The Internal Revenue Service gives non-profit organizations a considerable advantage – tax exemption. These organizations qualify for tax exemption under 501(c)(3). However, not all non-profits qualify for 501(c)(3), and there are various expenses associated with getting a 501(c)(3) tax-exempt status.
The cost to start 501(c)(3) ranges from $975 to $25,260, depending on the size and complexity of your organization. These figures include necessary expenses, such as filing fees and insurance. Some of these costs are optional, and others are mandatory.
Summary of 501(c)(3) Startup Costs:
|Expense||Minimum Cost||Maximum Cost|
|501(c)(3) filing expenses (Form 1023 or Form 1023-EZ)||$275||$600|
|Attorney and accounting expenses*||$0||$4,000|
|Charitable solicitation fees||$100||$200|
*Denotes an optional expense that is a typical expense associated with starting a 501(c)(3) organization but not a requirement.
Want to learn more about the cost to start a 501(c)(3)? We’ll explore the various expenses and answer some of the most frequently asked questions.
- The Costs to Start a 501(c)(3):
- Examples of questions asked on the eligibility worksheet include
- Frequently Asked Questions
- A Final Glance at the Cost to Start a 501(c)(3)
The Costs to Start a 501(c)(3):
As you can imagine, there’s a lot involved when it comes to an organization exempt under 501(c)(3). The IRS won’t grant just any entity exemption status – you must be established and have your ducks in a row before applying. Let’s take a deep dive and explore all the costs you can expect to pay when you start a 501(c)(3) organization.
501(c)(3) Filing Expenses
Perhaps the most critical part of the 501(c)(3) process is filing Form 1023 or 1023-EZ to receive exemption status from the IRS.
The form’s full name is “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” You’ll either have to fill out Form 1023 or Form 1023-EZ, but not both. Form 1023-EZ has an eligibility worksheet that asks you various questions. If you answer “yes” to any of the questions, you must fill out Form 1023.
Depending on your knowledge of tax forms, you may need to enroll the help of an attorney or accountant. It’s vital to fill the forms out correctly to save time and avoid potential fines. If you hire professional help, you can expect to pay around a couple of thousand dollars, if not more.
Let’s take a closer look at the cost of Form 1023 and 1023-EZ and how you file them:
Form 1023 enables you to apply for federal income tax exemption. Before filing Form 1023, you must create an account on Pay.gov. Unlike other tax forms, Form 1023 comes at a cost – $600 per user fee that you must pay when you file the application.
Not only that, but if you need assistance with the form, you may need to pay an accountant or lawyer a few thousand dollars. It’s also essential to note that you must have an organization, for example, a limited liability company (LLC) or corporation, before you can file Form 1023.
Per the IRS, organizations that participate in the below activities are not eligible to become tax-exempt and can’t file a Form 1023:
- Any illegal activity
- Political campaigns at the local, state, or federal level
- Substantial non-exempt business
- Partake in business that doesn’t relate to its non-exempt status
- Participate in political affairs
What’s the difference between Form 1023 and 1023-EZ? The most obvious difference is that Form 1023-EZ has mostly “check-the-box” questions, and there isn’t as much writing required. Form 1023-EZ is a simplified version of Form 1023 that has a similar purpose – to apply for tax-exempt status.
The bottom of the form contains an eligibility worksheet with a series of questions. You must check “yes” or “no” for each question. If you check “yes,” you cannot apply for tax-exempt status using Form 1023-EZ. However, you can still fill out Form 1023.
Examples of questions asked on the eligibility worksheet include
The fair market value of your organization’s assets
If you have a mailing address outside the United States
Whether you’re a for-profit or non-profit entity
If you’re a college, school, or university
The amount of your gross receipts in the last three years
Like Form 1023, you also file Form 1023-EZ through Pay.gov. Fortunately, Form 1023-EZ only costs $275 to file ($325 less than Form 1023). And since Form 1023-EZ is relatively simple, you may not need to hire an attorney or accountant.
Generally, you must have a business entity to qualify for an exemption under 501(c)(3). For example, limited liability companies (LLCs) and corporations may apply for exemption status via Form 1023.
You can also apply for exemption status if you have a trust or an unincorporated association. Depending on your state, incorporation fees usually cost around $300. Limited liability companies are generally the cheapest entity to start, while corporations cost a bit more.
Now, you might be wondering, “what’s an unincorporated association?” The best way to describe an unincorporated association is by two people who came together to create a non-commercial entity.
For example, two friends decided to start a church or other charitable organization. In other words, the duo has a partnership, but they’re not operating for profit. Filing for exempt status as an unincorporated association is quite common, especially if you’re just starting your non-profit. However, as your non-profit organization grows, you may need to hire employees and establish an online presence to broadcast your message.
501(c)(3) organizations can hire employees, and the directors can also pay themselves a salary. Nevertheless, you don’t need employees to start a 501(c)(3) organization. Some non-profits start with volunteers and hire full-time staff once they get additional funding.
For our analysis, we’ll imagine that you have hired one full-time employee to manage your non-profit’s day-to-day operations (which is quite familiar with new organizations).
This employee helps you with some of your startup endeavors, such as marketing, web development, and purchasing insurance policies. Although employing individuals is a long-term expense, the average cost to hire a new employee is approximately $4,200.
Like hiring employees, web development is another optional expense. You don’t need a website to create a non-profit organization, but many professionals suggest building one. Why? A website helps get the word out, attract donors, and makes your non-profit appear more legitimate.
If you’re just starting to build your online presence, you’ll need to get a domain name and hosting package.
The initial cost of a domain and hosting will set you back around $50. Afterward, you’ll want to hire a professional web developer to create your site. Most web developers will charge at least $650 for an essential website, meaning the total cost of creating a website is around $700.
Many non-profit organizations use trademarks to symbolize their mission and make themselves memorable. You can trademark various things, including symbols, designs, and phrases. Most 501(c)(3) entities will need a trademark at some point, whether it’s when they’re creating a logo or website.
The United States Patent and Trademark Office charges $250 for a TEAS Plus electronic filing application. Nonetheless, the exact cost can vary, depending on the trademark’s filing basis. Typically, non-profit trademarks are cheaper than trademarks registered on a foreign application basis.
You should also expect to pay around $300 in legal fees associated with a trademark. Thus, the total price of a new trademark for a 501(c)(3) organization is $550.
You wouldn’t drive a car without insurance. The same thought process applies when it comes to a non-profit. Regardless of the size or scope of your non-profit, you should have some general liability insurance policy. This insurance policy will protect your 501(c)(3) organization from costly property damage, advertising lawsuits, or injuries suffered by customers.
It’s also excellent to have general liability insurance if you host fundraising events with many people. Depending on the policy limits and your organization’s size, you can expect to pay around $600 per year for insurance. Note: the $600 reflects a discounted price that many insurance carriers offer if you pay for the entire year in advance.
If you employ individuals to work for your charity, you’ll also need to pay your portion of health, dental, and vision insurance (depending on the employees’ classification). We excluded compensation-based insurance in this section as this insurance falls under employee expenses.
If you’re the director (or owner) of the 501(c)(3) organization, you don’t have to purchase insurance for yourself to qualify for non-exempt status. Many non-profit owners receive health insurance through a spouse, full-time job, or buy it directly.
Most non-profits need a physical office space to carry out their operations. The average cost of office space ranges from $9 – $25 per square foot per year. Let’s consider a non-profit with a 2,000 square foot office priced at $17 per square foot per year. The non-profit would pay $34,000 per year or $2,830 per month.
It’s not uncommon for commercial landlords to ask for a deposit equal to two months’ rent ($5,660). Furthermore, the organization would have to pay around $6,000 to furnish the space, bringing the total initial cost of an office to $11,660.
Office space is optional, especially for smaller organizations. Thus, you could potentially cut out this expense if you have a 100 percent remote operation.
Attorney and Accounting Expenses
As mentioned above, many 501(c)(3) organizations hire attorneys and (or) accountants to help them file a Form 1023. The work that goes into this form is relatively complex, and therefore, you may need someone with industry expertise. Hiring an attorney or accountant will set you back between $2,000 and $4,000, depending on your location and the non-profit’s complexity.
There’s no prerequisite to market your organization if you want 501(c)(3) exemption; however, many individuals will market their cause to start bringing in donations. Before marketing, you’ll want to ensure that you have a website and a solid social media presence.
An initial marketing campaign will cost you around $2,500, depending on the size and scope. Market efforts may include advertising on Facebook, door-to-door, or hiring people to make phone calls. Eventually, you’ll be able to find people to support your cause through word-of-mouth, but carrying out a marketing campaign is generally the first step.
Charitable Solicitation Fees
Forty-one states require non-profits to register for charitable solicitations. In other words, you must pay a fee before you can start collecting donations. States regulate fundraising to ensure that organizations act ethnically and don’t violate local laws. You can expect to pay around $100 – $200 for charitable solicitation registration.
Fortunately, this type of registration isn’t very complex, and you shouldn’t need help from an attorney or accountant. The best way to determine the exact cost is to Google your state name and “charitable solicitation.” Most non-profits apply for charitable solicitation after they file Form 1023 and receive 501(c)(3) exemption from the IRS.
Frequently Asked Questions
Want to learn more about starting a 501(c)(3)? Here’s a look at some of the most frequently asked questions:
How Long Does it Take to Get a 501(c)(3)?
It takes the IRS between three to six months to process a Form 1023.
What is the Maximum Donation to a 501(c)(3)?
While there isn’t a maximum donation to a 501(c)(3), you can’t deduct more than 60 percent of your adjusted gross income from your taxes.
How Many 501(c)(3) organizations are there?
There are currently more than 1.6 million 501(c)(3) organizations in the United States.
How Do 501(c)(3) organizations make money?
Most 501(c)(3) organizations make money through donations or selling goods and services.
A Final Glance at the Cost to Start a 501(c)(3)
As you can see, there are various costs associated with starting a tax-exempt organization under 501(c)(3). Some of these expenses are optional, such as office space and marketing. On the other hand, all organizations must pay filing and charitable solicitation fees.
The average cost to start a 501(c)(3) organization ranges from $975 to $25,260, depending on the scope and size of your operations.