a sample policy in Appendix A of the IRS Form 1023 Instructions. Additionally, a New York nonprofit may also be required to adopt a whistleblower policy if it receives over $1,000,000 in a year, and has 20 or more employees.
United States law, under the Sarbanes Oxley Act, provides certain protections to internal whistleblowers and certain prohibitions against document destruction, with respect a wide range of entities, whether for-profit or non-profit. In this light, many nonprofits, particularly larger ones, choose to adopt a whistleblower policy and document retention policy. While these policies are not required by the Sarbanes Oxley Act, a New York not-for-profit corporation must have a whistleblower policy if it receives over $1,000,000 in income in a single year, and has 20 or more employees.
There are many other policies that a nonprofit can have. However, beware — worse than not having a policy is having one and not adhering to it.
Hold an Organization Meeting of the Initial Directors of your New York Nonprofit Corporation
Not-for-profit corporations formed in New York are required to hold an organization meeting of initial directors. Any of the initial directors named in the certificate of incorporation can call the meeting. Essential business that should be carried out at the organization meeting includes the following:
- Ratify certificate of incorporation, if it was not signed by all the Directors;
- Adopt the bylaws;
- Adopt conflict of interest policy and other policies;
- Appoint or elect officers;
- Appoint members of committees, especially the executive committee, if necessary;
- Authorize application for Employer Identification Number (EIN);
- Authorize application for recognition of 501(c)(3) status;
- Authorize registration as a charity in New York; and
- Authorize opening of bank account and financial controls.
All the above actions should be properly memorialized in a set of corporate minutes, which should be signed by the Secretary of the nonprofit.
Obtain U.S. Employer Identification Number (EIN) for your NGO
All United States corporations must have an EIN. It is a unique identifier that is used in federal tax related filings, as well as many state filings, and is required to complete your New York nonprofit’s 501(c)(3) application. The EIN will also be needed to open a bank account for your organization.
To obtain an EIN, a responsible party, who must be someone with control over the nonprofit’s finances, must be identified. If the responsible party has a Tax ID number, such as a social security number or individual taxpayer identification number, an EIN can be obtained via an online application, for free, on the IRS website, in literally 5 minutes.
If the responsible party does not have a Tax ID number (e.g. lives outside the United States and has never had any reason to obtain one), the EIN must be obtained through the paper application, IRS Form SS-4. Application procedures in this case can be rather complex and it is highly recommended that you hire an attorney or tax professional to help you.
Prepare and File IRS Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code”
OK! Armed with a business plan, certificate of incorporation, bylaws and EIN for your New York not-for-profit corporation, you are now ready to take the leap into 501(c)(3) territory by preparing Form 1023.
Form 1023 is used by the IRS to determine if your organization qualifies for the 501(c)(3) tax-exemption. It is also used to determine whether the organization is classified as a public charity or private foundation. Public charity classification is generally the more tax-favorable and less restrictive classification. Most nonprofits do not want to be classified as a private foundation unless they have to be.
There are two versions of Form 1023, an expedited Form 1023-EZ and a much more extensive Form 1023. The IRS estimates that the Form 1023 will take non-experienced persons at least 100 hours to complete.
Not all nonprofits can use the “EZ” version of the form, and the IRS has provided a Form 1023-EZ Eligibility Worksheet in the Form 1023-EZ instructions to help you determine if yours will qualify. However, for your convenience, the main reasons for not being eligible to use Form 1023-EZ are as follows:
- Nonprofit’s current assets are valued at over $250,000;
- Nonprofit’s gross receipts (i.e., the total value of cash and property received as donations or payments) in a single year exceeded $50,000, in any of the last three years;
- Nonprofit projects gross receipts in a single year to exceed $50,000 this year, next year, or the year after;
- Nonprofit is categorically prohibited from using the form because it is seeking certain special classifications (e.g., as a house of worship or a school);
- Nonprofit is categorically prohibited from using the form because it will engage in certain activities (e.g., financial counseling); and
- Nonprofit does not have a U.S. address.
It is very important to take your time and think over your answers to Form 1023, whether the “EZ” version or the regular version. The IRS is looking for reasons not to approve the application. Any red flags could cause the IRS to follow up with questions, greatly delaying approval; if any questions are answered wrongly, the application can be rejected, the filing fee lost, and reapplying will be extremely difficult (it is sometimes easier to use a whole new NY nonprofit corporation than to try and save one that has been rejected). You do not want to this to happen to you.
As of February 2018, the filing fee for Form 1023-EZ is $275, and $600 for the full Form 1023.
Processing time will take from 2 weeks to a few months depending on the form you used, how long your application was, how well it was written, and what activities and programs your New York 501(c)(3) nonprofit NGO will have. If all goes well, you will receive an Affirmative Determination Letter from the IRS as proof of your New York nonprofit’s 501(c)(3) status.
Congratulations! Now your New York Nonprofit NGO has been officially recognized as a 501(c)(3) tax-exempt organization.
Register 501(c)(3) Nonprofit Organization with the New York Charities Bureau
All New York charities must register with the Charities Bureau of the New York Attorney General’s office. You must register your nonprofit online on the Charities Bureau website.
If you have followed all the directions above, you should have everything you need to complete the application. It will need to be signed by the treasurer or chief financial officer, and another authorized officer of the nonprofit, such as the President or Executive Director. The charities bureau filing fee is $25.
Obtain New York State Tax Exemptions for your 501(c)(3) Nonprofit NGO
As a 501(c)(3) Nonprofit NGO, your organization is exempt from many federal taxes and certain state taxes. However, in New York, state tax exemptions are not automatic.
For most nonprofits, the main tax exemptions required are the corporate franchise tax (i.e., the annual New York corporation tax) exemption, and the sales and use tax exemption. Obtaining the corporate franchise tax exemption involves filing Form CT-247, along with your IRS 501(c)(3) determination letter, nonprofit corporation certificate of incorporation and bylaws, to the New York State Tax Department, Corporation Tax office. Obtaining a tax exemption certificate to provide vendors, in order to not have to pay New York sales and use tax, involves Form ST 119.2, along with your IRS 501(c)(3) determination letter, with the New York State Tax Department, Sales Tax Exempt Organizations Unit.
Nonprofits that own real estate may wish to request property tax exemptions. This is done by submitting the appropriate forms to the appropriate tax assessor’s office based on the location of the property. Be aware that different tax assessors have different deadlines, and unlike the sales and use tax, and franchise tax, exemptions, above, the property tax exemption must be renewed every year.
Mission accomplished! Your New York 501(c)(3) Nonprofit NGO is fully set up. Now go change the world!
This blog post is provided for general informational purposes only. It is not legal advice, and should not be a substitute for legal advice. If you have questions or comments about the post, or would like to learn more about something in the post, please feel free to contact me.
Additionally, you may be interested in taking a look at my New York nonprofit law services.