In the U.S., nonprofit organizations can become tax-exempt by obtaining 501(c)(3) status. This special status, named after a section of the Internal Revenue Code, offers some great perks for nonprofits, including thrift stores.
When your nonprofit gains 501(c)(3) status, your thrift shop is exempt from federal income taxes, which means more of your profits go toward supporting your cause.
But the benefits don’t stop there: your donors and customers win, too. Donors can write off their contributions at tax time, making them more likely to give, and you can offer shoppers better prices, helping build customer loyalty.
If you are ready to unlock these benefits, here’s a simple, step-by-step guide on how to get 501(c)(3) status for your nonprofit thrift shop.
1. Choose a Legal Structure
To apply for 501(c)(3) status, your nonprofit must be set up as a legal entity.
That might sound complicated, but it doesn’t have to be! The IRS simply wants to know that your organization’s mission aligns with tax-exempt purposes, like charities, private foundations, or religious, scientific, and literary work. For thrift shops, this usually means focusing on charitable efforts.
Next, your nonprofit needs to choose one of three legal forms: a trust, an association, or a corporation. Over 90% nonprofits in the U.S. opt to become corporations, and here’s why:
- Stable structure: A nonprofit corporation operates as its own legal entity, with a board of directors and clear rules. This structure helps maintain accountability and transparency.
- Perpetual existence: Corporations continue to operate even if the founders or current leaders step down, ensuring your nonprofit’s mission can carry on uninterrupted.
- Attractive to funders: Many government agencies and private funders prefer working with corporations, as they follow all the legal guidelines.
Take some time to weigh the benefits of each structure and choose the one that best fits your nonprofit’s goals.
2. Select a Name
Before you learn how to get 501(c)(3) status for your nonprofit, you need to pick the perfect name.
Once you’ve landed on a name, check if it’s available in your state’s business name registry. Each state has its own rules, but generally, your nonprofit’s name needs to meet a few basic guidelines:
- It must be unique, meaning no other business or organization is already using it.
- It shouldn’t be misleading, like implying that your nonprofit is connected to the government if it’s not.
- It must follow any state-specific rules. For example, some states might require you to add “Inc.” or “Corp.” to the name, while others restrict certain words.
Besides the legal requirements, it’s a good idea to choose a meaningful name that gives potential donors and funders a clear idea of your nonprofit’s mission.
3. Appoint a Board of Directors and Create Bylaws
After registering your nonprofit’s name, the next step is selecting your board of directors. This team will help guide your organization and ensure it’s run smoothly and ethically.
Most states have a few basic requirements for board members, such as:
- A minimum of three directors, though some states allow fewer for smaller nonprofits.
- All members must be at least 18 years old.
- No conflicts of interest, meaning that the board’s decisions should always serve the nonprofit, not personal gain.
Once your board is in place, it’s time to create the bylaws. These internal rules outline how your board will operate and make decisions. The bylaws ensure your nonprofit functions fairly by establishing guidelines for meetings, financial management, and resolving conflicts of interest.
4. Draft and File the Articles of Incorporation
When you have determined your nonprofit’s board of directors and internal rules, you need to draft the articles of incorporation. These organizing documents should include the nonprofit’s name and purpose, the names and addresses of its board of directors, the nonprofit’s Registered Agent, and the dissolution clause.
Here’s what these should look like:
- The Registered Agent receives and manages the nonprofit’s legal communications.
- The dissolution clause is a rule required by federal law. It explains what happens to a nonprofit’s assets if it shuts down. Usually, a closing 501(c)(3) nonprofit has to give its assets to another 501(c)(3) organization.
When they are ready, submit these articles to your Secretary of State office or your state’s equivalent agency. You’ll need to pay filing fees when you submit these documents, which vary from state to state.
5. Get an Employer Identification Number (EIN)
After you’ve submitted your articles of incorporation, your next step is to apply for an Employer Identification Number (EIN). This is a unique number that the IRS uses for tax purposes. With an EIN, you can open a bank account for your nonprofit, hire employees, file taxes, and apply for permits, licenses, and even 501(c)(3) status.
6. Apply for 501(c)(3) Status
With your EIN ready, it’s time to learn how to get the 501(c)(3) status.
Start by filling out IRS Form 1023 or, if you qualify, the simpler Form 1023-EZ.
Form 1023 is the application for recognition of exemption under section 501 (c)(3) of the Internal Revenue Code. If your nonprofit meets the IRS’s requirements, you might be eligible to file the shorter, easier Form 1023-EZ.
After completing the form, submit it to the IRS along with the filing fee — $600 for Form 1023 or $275 for Form 1023-EZ. After your nonprofit is approved, you must file annual tax returns using Form 990 and follow the rules for staying in good standing, like not participating in political campaigns and limiting lobbying efforts.
Strong management and careful record-keeping are essential for staying compliant and running a successful nonprofit.
7. Comply With State and Local Requirements
Depending on where your nonprofit is registered, you might have a few extra steps to follow to meet state and local regulations. Always check your local laws and make sure you comply with the following:
- State incorporation laws: Each state has its own rules for incorporation, which can include filing statements, fees, and financial reports. Make sure you’re up to date on these to keep your nonprofit in good standing.
- Charitable solicitation rules: Some states require nonprofits to register with a state agency before raising funds for charitable purposes.
- State tax exemptions: Along with the federal tax exemption you get with 501(c)(3) status, some states offer tax exemptions. It’s worth contacting your state’s tax office to see if your nonprofit can apply for these, too.
Also, check if your local or state government requires any permits or licenses for your nonprofit’s activities. While these aren’t directly related to getting 501(c)(3) status, they might be necessary for running a thrift shop, hosting fundraising events, or even holding raffles. A quick look into zoning permits or event licenses can help make sure your tax-exempt nonprofit runs smoothly.
Support Your Nonprofit’s Finances With ThriftCart
Knowing how to get the 501(c)(3) status for your nonprofit will set up your thrift store for long-term success. Once you have obtained the status and all equivalent local and state licenses, your organization can receive tax exemptions and grants, and your donors can make tax-deductible donations.
Specialized point of sale (POS) software like ThriftCart can be an invaluable asset when you apply for tax-exempt status. Besides tracking donations and donor information, it can provide key metric performance reports and help you maintain accurate records.
Book a demo today and discover how ThriftCart can help your nonprofit remain tax-compliant.
