The state of Maryland has approximately 32,000 successful nonprofit organizations in the nonprofit sector. Together these nonprofits employ almost 253,000 people and represent 10.6% of the state workforce.
Among the most popular of these nonprofit corporations are Maryland New Directions, Operation Second Chance Inc, and International Paruresis Association, Inc. Nonprofit organizations aim to meet an unfulfilled need in the community and are ultimately developed for the greater good of society.
Starting a nonprofit has many benefits, including receiving tax-exempt status, credibility, and limited liability. It can take anywhere between two weeks to three months to get a nonprofit organization in Maryland up and running.
While it’s a good idea to start a nonprofit organization, you must be aware of the state’s necessary laws governing nonprofit organizations.
In the following article, we’ll provide a step-by-step guide to show you how to go about starting a nonprofit in the state of Maryland.
1. Select a name for your organization
Choosing a name for your Maryland nonprofit organization is one of the most important steps in the process. You should think carefully about your organization’s name as it ultimately establishes your nonprofit’s brand and image.
In Maryland, your Corporation name must include one of the following words or abbreviations such as:
- Company – but it cannot be preceded by the word “and” or the symbol for that word
To check the availability of your nonprofit name in Maryland, refer to the Maryland State Department of Assessments and Taxation.
Additionally, feel free to read the official naming guidelines on the office of the Attorney General website for Maryland land-based organizations.
Also, ensure that the name is available as a web domain in the event you plan on starting a website to boost the credibility of your nonprofit organization.
2. Nominate a Maryland registered agent
All nonprofit organizations in Maryland must appoint a service of process agent for the nonprofit organization. A “service of process” agent is also referred to as a registered agent, statutory agent, or resident agent.
Ultimately, the registered agent is tasked with receiving important legal documentation on the nonprofit’s behalf. In the event a lawsuit is brought against the nonprofit organization, it’s the registered agent who will serve as the organization’s point of contact with the state of Maryland.
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Anyone may be nominated as a resident agent in the state of Maryland; however, they must fulfill the following requirements:
- They must be a resident of Maryland
- They must have a physical street address in the state of Maryland
- They must be at least 18 years of age or older
- They must consent to the appointment
- They must maintain usual business hours
3. Recruit your board members
Every nonprofit in the state of Maryland is required to have a Board of Directors in order to legally operate in the state. The Board of Directors is made up of a few directors as well as officers who will have individual responsibilities and authorities within the organization.
When recruiting directors, they must fulfill the following requirements:
- You must nominate at least three directors not related to each other
- Membership and residency are not compulsory
- The term for the directors must be agreed upon at the next annual board meeting
When recruiting Maryland officers, the following requirements apply:
- You must elect a president
- A secretary
- A treasurer
- The term that the officers will serve is approximately one year until a successor is qualified and elected
- The same person is allowed to hold two or more offices
However, when signatures are required, the person holding two or more offices may only sign under one capacity.
4. Consent to bylaws and conflict of interest policy
Your Maryland nonprofit needs to have two important governing documents and policies. The first is a bylaws document which is the primary governing document of the nonprofit. They basically cover the internal rules for operating structures in key positions within the organization.
The bylaws do not have to be filed with the Articles of Incorporation in the state of Maryland; however, when applying for 501(c)(3) tax exemption, you will need to send in a copy of your governing documents to the Internal Revenue Service to have tax exemption eligibility.
So it is advised that the bylaws are ratified prior to filing for tax exemption. The next critical governing document is the conflict of interest policy, which is a regulated document for important organization members.
In a nutshell, the conflict of interest policy is a guideline for mitigating and avoiding conflict of interest when using nonprofit resources and assets. It also provides guidelines on how stakeholders should conduct themselves and prioritize acting in the organization’s best interest at all times.
5. Select a Maryland nonprofit startup corporation structure
The next step in the process is choosing a nonprofit corporation structure for your Maryland nonprofit. Maryland offers three types of nonprofit corporations, which are:
- Nonstock Corporations: In the event that there are one or more individuals engaged in a nonprofit enterprise, this type of corporation would be best suited or most appropriate. Tax-
- Exempt Nonstock Corporations: In the event that one or more people engage in a nonprofit enterprise, this type of corporation would be the best option. It’s also suitable if you plan on applying for federal income tax exemption under 501(c)3.
- Religious Corporations: This type of corporation only applies if you plan on incorporating a religious congregation that also plans on applying for tax exemption.
6. Prepare and file nonprofit Articles of Incorporation
Preparing and filing Articles of Incorporation is the first legal step in getting a nonprofit organization recognized by the government. When filing your Articles of Incorporation with the Department of Assessments and Taxation, you need to remember the specific language required.
You need to include two unequivocal statements in the Articles of Incorporation. Therefore your articles must expressly state the following:
The purpose of your nonprofit must be clear, and it must also be limited to one of the below categories:
Charitable, Scientific, Literary, Religious, Educational, Testing for public safety, Preventing cruelty to animals and children, and Fostering international/national amateur sports competition
Your Maryland nonprofit’s assets must be used for the purposes stipulated under the Internal Revenue Code. Consequently, the articles are required to disclose how the assets are being used and what will become of the nonprofit’s assets in the event of dissolution.
Additionally, your articles should contain the information below:
- The Maryland nonprofit’s duration
- The Maryland nonprofit’s name
- The Maryland nonprofit’s purpose
- The street address and name of your statutory agent
- The street address of the organization’s registered office
- The name and address of each incorporator and each initial director
Refer to the Maryland Department of Assessments and Taxation for the relevant Articles of Incorporations forms or template and to file online.
7. File an initial report
Initial reports are not required in Maryland.
8. Secure an EIN (Employer Identification Number)
Obtaining an Employer Identification Number is the next step in the process of starting a Maryland nonprofit organization. The EIN is a custom nine-digit number assigned to your organization by the Internal Revenue Service and needs to be applied for by all nonprofit organizations irrespective of whether you plan on hiring employees or not.
Ultimately, it’s used as an identifier when filing for tax exemption, opening business bank accounts, and submitting tax documents.
After your Articles of Incorporation have been approved, you’re free to apply for your EIN. You need to use IRS Form SS-4, and if you submit your application online, your EIN will be provided immediately.
9. Apply for federal tax exemption
Applying for federal income tax exemption from the IRS is an important step in the process. This is all the more reason to familiarize yourself with the Compliance Guide for Tax-Exempt Organizations. Ultimately, it allows you to get federal tax exemption and also save money, making your nonprofit more productive.
It also makes a huge difference when applying for sponsorships and grants from the government and private foundations.
When applying for federal tax exemption, ensure that you include your Articles of Incorporation.
Once your application has been approved, you’ll receive a determination letter from the Internal Revenue Service stating that your nonprofit organization is tax-exempt.
Refer to the IRS website for the different statuses and filing requirements required in the state of Maryland.
10. Apply for Maryland state tax exemption
After receiving your determination letter, you’ll still need to obtain state income tax exemption, making your nonprofit an exempt organization or exempt from federal income tax.
When applying for state income tax-exempt status with the Legal Department of the Revenue Administration Division, ensure that you include the following:
- A copy of your nonprofit’s most recent financial statement
- Your organization’s bylaws
- The IRS determination letter
- An explanation of the purpose, nature, and scope of your organization
- Request for exemption from Maryland income tax
Receiving state income tax exemption means that you won’t need to file income tax returns. You need to apply for state income tax exemption with the Controller of Maryland.
The next step in the process is applying for sales tax exemption also with the Controller of Maryland. Refer to the sales and use tax exemption certificate application Form to make your application online.
11. Other applicable permits and licenses
Depending on the scope of the nonprofit’s programs and your nonprofit needs, you may or may not need to apply for other business licenses and permits in the state of Maryland on both local and state levels. To find out more about applicable business licenses and permits, refer to Maryland’s One-Stop Portal.
Additional state registration and reporting requirements
If you plan to receive tax-deductible funds from donors or raise funds for your nonprofit organization, it’s regarded as a charitable solicitation. Therefore, in the state of Maryland, you are required to register for charitable solicitation with the state.
In the event that you plan on fundraising in other states, you need to register with each of those states as well.
To register for charitable solicitation in the state of Maryland, file with the office of the Secretary of State.
Additionally, you need to update your registration on a yearly basis and file your annual registration no later than six months of the end of your fiscal year.
12. Submit an annual report
All Maryland existing organizations are required to file an annual report with the Maryland Department of Assessments and Taxation. You’ll need to complete and file the annual report Form-1 with the DAT.
Costs of starting a new nonprofit in Maryland
The following costs apply to all Maryland nonprofit corporations:
- Articles of Incorporation: $100 filing fee + $20 organization & capitalization fee + $50 development center fee if applying for 501(c)(3),(4), or (6) + optional $5 return mail fee + optional $50 expedite fee. The expedite fee is required to file online, by fax, or in-person.
- Application for federal tax exemption 501(c): $275 or $600 IRS fee
- Maryland Charitable Registration: $0 – $300
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.
A for-profit organization is also a private foundation created by a single benefactor, business, or individual. The aim is to make a profit which is then distributed to the benefactor and the relevant shareholders in the business. Public charities, on the other hand, generate funds from the public, and instead of distributing these funds to founders and members of the public charity, the money is used to support its initiatives directly.
No, it is not possible for a single person to start a nonprofit organization. This is because when applying for 501(c)(3) tax exemption with the Internal Revenue Service, you need to have at least three unrelated directors on your Board of Directors. This is a requirement for obtaining tax exemption.
Yes, it is possible for you to pay yourself a salary as a nonprofit founder. However, you should be aware of budget limitations when setting your salary. Ultimately, it’s quite normal and legal for both founders and nonprofit employees to receive a taxable salary; however, this must be disclosed to the IRS. You may also seek legal advice prior to deciding on appropriate salaries.
An NGO is a nongovernmental organization. It’s used to refer to charitable organizations operating outside the US. On the other hand, the term nonprofit is used for charitable organizations operating in the United States and ones that are structured as nonprofit corporations.
An organization’s mission statement should never be underestimated. This is because a well-focused and clear mission statement serves as a guide for all major decisions made by nonprofit organizations. This is especially so when it comes to decisions about new projects and programs to undertake and which ones to avoid.