What Does It Take to Start a Tax-Exempt Organization in New York?
A guide to nonprofit creation in New York StateBy Lauren Peck | Reviewed by Canaan Suitt, J.D. | Last updated on November 7, 2023 Featuring practical insights from contributing attorneys James J. Hsui and Clifford Perlman
Use these links to jump to different sections:
- New York Nonprofit Formation and Tax Exemption Eligibility
- Do You Need Legal Help to Start a Nonprofit Corporation?
- Maintaining Tax Exemption for Your Nonprofit
- Find a Lawyer with Experience in Nonprofit Organization
When clients enter his office wanting to start a nonprofit, attorney Cliff Perlman has them take a step back.
“A lot of times people come to me… and they’re better off not starting a nonprofit; they’re better off doing it as a for-profit [business entity],” says Perlman, who advises philanthropic organizations at Perlman & Perlman in Midtown. “Maybe it doesn’t make any profit, but it’s not regulated the same way.”
New York Nonprofit Formation and Tax Exemption Eligibility
If, however, a nonprofit is the best fit for your venture, James Hsui—who practices nonprofit, business, and international law for clients at an eponymous firm in lower Manhattan—recommends getting a thorough understanding of the federal tax-exemption category you’re thinking of choosing.
“The most common one is 501(c)(3), which [includes charitable organizations], [religious organizations], schools, universities … but a 501(c)(3) isn’t the only kind.”
The Internal Revenue Service (IRS) has nonprofit tax designations for everything from veterans’ organizations and social clubs to cemeteries and horticultural organizations. “Each of the 501(c)s really have their own requirements and their own definitions, so what a nonprofit is trying to do really is important when trying to decide where it falls into,” Hsui says.
Do You Need Legal Help to Start a Nonprofit Corporation?
But is this something you need an attorney for? “You can try and do it yourself, but it can be a nightmare,” says Perlman, whose firm clients have included Doctors Without Borders and Human Rights Watch.
If you’re forming a 501(c)(3), Hsui says, “The IRS estimates that a layperson would take somewhere over 100 hours to really get everything set up with its regular application. The streamlined application for smaller organizations is faster and doesn’t ask as many questions, but there’s still a lot of opportunity to get things wrong.”
As with a for-profit company, consider where you might incorporate. “I vehemently recommend to any of my clients not to incorporate in the state of New York,” Perlman says. “They regulate charities more than any other state in the country.” Incorporating out of state, he adds, may cost a few hundred dollars more and may involve filing a qualification, “but it’s still worth doing.”
Maintaining Tax Exemption for Your Nonprofit
After your nonprofit gets up and running, it’s important to stay abreast of the law to keep your tax-exempt status in good standing.
For example, while a 501(c)(4)—like the National Rifle Association or American Civil Liberties Union—can engage in political campaigning and lobbying, 501(c)(3) nonprofits are “absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office,” according to the IRS.
An attorney can also help unravel state-level nonprofit laws, particularly around fundraising. “About 40 of 50 states in the country require you to register in that state if you’re soliciting there,” Perlman says. “Even literally just one email into that state, most states would say, ‘You’re supposed to register here.’”
“It also applies in the instance of online donations,” Hsui adds. “For the most part, the rule is: Monitor where your donations are coming in from.”
Numerous nonprofits have Hsui and Perlman on speed dial for advice on ongoing legal questions and issues. For Hsui, some of this work might involve helping with contracts or vetting activities to make sure the nonprofit isn’t running afoul of the IRS. And as nonprofits grow in size or scope, he helps clients navigate that process, such as “moving from fully volunteer positions to maybe have a few paid positions.”
Perlman estimates that his firm serves as a general counsel for 300 to 400 organizations, advising on a range of issues from real estate to digital privacy and security concerns. “As a business, [nonprofits] run into similar issues that regular businesses run into,” he says. “And if we can’t handle it, we’ll find the client the right people.”
Find a Lawyer with Experience in Nonprofit Organization
If you are thinking about starting a not-for-profit corporation in New York, consider speaking with a business lawyer experienced in nonprofits sooner rather than later. Whether it’s questions about filing requirements with the state attorney general, articles of incorporation, naming a registered agent, getting an employer identification number (EIN), securing state tax exemptions, or filing fees, an experienced attorney can guide you through every step of the nonprofit formation process.
For additional information on legal issues related to tax-exempt organizations, see our overview on business organizations overview.
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