Nonprofit organizations are considered to be “tax-exempt” by the US Internal Revenue Service (IRS), which simply means that they do not have to pay taxes on most of their income and donations, unlike for-profit businesses.
Nonprofits also enjoy other tax exemptions, including sales tax exemptions. If you’re considering forming a nonprofit organization in Ohio, there are some key factors that you should keep in mind so as to classify your organization as a 501(c)(3).
Starting a 501(c)(3) Nonprofit in Ohio is Easy!
Step 1: Name Your Ohio Nonprofit
The first step to forming a nonprofit company in Ohio is choosing a name for your organization. Your name must contain the words “corporation,” “incorporated,” or “company.” The following are not allowed: Federal and state designations, including postal service abbreviations.
Step 2: Choose a Statutory Agent in Ohio
A statutory agent is a sole director, general manager, or president of a nonprofit company. The agent must be one of the following:
- An individual who is at least 18 years old
- An incorporated company with a physical address in Ohio
- A partnership with at least one partner who lives in Ohio
- A trust that has at least one trustee that lives in Ohio
Step 3: Select your Directors & Officers
There must be at least three officers and directors for a nonprofit corporation, and one of the directors must be the registered agent. No one, including corporate employees (except volunteers), can benefit from the nonprofit’s profits or assets unless they are unpaid officers or directors.
Step 4: Adopt Bylaws & Conflict of Interest Policy
The nonprofit’s bylaws and conflict of interest policy should include:
- An explanation of how the directors are elected or appointed
- The procedures for amending the bylaws
- A statement of whether the Ohio nonprofit corporation will have members
- The conditions upon which a member will be admitted, suspended or expelled
- Rules that govern meetings
- The authority that each officer has
- A method for removing an officer or director.
Step 5: File the Ohio Articles of Incorporation
The next step is filing the Ohio Articles of Incorporation. You can complete and file your own Ohio nonprofit Articles, or you can hire a professional to do so for you.
A form will need to be filed with the Secretary of State’s office. The filing fee is $105 if the organization is not seeking tax-exempt status under Section 501(c)(3).
Step 6: Get an EIN for your Ohio Nonprofit
A Federal Employer Identification Number (EIN) is a nine-digit number that the IRS uses to identify your business.
To apply for an EIN, visit the IRS website and file Form SS4.
Step 7: Apply for 501(c)(3) Status with the IRS.
Once your nonprofit has been formed in Ohio, you’ll need to file for a 501(c)(3) tax-exempt status with the IRS.
You can download a copy of Form 1023 from the IRS website and submit it yourself, or you can hire a professional.
To qualify as a 501(c)(3), 90% of your organization’s earnings must go toward charitable, religious, scientific, literary, or educational purposes.
Pros and cons of forming a nonprofit organization in Ohio
- Nonprofits in Ohio (and other states) can receive tax benefits such as sales and property tax exemptions.
- Nonprofits do not have to pay federal income taxes on money they make
- Nonprofits don’t have to pay capital gains tax when selling assets for more than their original value, unlike for-profit businesses.
- Individuals and organizations may be eligible for grants and loans from the government if the organization is a 501(c)(3)
- The process of forming a nonprofit in Ohio can be time-consuming. It typically takes around six months to complete all necessary steps.
- Starting a nonprofit in Ohio requires at least three officers/directors, and one director, or registered agent, must reside in Ohio.
- Nonprofits are required to pay franchise taxes every year
How much does it cost to start a nonprofit?
To start a nonprofit in Ohio, you should budget between $1,000 and $2,500 for legal services. This excludes the price of filing fees that the state charges to form a nonprofit.
The total cost will also depend on whether or not your organization decides to seek 501(c)(3) status under the IRS.
To do this, you’ll need to hire an expert who can help draft and submit Form 1023. The price range for such experts is between $3,000 and $10,000.
Separate your personal assets from the organization’s assets
The IRS requires that all personal assets must be completely separate from your nonprofit’s assets. If you have a car, for example, it needs to be in your own name and not under the name of your nonprofit.
- Open a business bank account: For most nonprofits, this is the first thing they’ll need to do after forming their organization. This will help you establish credit and ensure that all donations go directly to your nonprofit.
- Create an IRS account: To receive tax-exempt status, you’ll have to file Form 1023 with the IRS. If you are ready, start your free application for federal tax exemption today. You can also choose to hire a professional or submit it yourself, depending on your time and budget constraints.
- Get a credit card: Many small businesses (including nonprofits) use credit cards to pay for business expenses. If you are working with a small budget, chances are you will not be able to afford one at first. However, if your budget allows it, applying for a card is often the easiest way to go about paying for business expenses since most companies do not require much information when submitting an application online.
- Hire a bookkeeper: Hiring a bookkeeper to track your organization’s expenses is the best way to avoid potential problems with the IRS down the road. You can also use free online software, such as Wave Accounting or Zoho Books, which allow you to keep track of your business’ spending. They offer convenient mobile apps so you can ensure that your nonprofit always has access to its records.
Get insurance coverage
Nonprofits, like other businesses, need to be insured. Having the proper insurance can help protect both your organization and its assets from unforeseen accidents and losses. Homeowners Insurance is a good option for nonprofits that don’t own physical assets such as real estate or equipment.
1) Business Property Insurance: If your nonprofit owns physical assets such as equipment and computers, you’ll need to purchase a separate insurance policy
2) General Liability Insurance: This type of coverage protects your organization from claims that may arise from injury or damage done by the business during its operation. It provides protection in the event that customers seek damages due to personal injuries, such as tripping on an uneven sidewalk at your place of business.
3) Professional Liability Insurance: This type of insurance will protect you in the event that claims are filed against your organization for professional negligence. It may include errors committed by the nonprofit’s employees or attorneys, such as malpractice during contract negotiations
4) Posting a performance bond: Nonprofits are required to post performance bonds before beginning construction on buildings or other property that is worth more than $10,000. A performance bond acts like an insurance policy that promises payment if the project does not come out how it was supposed to.
The amount of this type of bond is set at 110 percent of the estimated cost. Performance bonds can be expensive and difficult to acquire, but they can also help prevent problems with contractors down the road.
5) Establishing credit: If your nonprofit is planning on taking out a loan to finance any large projects, such as purchasing real estate, it will need to establish credit. You can do so by applying for a business credit card or using PayPal.
Obtain the necessary licenses and permits
Depending on what type of services your nonprofit plans to offer, you may be required to obtain additional licensing for certain tasks.
This includes licenses related to whatever your organization does, including child care providers, cosmetology, funeral homes, taxi drivers, etc.
Build a Business Website
Nonprofit companies that have their own websites are able to build relationships with donors and volunteers online.
Having your own website makes it easy for people to find out more information about you, donate if they wish, and spread the word about your mission.
- Donate to other nonprofits: If your nonprofit can afford it, donating money or equipment to other nonprofits is a great way to show community support. This type of support can go a long way in creating partnerships between organizations.
- Advertise: While advertising may not be an option for every nonprofit, doing so can help increase awareness about what causes you are fighting for. Adopting this approach will require time and money, but many nonprofits find that it’s worth the initial investment. You can use signs, flyers, billboards, and other means to get your message out.
- Build a referral network: You may also want to consider contacting local businesses and asking if they are willing to refer customers who have requested information about your nonprofit. This could be as simple as creating a list of frequently asked questions so that potential clients can easily identify what you offer.
- Tapping into social media: Social media offers nonprofits the opportunity to share their mission with a larger audience. Facebook, Linked In, Twitter, YouTube, Pinterest, and other platforms allow users to follow organizations they care about and sometimes even donate money right from their phones or computers without having to leave the site. Creating a website is an important first step, but it’s just as important for nonprofits to invest in building a strong presence on social media websites.
Apply for Federal Tax-Exempt Status
If you plan to apply for federal tax-exempt status and receive public and private foundation grants, you will need to make sure your nonprofit meets the criteria of a publicly supported charity.
- Public Charities Organizations that are considered political groups, labor unions, gun clubs, social clubs, chambers of commerce, or business leagues cannot be considered public charities (although they can sometimes qualify as supporting organizations .)
- Private foundations: Private foundations give money to other nonprofits rather than turning directly to the general public. They also tend to distribute money over several years while public charities typically issue annual reports.
- Supporting Organizations: Supporting organizations financially support public charities but do not have their own independent charitable programs
- Community Foundations: Community foundations serve and represent people in one or several communities, which can be an entire city or even a single neighborhood. They are also required to provide grants only in the area where they are located.
Sales and Use Tax
The state of Ohio exempts nonprofits from all or a portion of the sales and use tax that they would otherwise have to pay.
Organizations must apply to the Department of Taxation for this exemption, but there are some restrictions on how it can be used.
- Resale certificates: Nonprofits may be able to provide resale certificates to individuals who buy goods or services on behalf of the organization. This allows buyers to avoid paying tax on sales.
- Sales Tax Exempt Organization Business Certificate: As long as your nonprofit meets certain criteria, you can apply for an exemption certificate allowing you not only to purchase equipment and materials without having to pay tax but also to sell items without collecting sales tax on those transactions. However, according to the Ohio Department of Taxation, you cannot sell your merchandise at a discounted rate.
Real Estate Tax
Nonprofits looking to buy real estate must apply for a real estate tax exemption through their county auditor’s office.
This exemption can save organizations thousands of dollars per year.
- Property Tax Exemption: Ohio offers property tax exemptions to religious, charitable, scientific, literary, and other nonprofit educational associations. These groups are not required to pay taxes on the first $20,000 of market value or taxable value of their properties. However, they do still have to pay taxes on any portion that exceeds the first $20,000.
- Property Tax Exemption for Religious Organizations: Nonprofit corporations that our churches may be exempt from paying property taxes on their places of worship, which are valued at up to $150,000. If they do not meet this criterion, religious organizations can apply for a partial exemption depending on the value of their property. For example, if an organization’s place of worship is valued at more than $100,000 but less than $225,000, it would pay no taxes on the first $100,000 and 50 percent of all taxable value exceeding that amount.
Taxes Related to Employees
Though nonprofits may not have to pay sales, income, or property taxes, they do need to make sure they are complying with all other applicable federal and state tax laws.
Employers in Ohio must withhold Social Security and Medicare taxes from their employee’s wages up to certain limits.
Additionally, employees in the Buckeye State must also pay a flat rate of 4 percent in worker’s compensation insurance premiums on any taxable annual income over $9,000
Employment Tax Requirements:
- Nonprofits must comply with employment tax requirements when hiring new employees, including withholding Social Security and Medicare taxes from their wages up to certain limits.
- In addition, nonprofits may be required to withhold federal income tax.
Ohio Solicitation Laws
The Ohio Internal Revenue Code prohibits “solicitation of funds” by anyone who is not a registered charitable organization with the secretary of state.
- Unlawful Solicitation: Most organizations looking to raise money through donations will need both a solicitation and a registration statement approved and on file with the Secretary of State. If an organization violates this law, it can face fines up to $5,000 per violation.
- Doing Business as (DBA) Requirements: Nonprofit companies must register their DBA with the Ohio Secretary of State if they choose an identifier that differs from their tax-exempt name or acronym. For example, ‘Cleveland Animal Rights Coalition Inc.’ would be required to register its name as ‘Cleveland Animal Rights Coalition.’
How to start a nonprofit with GoFundMe?
GoFundMe is the world’s largest social fundraising platform, with over $5 billion raised so far.
With GoFundMe, you can create a campaign to raise money for events like these:
- Emergency / Crisis Support
- Personal Emergencies and Family Needs
- Medical and Health-Related Expenses
- Funeral and Burial Expenses
- Pet Medical Bills and Losses
- Accidents, Thefts, Natural Disasters, and Other Catastrophes
- Education Costs (K-12) or School Tuition Fees (College/ University)
- Housing Assistance (Foreclosures, Eviction, Moving Expenses) Bills (Water, Electric, Gas & Heating Costs;
How to Check on a Non-profit Business in Ohio
A registered charity organization in Ohio is required to make its financial documents available for public inspection.
Also, it must file an annual report that includes copies of its most recent federal tax return and the names of its five highest-paid employees.
Charities are also required to submit a copy of their registration if they solicit donations from outside Ohio.
Nonprofit organizations in Ohio must follow detailed rules and regulations to avoid legal penalties. This includes getting a registration statement on file with the Secretary of State, paying certain taxes, filing annual reports, and more.
Before starting a nonprofit in Ohio, consult an attorney or do your own research to make sure you are compliant with all state laws.