There are approximately 1.5 million nonprofit organizations in the US. Hawaii has approximately 10,000 nonprofit organizations or charitable organizations as they are commonly referred to. These organizations help improve issues in the community, and unlike for-profit organizations, they are not created for profit but for the greater good of the public.
Consequently, nonprofit organizations enjoy various benefits like federal and state tax exemption. However, beyond that, there are several other nonprofit benefits, including:
access to grants, limited liability, and the fact that founders are kept separate from the organization, limiting their liability further.
Your nonprofit organization in Hawaii must align with the rules of the state, and you must apply for a 501(c)(3) tax-exempt nonprofit organization with the IRS. Let’s take a look at the step-by-step guide below.
1. Select a name for your organization
Once you identify the nonprofit organization’s purpose, the next step is choosing a name for your charity. In Hawaii, the nonprofit name cannot suggest or state that it exists for any other cause other than what is explicitly stated in the Articles of Incorporation. This is as per the naming rules in the state.
Additionally, the nonprofit corporation name does not need to include a designation such as Inc or Corporation. However, it does need to be distinguishable from other businesses or organizations in the state of Hawaii.
To check the availability of a nonprofit organization name in the state of Hawaii, or conduct a name search, refer to the Hawaii Secretary of State website or the Hawaii Department of Commerce and Consumer Affairs Business Registration Divisions website.
2. Nominate a Hawaii registered agent
Your Hawaii nonprofit requires a registered agent. The registered agent is also called the statutory or service of process agent who acts as the organization’s representative to the Hawaii Department of Commerce and Consumer Affairs.
The primary goal of the registered agent is to receive correspondence, tax notifications, and compliance information on behalf of your charitable organization. They are also liable to accept legal documents and summons on the organization’s behalf in a legal matter.
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You may appoint anyone as a registered agent, including yourself; however, the individual needs to meet certain requirements, including:
- They must have a physical address in Hawaii
- They should maintain regular business hours at the physical address in Hawaii
- They must be residents of Hawaii and at least 18 years old
- If you’re choosing to nominate a business entity to act as your nonprofit registered agent, they must be registered to operate in the state of Hawaii
- They must consent to the appointment
3. Recruit your board members
In order to legally operate your Hawaii nonprofit organization, you need to recruit a Board of Directors. The Board plays a significant role in the operations of the nonprofit, with everything from finances to the nonprofit’s ultimate purpose.
Essentially, the Board of Directors is the support system for the nonprofit. Some of the roles that the Board must fulfill are:
- Structural guidance
- Financial management
- The hiring of executive directors and more
While they are not overly involved in the day-to-day running of the nonprofit organization, they do have an imperative role in maintaining the overall well-being and success of the organization.
The Board of Directors in Hawaii must include the following:
- At least three directors unrelated to each other
- A minimum of one officer who will be in charge of recording board meetings minutes
Elected officers are not required in the state of Hawaii. However, you may still choose to do so, considering that elected officers can help improve the effectiveness of the Board and serve as a foundation of leadership.
If you decide to elect officers, you will need a:
- Vice president
- Secretary for your Hawaii nonprofit organization
4. Consent to bylaws and conflict of interest policy
During the Board’s first meeting, you’ll need to compile two very important documents, which are the:
- Conflict of Interest Policy
The bylaws will need to declare whether the nonprofit is:
- A Membership organization
- Actions that are prohibited for board members
- The time limits for board members
The Conflict of Interest Policy is basically the corporation’s code of ethics and includes the rules that the nonprofit’s members, including the Board of Directors, must abide by at all times.
Essentially it should state that the nonprofit’s purpose must be prioritized above all else and that every decision taken should be to further the success of the nonprofit organization and not benefit individual members’ personal agendas.
5. Select a Hawaii nonprofit startup corporation structure
There are a few types of nonprofit organizational structures in Hawaii as follows:
- Mutual benefit corporations: This type of nonprofit corporation is a type of organization similar to other mutual benefit corporations found in common law nations. These corporations may or may not opt for state and IRS tax-exemptions.
- Public benefit corporations: Public benefit NPOs are created for charity purposes, considered charitable organizations, and act as social welfare organizations. These corporations developed for the public benefit include religious and charitable organizations formed to generate public and social good.
- Mutual benefit common interest development corporations: These are the nonprofit formations created under the Davis Stirling Common Interest Development Act to administer common interest development, such as a homeowner’s association.
- Religious organizations/corporations: These nonprofits are solely for religious purposes, such as a church.
6. Prepare and file nonprofit Articles of Incorporation
The next step in the process of forming your Hawaii nonprofit corporation is preparing and filing your Articles of Incorporation. The Articles of incorporation will need to be filed with the Hawaii Department of Commerce and Consumer Affairs.
The articles must include basic information including:
- Your organization’s name
- Your organization’s statement of purpose
- Provisions that are required for both federal and state tax-exempt purposes
- The name and address of your statutory agent
You’ll find a nonprofit Articles of Incorporation Form at the Hawaii Department of Commerce and Consumer Affairs. The file is also referred to as Form DNP-1. You may choose to either fill in the blank form or use the sample template as a guideline to base your articles.
Additionally, you need to include specific language to ensure that you attain or are eligible to receive 501(c)(3) tax-exempt status with the IRS.
Essentially, you need to include a clause or statement declaring exactly what the nonprofit organization’s assets will be used for and exactly what’s going to happen if the organization is dissolved.
You may file the Articles of Incorporation online or via mail at the following address:
State of Hawaii
Department of Commerce & Consumer Affairs
Business Registration Division
P.O. Box 40
Honolulu, HI 96810
7. File an initial report
While nonprofits in various states across the Us are required to file an initial report, this is not a requirement in the state of Hawaii.
8. Secure an EIN (Employer Identification Number)
Every nonprofit organization in Hawaii needs an EIN. The EIN stands for Employer Identification Number and is often referred to as the FEIN or Federal Employer Identification Number.
The EIN is useful in various instances, such as opening a business bank account and applying for tax exemption in the state of Hawaii.
9. Apply for federal tax exemption
Every Hawaii nonprofit organization will need to apply for federal tax exemption in the state. In order to obtain tax exemption from the Internal Revenue Service, Form 1023 needs to be completed as per Internal Revenue Code.
The information you need to compete in this form includes:
- Various details regarding the nonprofit organization in Hawaii
- The organization’s history
- The organization’s finances
- The organization’s structure
- The organization’s governance policies
- The organization’s operations
- Activities that your organization will be involved in and more
The following instructions will assist you in completing Form 1023.
The instructions for completing Form 1023-EZ are available on the IRS website. Once your application is approved, the IRS will give you a determination letter stating that you are an exempt organization and this means that you are now considered a part of the public charities nonprofit sector.
10. Apply for Hawaii state tax exemption
In most states in the US, you need to apply for state tax exemptions. However, in Hawaii, once your nonprofit has been granted an IRS determination letter, it is a part of the existing organizations that are exempt from federal income taxes, which also makes the organization exempt from state income taxes.
However, you still may wish to apply for general excise tax exemption, which you should do with the Hawaii Department of Taxation. You’ll need to complete Form G-6, which is the application for exemption from general excise taxes.
Instructions to complete the above-mentioned form may be found on the Hawaii Department of Taxation website.
The following application, once approved, will grant you exemption from general excise tax in the state of Hawaii. This is because Hawaii does not have sales tax but general excise tax.
11. Other applicable permits and licenses
In order to legally run and operate your nonprofit organization in the state of Hawaii, you’ll need to secure all applicable permits and licenses by filling in Form BB-1 and obtaining your state tax identification number. Feel free to make use of the Small Business Administration Business License and Permit Lookup tool to search for your Hawaii business type and locality.
Additional state registration and reporting requirements
Nonprofit organizations or charitable organizations in the state of Hawaii are free to take advantage of a number of tax benefits, including exemption from certain taxes, and they may also benefit from raising tax-deductible donations to fund their organization’s purpose.
Therefore, charitable organizations that raise funds or are involved in charitable solicitation in Hawaii need to register with the Department of the Attorney General.
12. Submit an annual report
All Hawaii nonprofit corporations must file annual reports every year with the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division.
The Hawaii annual report will need to include the following information:
- The organization’s name
- The organization’s principal address
- The state that the nonprofit was initially formed
- The statement of purpose
- The name and physical adjust of the registered agent in Hawaii
- The name and address of the principles, including directors, officers, members.
- The date and signature of the individual filing the annual report
Costs of starting a new nonprofit in Hawaii
The following filing fees apply to all Hawaii nonprofit organizations.
- Articles of Incorporation: $26 + optional $25 expedite fee
- Federal tax exemption application 501(c): $275 or $600 IRS fee
- Application for state tax identification number, Form BB-1: $20
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
There are a couple of reasons to file an annual report in the state of Hawaii, one of them being it is required by statute. It also places your nonprofit in good standing and allows it to remain in good standing with the state. Additionally, all nonprofits who submit annual reports on time and remain in good standing with the state are eligible for state contracts.
The state of Hawaii does not have charitable gaming laws, even though many other states do. Therefore, as a nonprofit corporation planning on fundraising using raffles, bingo, and other types of charitable games, your organization will need to follow the general Hawaii Gambling Laws. To learn more about compliance with this law, refer to the Hawaii Attorney General Guidance on Charitable “Raffles” compliance guide.
An organization’s mission statement basically outlines the organization’s purposes, goals, and values. The reason why every nonprofit needs a mission statement is to serve as a guide for major decisions that the organization must make at some point in time. The mission statement also allows potential donors to see exactly what you hope to achieve by starting your nonprofit organization and should be a part of your nonprofit’s business plan.
In order to have eligibility for 501c3 tax exemption in Hawaii, you will need to have elected your directors, filed Articles of Incorporation, adopted bylaws and conflict of interest policy, and obtained your nonprofit’s EIN.
Nonprofit organizations often choose to recruit volunteers who are passionate about the cause. However, it is not uncommon for nonprofits to hire employees and pay them a salary based on their time and service to the organization. However, this must be disclosed to the IRS.