Hey, everyone, welcome to V-FAQ’s. I’m attorney Joe Collier and today we’re going to talk about how to start a tax exempt company. A lot of you know this as a 501(c)3 and to get started, you have to have one of three eligible entities, that’s a trust and unregistered association or corporation. We’re going to start with a corporation because a trust is very inefficient, it’s a hassle to use, you have to title assets in a certain way, and no one wants to deal with that. Non-registered association have to follow the same steps as a corporation, but you don’t get the benefit of registration. So we’re not going to talk about that.
Now, in a previous video, I discussed how to start a corporation. So watch that video, write down those steps. And we’re going to make two changes to that. The first change is in your Articles of Incorporation, there’s a purpose clause, there’s also going to be a purpose clause on your bylaws. The purpose clause, normally, I would advise you to write down any lawful purpose that allows you to do any business conduct without being pinned down to one industry or activity.
Now, for a tax exempt company, you have to pin yourself down you have to write exclusively for the purpose of whatever activity you’re pursuing under 501(c)3. There are three activities that will grant you tax exemption: charity, religion, and education. So if you’re going to start a charity, you write exclusively for charitable conduct permitted by 501(c)3, that’s your purpose clause in your articles and your bylaws. Now, the second change is that shareholders are going to be called members. That’s because there’s a rule saying there can be no private interest holders in your corporation. A tax exempt company cannot be for the private financial interest of individuals. So that means that there’s no shareholders and that people working for the corporation have to be paid reasonably. If you’re going to be the founder and elect yourself to be on the board of directors, you can pay yourself, but it has to be within reason.
Now, those are the two changes that you make to receive your tax exemption status you have to apply on the IRS website. For the tax exemption, you also have to apply on your state’s tax department’s website, or submit their paper filing, if that’s what they require. That way you receive both your federal and your state tax exemption. Now, you have to do this at least at the IRS level, within 27 months of starting your company. Otherwise, you have to start a new company because it’s only eligible for the first 27 months. To do that filing, you’re going to need your basic business startup documents, bylaws articles of incorporation the certificate of registration you receive. When the state approves your filing, and financial statements for the past however long you’ve been open. Even if these financial statements are blank, you still have to submit them it’s part of the application package. Also, for at least the IRS, there’s going to be a filing fee of usually $275.
So you submit all that information with your filing fee. It comes back you’re approved for tax exemption, you just have to maintain your purpose and your financial interest where owners or directors are not being paid ridiculous amounts of money. And again, there’s no owners because there’s no shareholders. There are only people that run the company and that’s going to be the board of directors. So that’s it, you’ve got your tax exempt status. Thank you for watching, and I’ll see you next time.
I went to law school at Capital University in downtown Columbus. There, I became the first person in school history to graduate the program (a 3-year program) in just 2 years while on the Dean’s list. I started my firm straight out of law school after marrying my beautiful wife and passing the bar exam. Now, I represent businesses in litigation, draft transactional documents, provide legal advise to business owners, and represent them in transactional negotiations.