A 501(c)(3) corporation is a nonprofit organization that does not have to pay federal income taxes. Taxpayers can deduct from their own taxable income donations to 501(c)(3) corporations. To qualify, the corporation must devote itself to a charitable, religious, scientific or educational purpose and be recognized by the Internal Revenue Service as tax-exempt. A tax-exempt organization may incorporate by filing Articles of Incorporation with its state so that the members or directors do not face personal legal responsibility for the organization's debts or actions.

Preparing the Articles of Incorporation

Give the corporation a name that another entity is not using. Search the online database of your state's corporations or secretary of state's office to see if a name is available. Merely using the ampersand symbol ("&") rather than "and," articles such as "the" and "a" and Arabic numerals ("1,2,3") for the words "one, two, three" do not make corporate names distinguishable. The name may not imply that the corporation is a government agency or affiliated with a government agency.

Describe in the Articles of Incorporation the purposes and powers of the corporation and limit them to charitable or other Section 501(c)(3) purposes; specifically cite Section 501(c)(3) of the Internal Revenue Code. Avoid using broad and vague phrases such as "operate a hospital" or "research"; provide details or words to show that the corporation will act only for purposes allowed by 501(c)(3). Stating that the corporation will pay donations it receives to other 501(c)(3) corporations will qualify for exemption. Include in the articles a statement that the corporation will not give any of the "profits" to the directors or members; a 501(c)(3) can have paid employees.

Decide if your corporation will have members. As do shareholders in a for-profit corporation, members of a nonprofit elect the board of directors, who conduct the corporation's business. Unlike shareholders, members do not receive dividends or payments from the corporation. If a nonprofit chooses not to have members, the directors choose the board members; however, the corporation's organizers create the initial board of directors.

Getting IRS Recognition

Churches and their affiliated groups and associations and public charities, such as schools and hospitals, that do normally not receive more than $5,000 are automatically exempt from federal taxation. Even so, these corporations should request a letter from the IRS confirming their tax-exempt status to qualify for exemptions from state and local income taxes and requirements that organizations register to solicit charitable contributions.

Apply for an Employer Identification Number by filing a Form SS-4; you can download the form from irs.gov. The IRS identifies the nonprofit with an EIN, just as it uses a Social Security number for individual taxpayers. The nonprofit must submit one even if it has no employees. Insert on the form the corporation's name as it appears on its Articles of Incorporation.

Submit a Form 1023 to request that the IRS recognize your corporation as tax-exempt. Include with the form a copy of the Articles of Incorporation to show that it was filed with your state's corporations office. The IRS requires that you have statements that the corporation will pursue only charitable purposes, that earnings will not go to officers, directors or members and that the corporation will not participate in political campaigns or lobbying for legislation; your Articles of Incorporation should already have these statements.

Tip

If your corporation affiliates with or is subject to a central organization, ask for the central body to send the IRS a written request to recognize your corporation. The IRS will issue a letter stating your corporation is covered by the central organization's tax-exempt status.

The corporation's directors must approve bylaws, or the rules that govern how the corporation operates. Do not file the bylaws with your secretary of state or corporation's office.

Warning

The corporation must file a Form 990 return with the IRS even though it is tax-exempt. The return includes space for the corporation to describe its mission or most important activities.

Arizona does not automatically exempt 501(c)(3) organizations from sales and use taxes.