The Nonprofit FAQ

Can the organization operate while completing the 501(c)(3) process?

Ina Frank wrote this note for the NONPROFIT FAQ when it was just getting started: State laws vary, so check closely. There are really two questions: a. May a "non-profit" organization operate before the STATE grants it a charter as such an organiztion? The short answer is: State law governs absolutely. The oxymoron is: an "organization" that does not yet have its charter from the state does not exist, except perhaps (state law, again) as an "association" of its members. But such a "proto-organization" can probably solicit support (although doubtful that it could do so to the general public -- state law, wouldn't you know) for the costs of organization (i.e., incorporation, IRS filings, etc.) So, declaring oneself to "be" a non-profit before the state of incorporation bestows such a mantle is presumptuous but, so long as the status is correctly disclosed, probably not illegal. However, soliciting funds -- especially from the public -- before organizational status is achieved (and specific state approval for the solicitaion, as many states require, is also obtained) may very well be illegal. State law governs. b. May an organization solicit funds as a "non-profit" before the IRS recognizes its tax-exempt status. Federal tax exempt status (i.e., recognition as a tax-exempt public charity pursuant to Sec. 501(c)(3) of the Internal Revenue Code) is another story. It is quite normal behavior for non-profits to begin operations before they get their federal tax exemption, since that can take months (or longer.) There is nothing wrong with a non-profit's applying for grants or soliciting support before the IRS rules, so long as the interim status is disclosed. A donor giving to a non-profit during this period does take a risk that tax-exempt status will not be granted, in which case the contribution is not deductible. For a private foundation, the risk is greater, since that type of entity may not grant funds to other than a recognized exempt organization. In the latter case, fledgling non-profits use the offer of a grant, conditioned on IRS approval, as a way to expedite the approval process. (Believe it or not, it does work, if adequately documented.) In the former case, the non-profit may agree to return the contribution if tax exempt status is denied. And, you have to acknowledge those donations and tell the donor that you have state approval while federal application is in progress. Reposted with minor corrections 10/11/98 -- PB