The state of Minnesota has approximately 9,000 nonprofit organizations. Some of the NPO’s making the biggest impact in the state are Kids In Need Foundation, Washburn Center for Children, and Opportunity Neighborhood.
The key to thriving communities is a strong nonprofit sector. Therefore, nonprofits play a vital role in building healthy communities by offering critical services that deliver economic mobility and stability.
This is why nonprofit organizations that comply with all relevant and applicable laws are granted certain benefits such as eligibility for grants and tax exemption as well as limited personal liability, among many other advantages.
Starting a nonprofit organization in the state of Minnesota could take you anywhere between two weeks to three months, depending on whether or not you have all of your paperwork in order.
The following step-by-step guide will take a closer look at what it entails to start a nonprofit in Minnesota.
1. Select a name for your organization
Every nonprofit organization needs a name. In fact, it’s the first and foremost important step in starting a nonprofit corporation in Minnesota. When deciding on a name for your nonprofit, it should comply with Minnesota naming requirements and should also be easily searchable by potential donors.
The name you pick for your Minnesota organization should be written using English characters or letters. Additionally, the organization’s name should not imply that it was not organized under the Minnesota statutes governing corporations.
Refer to the Minnesota statutes for complete rules on naming Minnesota-based nonprofit organizations. To check the availability of your nonprofit name, you should also do a name search on Minnesota’s Secretary of State website.
In the event you plan on creating a website for the nonprofit organization, it’s suggested that you check whether the business name is available as a web domain.
2. Nominate a Minnesota registered agent
Your Minnesota nonprofit organization will need to appoint a registered agent. The registered agent is an individual in charge of receiving all legal documentation for your nonprofit.
Anyone may be appointed as a registered agent as long as they meet the requirements stated below:
- They must be a resident of the state of Minnesota
- They must have a physical address in the state of Minnesota
- They must be at least at least 18 years of age
- They must maintain regular business hours
- They must consent to the appointment
3. Recruit your board members
The next step in starting a nonprofit organization in the state of Minnesota is recruiting your incorporators, officers, and directors.
The officers are the head of your organization’s board, and you need to recruit a president and treasurer. The same person may hold both these offices; however, officers can only sign once when signing official documents. So you need to ensure that you have at least two officers on your board when documents require two or more signatures.
Minnesota nonprofits need a minimum of three directors. This is one of the requirements to obtain 501(c)(3) tax exemption in the state. Your directors must be natural persons or adults, and there are no residency or membership requirements regarding directors in the state of Minnesota. The term limit is one year unless your bylaws state contrary.
Lastly, you need to nominate an incorporator who will be responsible for signing your Minnesota nonprofit’s Articles of Incorporation. The incorporator may be an individual that’s already on your Board of Directors.
The directors are essentially the leaders of the nonprofit organization, so you should take the time to nominate the right people with the right skills.
4. Consent to bylaws and conflict of interest policy
Prior to applying for federal tax exemption with the IRS, your nonprofit will need to adopt bylaws and the Conflict of interest policy.
The bylaws are essentially a roadmap for the nonprofit to follow when making decisions pertaining to the organization’s rules, culture, and structure.
The Conflict of interest policy ensures that all decisions made by the board are always with the organization’s best interest at heart and not for personal gain.
A copy of the bylaws does not need to be filed with the state; however, they must be used as the nonprofit’s internal operating manual. Additionally, they must follow both state and federal law.
Your bylaws must include the following information:
- The nonprofit’s purpose
- The nonprofit support structure
- The responsibilities, descriptions, and positions of officers
- The terms of service of the board member and officer removal
- The number of board meetings per year, voting rights, quorum, and other requirements
- The nonprofit membership information conflict of interest policy
- How to amend your bylaws
Once your bylaws have been compiled and adopted, you are free to go ahead and apply for 501(c)(3) status with the Internal Revenue Service.
5. Select a Minnesota nonprofit startup corporation structure
Minnesota has various types of nonprofits or organizational structures, but they usually fall under one or more of the categories below:
- Religious organizations: These types of nonprofit structures are intended purely for religious purposes like synagogues, places of worship, and churches
- Mutual benefit common interest development corporations: These are the organizational formations created under the Davis Stirling Common Interest Development Act to administer common interest development, such as a homeowner’s association.
- Mutual benefit organizations: This type of organizational structure is a type of nonprofit much like other mutual benefit nonprofits. Their purpose is for the greater good, but of a specific group and not the general public.
Nonprofits under the mutual benefit category have members, and these members are charged monthly or yearly fees. This is how these types of nonprofits raise funds. The money is then used to benefit the paying members since dividends are expected. An example of this type of organization is a union. These organizations may choose to apply for state and IRS tax-exemptions, but it is not compulsory.
- Public benefit corporations: Public benefit nonprofit organizations are the most popular type of nonprofit corporation and are formed for charitable purposes. Therefore, they are referred to as public charities. They are meant to benefit a part of the public, meet an unfulfilled need or target a specific community.
Some of the different types of charitable corporations that fall into this category are educational programs, artistic ventures, and social services.
6. Prepare and file nonprofit Articles of Incorporation
Preparing and filing your Minnesota nonprofit’s Articles of Incorporation marks the legal start of your organization. It is also required to register your organization with the state of Minnesota. Your Articles of Incorporation must meet both state and IRS requirements.
Ultimately, this avoids any costly delays or, worse, getting your application rejected. The Articles of Incorporation play a crucial role when applying for 501(c)(3) tax exemption with the IRS. Therefore, they must clearly contain the following sections and must explicitly state the following:
The organization’s purpose must be stated clearly and also limited to one or more of the below categories: Charitable, scientific, literary, religious, educational, fostering national/international amateur sports competition, testing for public safety, and preventing cruelty to animals/children.
The Articles of Incorporation cannot be submitted without including a dissolution clause. Ultimately, you need to clearly state what the nonprofit’s assets are going to be used for and what would happen to the assets if the nonprofit is dissolved.
Your nonprofit’s assets must only ever be used for the purposes approved under section 501(c)(3) in order for you to be eligible for federal tax exemption.
When completing the Articles of Incorporation, use this template as a guideline to create your own Articles of Incorporation. Ensure that you complete all sections required by both the IRS website and the Minnesota Secretary of State.
Please note that you should keep the original file in your records and submit a copy to the state. Filing the articles online is the quickest way.
7. File an initial report
Minnesota nonprofits do not need to file an initial report.
8. Secure an EIN (Employer Identification Number)
In order to file with the IRS, your nonprofit organization needs an EIN. An EIN is an Employer Identification Number and is essentially a nine-digit number used by the IRS to identify your business entity.
Additionally, you may use it to file 990 returns, apply for federal tax exemption and open up a business account for your Minnesota nonprofit.
Your EIN may be obtained free of charge from the IRS by completing the IRS Form SS-4.
Although you may submit the form via mail, applying online is the best and quickest option. When you apply online, your EIN will be issued immediately.
For further reading and guidance on obtaining an EIN in the state of Minnesota, refer to the IRS Pub 1635.
9. Apply for federal tax exemption
Applying for federal tax exemption is one of the most important steps in starting a nonprofit in Minnesota. However, prior to applying for 501(c)(3) tax-exempt status, you need to fulfill the following requirements:
- Obtain an EIN
- Adopt bylaws and Conflict of interest policy
- Prepare and file your Articles of Incorporation with the required provisions
- Elect three directors unrelated to each other
Once you’ve met the above-mentioned conditions, you can go ahead and file Form 1023 for 501(c)(3) tax-exempt status. Small business organizations may file Form 1023-EZ, a streamlined and simpler application for tax exemption.
Once the Internal Revenue Service has approved your application, you’ll receive a determination letter stating that you are one of the existing organizations that are exempt from federal taxes.
Organizations that have received federal tax exemption under the Internal Revenue Code enjoy the following benefits: discounted postal rates, tax-exempt financing, exemption from federal income tax, tax-deductible contributions, as well as possible exemption from employment, sales, and income taxes.
10. Apply for Minnesota state tax exemption
Organizations that have applied for federal tax exemption and have received their determination letter do not need to apply for state tax exemption. However, you may file Form ST16 with the Minnesota Department of Revenue to obtain sales tax exemption.
11. Other applicable permits and licenses
Legally operating a nonprofit organization in Minnesota means that you need to secure the relevant licenses and permits, if any. Please refer to the Small Business Administration Business License & Permit look-up tool and search for your locality and nonprofit type.
Additional state registration and reporting requirements
In the event that your nonprofit meets the following requirements, they must register with the Office of the Attorney General:
- The nonprofit uses professional fundraisers
- Fundraising is not done solely by volunteers
- The nonprofit receives or plans to receive more than $25,000 in total contributions
Ultimately, every Minnesota nonprofit organization will need to register for charitable solicitation if they plan to raise funds in one or more ways or accept donations from sponsors, donors, and volunteers.
The form needed is the Charitable Organization Initial Registration Form and must be filed prior to soliciting any funds.
12. Submit an annual report
Minnesota nonprofit organizations are required to file an annual report each year with the Attorney General‘s office. If your organization files 990 return forms, then the annual report may be submitted along with the nonprofit’s taxes.
The annual report must be filed by July 15th each year or on the 15th day of the seventh month of the organization’s fiscal year.
While annual reports are state and tax requirements, your nonprofits will be able to take this opportunity to share their accomplishments with potential sponsors and donors.
Costs of starting a new nonprofit in Minnesota
The following filing fees are applicable to all Minnesota nonprofits:
- Articles of Incorporation: $70 by mail. $90 online or expedited in-person.
- Application for federal tax exemption, 501(c): $275 or $600 IRS fee
- Minnesota charitable registration: $25
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.
For-profits are organizations or companies that provide a product or service to consumers and, in doing so, make a profit. The ultimate purpose of a for-profit or private foundation is to generate a profit. On the other hand, a nonprofit organization has a purpose of providing a service to benefit the community without the intention of making a profit.
An exempt organization is one that has obtained tax-exempt status from the Internal Revenue Service. When a nonprofit has obtained 501c3 status, they are exempt from federal income tax. Additionally, they enjoy several other benefits such as access to grants, credibility with donors and sponsors, and limited liability.
A nonprofit’s mission statement describes the organization’s existence and aims to declare how the organization will fulfill its purpose. The mission statement may be included in the nonprofit’s business plan.
Running a successful nonprofit is not easy, but it is possible. All you need to do is set a goal, remain proactive, fulfill the necessary federal and state requirements your nonprofit needs, and spread the word.
The nonprofit compliance guide is put in place to make sure that nonprofit corporations do not abuse their 501c3 tax-exempt status. Tax-exempt organizations have credibility with the government and are exempt from federal and state taxes. They also receive other advantages like reduced postage rates.