Obtaining nonprofit status
Why you need a 501(c)(3) nonprofit status, taxes
If your orchestra is in the United States, an official federal 501(c)(3) non-profit status will open many doors for you, particularly in terms of fundraising. Most grants and fundraising programs are only available to nonprofit organizations, and your organization will be more attractive to individual or local corporate donors if they can deduct donations to your orchestra from their taxes. Additionally, you will not have to pay federal income taxes (though you will still have some annual filing requirements), and you can also file additional paperwork with your state to be exempt from state income taxes. Obtaining a 501(c)(3) status is a lengthy, expensive, and somewhat laborious procedure, but it should be something you do early on, as soon as you know your new orchestra is going to last.
How to get a 501(c)(3) nonprofit status
There are numerous services you can pay for to fill out the 501(c)(3) paperwork for you (LegalZoom being a popular example); however, I do not think they are worth the cost. The most laborious parts of putting together the 501(c)(3) application are the parts that are very specific to your organization, such as creating your bylaws and budget, which you really need to do yourself. If you feel the need to outsource something as fundamental as your bylaws, then you haven't taken enough time to really think through the structure and purpose of your organization to put it on sound footing in the first place. Think of your 501(c)(3) application as an opportunity to define and strengthen your organizational goals and structure. Assemble a small team of people to just pound it out and get it done.
The procedure for obtaining a federal 501(c)(3) nonprofit status is as follows:
- Obtain an Employer Identification Number (EIN)
- Design and elect your first board of directors
- Obtain official corporation status through your state
- Write and adopt bylaws
- Complete the federal 501(c)(3) application
- Wait several months for the IRS to process your application.
How long does it take?
The time it takes to prepare your application and get your state incorporation will depend on your state. The time it takes for the IRS to review and approve your application depends on the IRS and how good a job you did on your application. If you did a good job preparing your application, you should receive your non-profit status after a few months with no need for revisions. If, on the other hand, the IRS determines that revisions are needed, you will be assigned a revision specialist and will have to jump through several more hoops and wait for several more months before obtaining your status. The good news is that your non-profit status will be retroactive back to the date you submitted the application, so if you received any large donations during the time your application was being processed, your donors can still claim tax deductions once your non-profit status has been obtained (assuming a tax year doesn't end in between).
The RCO obtained its nonprofit status after just four months, but I know of another local organization that waited over a year even though they did not have to make revisions. I think it really depends on the quality of your application and how backed up the IRS is when you submit it.
How to get tax-exempt status at the state level
If you have successfully received your federal 501(c)(3) status, you should also be eligible for exemption from state income taxes. You will probably have to file some extra paperwork to the state. In California, you can file Form 3500A if you have already received your federal exemption. If you decide to file for state tax exemption before receiving your federal tax exemption, you have to fill out the longer and more detailed Form 3500, which has similar requirements to the federal application.