Special to the Philanthropy Journal
By James Gilmer
This piece is an updated version of the Compliance for North Carolina Nonprofits article that originally published in March 2016.
Nonprofits are held to a high standard of government scrutiny, and for good reason! 501(c) nonprofits are exempt from federal income tax, access public funds, and provide donors with a tax deduction on their contributions. To maintain accountability and transparency, and to protect the public, nonprofits must meet various initial and ongoing reporting requirements. Starting with the 501(c) application process, nonprofits must demonstrate that they support a public good and do so in a way that is free from conflicts of interest.
In addition to the IRS, various state agencies regulate nonprofits, and each state has different requirements. This post is part of a series on nonprofit compliance. Our first post in the series will focus on the rules and regulations governing nonprofits in North Carolina.
Disclaimer: This focus of this post is 501(c)(3) nonprofits, which includes public charities and private foundations. This information is general in nature and will not apply to every organization.
Starting a Compliant 501(c)(3) Nonprofit in North Carolina
If you want to start a nonprofit in North Carolina, you should first research nonprofits already serving your community. With approximately 41,000 nonprofit organizations in North Carolina, an organization may very well already serve the mission you have in mind. Public resources are limited, so you should consider aligning your efforts with an existing organization if at all possible.
If you discover that there is in fact an unmet need in your community and you decide to create a new nonprofit, your goal should be to set up the nonprofit correctly. Prioritizing compliance from the start will help you position the nonprofit for success. Establishing a 501(c)(3) nonprofit in North Carolina includes the following key steps:
- Incorporate a nonprofit corporation with the North Carolina Secretary of State. The nonprofit corporation is the legal entity that is recognized by the IRS. As part of the incorporation, you will appoint a registered agent, which is responsible for handling legal documents for the organization. The North Carolina filing fee for incorporation is $127 when you file online. The North Carolina Secretary of State’s office is relatively friendly and accessible by phone. You can file your nonprofit online by uploading a .PDF file. Keep in mind that the IRS requires certain provisions on the articles of incorporation. Failure to include the required language can result in your tax exemption being delayed or rejected.
- Obtain a Federal Employer Identification Number (EIN) from the IRS. Wait until North Carolina has processed the articles of incorporation. You can file online with the IRS. As long as you have a Social Security Number (SSN), and there is no duplicate business or nonprofit name in the IRS database, you can get an EIN instantly online. If you get an error, you will have to fax in Form SS-4 and wait a few weeks for the IRS to process your request.
- Prepare Bylaws and a Conflict of Interest Policy. These are internal records that govern the nonprofit organization. They must be consistent with North Carolina and IRS requirements. The IRS will review these documents as part of your application for federal tax exemption. Once you have state-approved articles of incorporation, an EIN, and bylaws, you can open a bank account for the organization. You may, however, want to call your bank to confirm everything that’s necessary.
- File Form 1023 or Form 1023-EZ with the IRS. This is your application for federal exemption. Form 1023 is a long, arduous form, and also requires you to submit each of the three items above. The filing fee is now $600 for applicants. For years, this was the only form you could file. Form 1023-EZ is a streamlined application that was released in 2014, and can be filed online. The fee to file Form 1023-EZ is $275, and the IRS may approve your exemption in a matter of weeks. The downside is that only certain organizations are eligible. Organizations with over $50,000 in revenue, those that work internationally, schools, churches, and hospitals, among others, are all ineligible to file 1023-EZ. The best way to ensure that you are eligible and can obtain a tax exemption is to follow the instructions carefully, or find an expert to manage the process for you. Once your organization receives its 501(c)(3) determination letter, your nonprofit is also exempt from paying North Carolina income tax.
- Apply for a Charitable Solicitation License from the North Carolina Secretary of State. Once you have your 501(c)(3) determination letter, you are exempt from paying federal and state income tax, but you aren’t done yet. Before you solicit any funds, you must register with the Charities Division of the North Carolina Secretary of State. North Carolina is quite strict and imposes penalties on charities that fail to register. The registration fee ranges from $0 to $202, which is based on your organization’s charitable contributions. The state will mail you acceptance of this registration, or may request additional information. You will be able to call and email the examiner of your application directly should you need assistance.
North Carolina Nonprofit Compliance
Nonprofits incorporated in North Carolina have several ongoing filing requirements. Paying close attention to these requirements will help avoid penalties for noncompliance.
- IRS Form 990. This is a federal return due to the IRS four months and fifteen days after the end of your fiscal year. For organizations whose year ends December 31, your due date is May 15th. If you fail to file this return in three consecutive years, the IRS will revoke your tax exemption. However, if you do not file in a single year, you will not be able to renew your Charitable Solicitation License, or show proof to foundations and donors, who may expect to see this return before they make a gift. There are several versions of the 990, and the form you file depends on your revenue. Small organizations making less than $50,000 in a year can file the 990-N postcard online, which takes just a few minutes. Many organizations file this after their first year, which is dedicated primarily towards initial setup. Medium-sized organizations file a streamlined 990-EZ, and large organizations prepare the full-length 990.
- Renew your Charitable Solicitation License, which is also due four months and fifteen days after the close of your fiscal year. The state fee will again be $0 to $202, based on your organization’s charitable contributions. North Carolina grants you an automatic 60-day extension, but after that period, you must file your application or you will face late fees. Charities fundraising in North Carolina must submit either a 990 or a financial audit, but not both, as is commonly believed. Smaller organizations need to file the Department’s annual financial report form. Out-of-state organizations should also prepare for the cost of obtaining and submitting a certificate of good standing from your state of incorporation, which is required annually.
- File North Carolina Sales Tax Returns. In North Carolina, nonprofits cannot file to become exempt from state sales and use tax, but they can file for semiannual refunds for qualified purchases by filing Form E-585 with the North Carolina Department of Revenue. The due dates are April 15th and October 15th.
- Meet Ongoing Secretary of State Obligations. Currently, nonprofit corporations do not file an annual report with the North Carolina Secretary of State but are required to maintain a registered agent located within the state. If you have a corporate registered agent, be sure to renew the service and update any contact information that may have changed. If you use an individual, make sure they are aware of the duties of a registered agent, and if they have moved addresses, file to update the state’s records.
North Carolina Compliance for Out-of-State Nonprofits
North Carolina is one of the forty-one states that requires charities to register prior to soliciting donations from its residents. That’s right, prior to soliciting donations. This requirement applies whether or not donations are actually received!
Before you ask for contributions from North Carolina citizens, make sure you register with the North Carolina Secretary of State. You will have to renew this registration annually. North Carolina is particularly strict when it comes to the use of professional fundraisers and fundraising consultants. You will have to disclose that information fully as part of your annual registration.
North Carolina is also one of about 25 states that require disclosure statements to be included on an organization’s solicitation materials. These statements provide information to prospective donors about your organization’s leadership, programs, and financials, and are required by statute. It’s always a good idea to review the requirements in each state where you solicit before you start fundraising.
Depending on your activities in North Carolina, you may have to obtain a North Carolina certificate of authority for the nonprofit corporation (foreign qualify) and appoint an in-state registered agent. North Carolina does not currently require all out-of-state nonprofits that fundraise in North Carolina to apply for authority, however certain specific activities may trigger that requirement. Having employees who are residents or opening a physical location within the state are common reasons that can create the need to foreign qualify.
Finally, if your organization also operates outside of North Carolina and has registered to solicit elsewhere, it’s a good idea to catch up on compliance requirements nationwide.
The Importance of Compliance
Meeting all the regulatory requirements in North Carolina and nationwide is an achievable goal, and one that benefits your organization, the nonprofit sector, and the public. By understanding state and federal requirements, you can maximize your return on investment in compliance and demonstrate your organization’s worth in the community. For assistance managing your state fundraising requirements, contact us or call us at 1-888-995-5895 to speak with an Account Executive.
James Gilmer is a Compliance Specialist for Harbor Compliance, a company that establishes 501(c) nonprofits and helps them manage compliance nationwide. Harbor Compliance assists charities in every state and several countries abroad. James serves on the Board for two nonprofits in Lancaster, Pennsylvania.