Becoming a nonprofit organization in the United States involves meeting specific legal and regulatory requirements at both the state and federal levels. Understanding these requirements is essential not only for legal compliance but also for long-term sustainability, fundraising, and eligibility for grants. Many funders require proof of nonprofit status before awarding grants for nonprofits, making proper formation a critical first step.
By following the correct legal process, organizations can establish credibility, protect their mission, and position themselves to access grants and other funding opportunities.
Choose a Nonprofit Purpose and Structure
The first legal step in forming a nonprofit organization is defining its purpose. In the United States, nonprofits must operate for a recognized charitable, educational, religious, scientific, or similar purpose that benefits the public.
Most nonprofits seeking grants for nonprofits form as nonprofit corporations under state law. This structure provides legal recognition, limited liability protection for board members, and credibility with donors and grantmakers. The organization’s mission should be clearly defined and aligned with activities that qualify for tax-exempt status.
Incorporate at the State Level
Nonprofits must incorporate in the state where they plan to operate. This involves filing Articles of Incorporation with the appropriate state agency, usually the Secretary of State. The Articles of Incorporation typically include the organization’s name, purpose, registered agent, and governance structure.
To support future grants eligibility, the Articles should include specific language required by the Internal Revenue Service (IRS), such as a nonprofit purpose clause and a dissolution clause stating that assets will be distributed to another nonprofit if the organization closes.
Create Governing Documents
After incorporation, nonprofits must adopt internal governing documents. These include bylaws and, in many cases, conflict-of-interest policies. Bylaws outline how the organization will be governed, including board responsibilities, meeting procedures, and decision-making authority.
Grantmakers often review governing documents when awarding grants, especially for larger grants for nonprofits. Strong governance policies demonstrate accountability, transparency, and organizational stability.
Appoint a Board of Directors
A legally compliant nonprofit organization must have a board of directors. Most states require at least one director, but having multiple independent board members is considered best practice.
Board members are responsible for overseeing the organization’s mission, finances, and compliance. An engaged and qualified board increases credibility with funders and improves access to grants by demonstrating sound leadership and oversight.
Obtain an Employer Identification Number (EIN)
All nonprofits must obtain an Employer Identification Number (EIN) from the IRS, even if they do not have employees. The EIN is used for tax filings, banking, and grant applications.
An EIN is required to open a nonprofit bank account and is commonly requested when applying for grants for nonprofits, making it a foundational legal requirement.
Apply for Federal Tax-Exempt Status
To be recognized as tax-exempt at the federal level, most nonprofits apply for 501(c)(3) status with the IRS. This involves submitting IRS Form 1023 or Form 1023-EZ, depending on eligibility.
Receiving federal tax-exempt status allows nonprofits to receive tax-deductible donations and become eligible for many public and private grants. Many grantmakers will not award grants to organizations without IRS-recognized nonprofit status.
Register for State and Local Compliance
In addition to federal requirements, nonprofits must comply with state and local regulations. These may include charitable solicitation registration, state tax exemptions, and annual reporting requirements.
Failure to meet ongoing compliance obligations can result in penalties or loss of eligibility for grants for nonprofits. Maintaining good standing at all levels of government is essential for long-term operations and funding success.
Establish Financial and Operational Systems
Once legally formed, nonprofits should establish financial controls, accounting systems, and recordkeeping practices. These systems support compliance, reporting, and transparency.
Grantmakers expect nonprofits to manage funds responsibly. Strong operational systems help organizations track grant funds, prepare reports, and demonstrate proper use of grants. Legal formation alone is not enough—operational readiness is key to grant success.
Understand Ongoing Legal Responsibilities
Becoming a nonprofit organization is not a one-time legal process. Nonprofits must file annual federal returns, such as IRS Form 990, and comply with state reporting requirements. Board meetings, financial oversight, and policy enforcement are ongoing obligations.
Consistent compliance protects tax-exempt status and reassures funders that grants will be managed responsibly. Grantmakers often review compliance history when awarding new grants.
Position Your Nonprofit for Grants and Growth
Meeting legal requirements lays the foundation for sustainable growth and funding. Properly formed nonprofits are better positioned to apply for grants, build partnerships, and attract donors.
For organizations seeking grants for nonprofits, legal compliance signals credibility, accountability, and readiness. By investing time in proper formation and governance, nonprofits can unlock long-term opportunities and maximize their impact.
