Four Fast Ways to Form a Charity in the US

Many thanks to Steph Gentile and Buff Miller for their review and contributions to this article.

Groups ranging from small neighborhood projects to large national initiatives sometimes want to mobilize quickly to meet a community need or another charitable purpose. Many of those groups consider starting a nonprofit — that is, forming a new entity that qualifies as a tax-exempt charitable organization under Section 501(c)(3) of the United States Internal Revenue Code. Would-be U.S. nonprofit founders often have questions about how to start a nonprofit, and how to accelerate the process.

Baseline: The regular process

Under normal circumstances, forming a new entity and obtaining an IRS tax-exempt determination letter takes anywhere from a few weeks to 10 months or longer, depending upon a variety of circumstances including the IRS’s current volume of requests. After forming a legal entity (usually, a nonprofit corporation under state law), the organization will fill out and submit an application for tax-exempt status on IRS Form 1023. A typical application package is 50 – 100 pages long, including both a lengthy application form and dozens of pages of attachments. The organization must then pay a $600 filing fee and can expect to be contacted by the IRS within 180 days of submission with confirmation of receipt.

Donations received prior to the entity’s application receiving approval from the IRS will generally be retroactively treated as tax-deductible contributions if the entity’s application is approved. Such donations will not be tax-deductible if the entity’s application is rejected by the IRS. Accordingly, many potential donors will insist on the receipt by the entity of a favorable determination letter from the IRS before contributing to the entity.

Some faster alternatives

In the face of natural disasters, public health or humanitarian crises, and other urgent needs, many would-be founders of tax-exempt entities ask how they can expedite this process.

Expedited option 1: Partner with an existing tax-exempt entity

Often the fastest way to get up and running is to join forces with an existing tax-exempt entity that is already working on a similar or complementary mission. In such a partnership the founders, volunteers and donors of the new project do everything they would otherwise do with a new entity, but under the umbrella of the existing tax-exempt entity. In addition to the obvious cost savings on overhead expenses, the name recognition of the existing tax-exempt entity will frequently open doors that would not be available to a brand-new startup entity.

Expedited option 2: Set up a fiscal sponsorship with an existing tax-exempt entity

In this alternative, the founders establish a nonprofit entity. But rather than waiting to receive a determination letter from the IRS, the new nonprofit entity enters into a fiscal sponsorship agreement so that it can start raising tax-deductible donations immediately. Fiscal sponsorship is an arrangement through which an existing tax-exempt entity (the sponsor) supports a new project through a contract called a fiscal sponsorship agreement. The purpose of the project must further the tax-exempt mission of the sponsor. Typically, the project is responsible for raising its own money, which is donated by donors to the sponsor, and then granted from the sponsor to the project so that the project can carry out the tax-exempt purpose of the donation. A fiscal sponsor typically retains a percentage of the funds raised by the sponsored project. Sometimes fiscal sponsorship is temporary, either because the project is waiting for its own IRS Form 1023 application to be processed or because the project itself is temporary (disaster relief can be a good candidate for a temporary project). Other times fiscal sponsorship is long-term. Since a fiscal sponsorship agreement is a private contract, it can be set up quickly. The setup time depends upon how quickly the project can secure a fiscal sponsor and how long the parties take to reach a negotiated agreement. This could be as little as a week, but three to four weeks is more typical. 

Any existing 501(c)(3) tax-exempt entity can serve as a fiscal sponsor, but there may be some advantages to using an experienced fiscal sponsor that already has the infrastructure in place for supporting newly launching projects. This may be especially true for organizations that need to act quickly and focus their attention on real-time developments in current events. The San Francisco Study Center provides a national directory of fiscal sponsors that can be filtered by geographic area or subject matter, including disaster relief. Since the sponsoring organization will control the funds raised by the new project, it is important that any new organization chooses a sponsor that has a good reputation and a good alignment with the work of the new project. New projects should ask to speak to other projects the sponsor has supported in the past as a reference check.

Fiscal sponsorships come in different models whose details are beyond the scope of this article. Projects pursuing fiscal sponsorship should carefully review the terms of the agreement and seek legal counsel when necessary. 

Expedited option 3: Request expedited review from the IRS

The IRS allows organizations to request expedited processing of a Form 1023 application for certain compelling reasons, including disaster relief. It is likely not sufficient that the organization’s activities would benefit victims or frontline responders. The organization must demonstrate that it is organized to provide critical relief and that the organization’s ability to serve those needs will be materially and adversely affected unless the application is reviewed expeditiously.

Applicants requesting expedited review must use the regular IRS Form 1023 and must attach a written statement that fully explains the compelling reason for expedited review. It is often helpful to include:

1. A brief description of the disaster, an immediate need and details of how the organization will provide relief
2. An explanation of the immediate need for the specific disaster relief services the organization provides

Financial circumstances can also provide a compelling reason for expedited review. A newly forming initiative with a scheduled major fundraiser or a commitment for a significant grant that is contingent upon the organization receiving tax-exempt status by a certain date may have a compelling reason for expedited review. In those cases, the organization’s written request for expedited review should include, to the extent applicable:

1. A description of any pending grants, including information about the grantor and the amount or property to be received
2. An explanation of how the loss of the grant(s) might impact the organization’s ability to operate and provide relief (and the relative value of such grant as a percentage of annual funding)
3. A statement explaining any other anticipated consequences should the expedited processing be denied
4. The date an exemption letter is required, if applicable

The IRS does not guarantee expedited review for all applicants who request it. If the applicant does not provide a compelling reason for the request or if the IRS chooses in its discretion not to grant expedited review, the IRS will review the application in accordance with its regular procedures.

Expedited option 4: Use the EZ form

Organizations with projected gross receipts of less than $50,000 per year for the first three years and total assets under $250,000 may be eligible to file the shorter version of the 501(c)(3) application, called the IRS Form 1023-EZ. The EZ form is much shorter than the standard form. In our experience, processing time for an EZ application is typically four to six weeks rather than eight to ten months. The filing fee is $275 for the EZ application instead of the $600 fee for the standard application. Applicants must file the IRS Form 1023-EZ online at pay.gov. An organization using the EZ application cannot request expedited review, since all EZ applications are already expedited.  

Organizations that plan to seek grant funding should check in advance with potential grantors about policies related to the eligibility of grant recipients who used the EZ application. Certain foundations may have policies or preferences against making grants to organizations that filed using the IRS Form 1023-EZ, because the EZ application requires so much less information and transparency than the regular form.

More information

Please note that newly forming charitable organizations must comply with requirements beyond the steps referenced in this article, including registering with the offices of relevant state attorneys general, filing annual reports and making timely tax filings. For more information about requirements for charitable organizations, see the resources available from the IRS’s Charities and Nonprofits webpage.