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Starting a Non-profit in Maryland

Anthony R. Pisarra, Esq.
Rev: Jan 2007

This note provides a brief overview of the steps required to start a new non-profit or charitable organization (or to qualify an existing non-profit for charitable status) in the State of Maryland.

This note is provided for informational purposes and is not intended as legal advice.

New Law Effective October 1, 2006, under House Bill 398 Chapter 459, Acts of 2006, all new charitable registrations MUST be in full compliance and receive a registration letter from the Secretary of State's office before soliciting funds from the public.

Non-profit and Charitable Organizations

A non-profit organization is an enterprise that does not distribute income to its owners and members but, rather, reinvests profits in its own operations and/or distributes income to other qualifying non-profit or charitable enterprises.

A charitable organization is an enterprise that is organized to accomplish a charitable purpose. Qualifying charitable purposes include those that are: charitable, religious, educational, scientific or literary.

Not all non-profits serve a qualifying charitable purpose.

Charitable organization need not be, but overwhelming are, non-profits (and must be non-profits in order to qualify for state and federal exemptions).

Non-profits, charitable and otherwise, are exempt from paying state and federal income tax.

Qualifying non-profit charitable organizations are are exempt from paying state and federal income tax and may, in addition, accept tax deductible donations from the general public.

Forming a Non-profit Charitable Organization

Defining A Charitable Purpose

Perhaps the most important step in organizing an exempt venture is defining the organization's charitable purpose. This language, as included in the organization's chartering documents, will both govern the future operation of the venture as well as play a key role in determining the organization's qualification for state and federal tax exemptions.

As previously noted, qualified purposes include those deemed: charitable, religious, educational, scientific or literary.

To qualify for exemption under state and federal tax law, the purpose recited in the organization's chartering document must explicitly limit the activities of the organization to one or more of the qualified areas.

The IRS has previously accepted minimal language stating simply that an organization is formed for "charitable purposes".

It has also rejected language stating that an organization is formed for "charitable and benevolent purposes", ruling that the word 'benevolent' while a close synonym might in fact allow the organization to engage in non-exempt activities.

For this reason, a short declaration of purpose including only the pre-approved nouns is preferable. In addition, the more general the enabling language is in the charter documents, the more flexibile the future governance and operation of the organization (although some promoters may consider this udesirable).

Provided, the IRS will require a full description of the organization's actual or planned operations at the time the organization applies for recognition of its exempt status.

Selecting A Name

An important step in and of itself, selecting a name for your organization is also helpul as you will need this information to complete most of the other steps in forming and registering the organization.

The actual name is, of course, a matter of taste. However, whatever the name ultimately selected, you should make sure it is available and clear of conflicts with existing names before proceeding.

For purposes of the State of Maryland, this requires that the name not be confusingly similar to a corporate or trade name currently registered with the State. Existing trade and corporate names can be searched in the Maryland State Department of Assessments & Taxation database at: Corporate Charter Search

For purposes of Federal Trademark law this requires that the name not be confusingly similar to a registered mark currently used in the same line of business. Existing trademark registrations can be searched in the U.S. Patent and Trademark Office database using the: Trademark Electronic Search System (Tess)

For purposes of domain name registration this requires that a variant of the name be available for registration and that the name not be confusingly similar to a previously registered name.

Forms of Doing Business

Non-profits and charitable organizations do business in one of three forms in Maryland: (1) unicorporated associations; (2) not-for-profit corporations; and (3) charitable trusts.

  • Associations: Unincorporated associations are relatively informal undertakings. They provide no limited liability protection to their members and directors and cannot be formally chartered in Maryland. However, for smaller organizations that will have few dealings outside its membership, and particularly those who will not solicit donations from the general public or seek formal non-profit status, an association may be an appropriate choice.
  • Tax-exempt Corporations: Maryland exempt, not-for-profit corporations take a simple non-stock corporate form. Simple to charter and administer, Maryland exempt corporations provide both limited liability protection to the organization's members and directors, as well as a straightforward vehicle for purposes of seeking recognition of federal exempt status.

  • Charitable Trusts: Charitable trusts represent a fairly specialized form, with highly technical formation, operational and administrative requirements. As such, they are not especially appropriate for most undertakings considered here.
  • Exempt corporations make sense for most non-profit enterprises, particularly those that will have substantial dealings with and/or solict donations from the general public.

    For this reason, and although applicable in part to other non-profit forms, the remaining bulk of this note will address the adminstrative steps in chartering and qualifying an a Maryland non-profit corporation for federal and state exempt status.

    Forming A Tax-exempt Non-stock Corporation

    A Tax-exempt Non-stock Corporation may be administratively chartered using a simple, one page PDF form supplied by the state: Articles of Incorporation for Tax-exempt Non-stock Corporation

    In order to complete the Articles you will require:

    1. The proposed name of the corporation;
    2. The mailing address of a Maryland location to serve as the 'corporate offices';
    3. The name and mailing address of an adult Maryland resident to serve as the promoter of the corporation; and
    4. The name and mailing address of an adult Maryland resident to serve as the corporation's resident agent (i.e. a person who will accept legal process and other filings on behalf of the corporation).

    The completed articles may be submitted, along with the required fees, to the State Department of Assessments and Taxation (SDAT) Corporate Charter Division.

    The corporation is considered formed once the Articles have been accepted by the state (10 business days for expedited filings)

    Registering with IRS: Application for EIN

    Once your articles have been accepted by the state, you must obtain a federal Employer Identification Number (EIN) in order to communicate on future business with the IRS (including your subsequent application for recognition as a qualifying exempt organization).

    An EIN can be obtained by completing an IRS Form SS-4. In order to complete the SS-4 you will require the following information:

    1. The Name of the Corporation as listed in the Articles of Incorporation.
    2. The Date on which the Corporation was formed (i.e. the date on which the Articles were accepted by the state).
    3. The Address of the Corporation as listed in the Articles of Incorporation.
    4. The Name, Address and Social Securtiy Number of the promoter listed in the Articles of Incorporation.

    The SS-4 can be submitted by mail or phone to your local IRS office, or completed online at IRS.Gov

    Qualification as a 501(c)(3) Organization

    Once the corporation has been assigned an EIN (instantaneous in the case of phone and online applications), you can begin the process of applying to the IRS for official recognition as qualified tax-exempt, non-profit charitable organization.

    Recognition can be secured by completing and filing IRS Form 1023: Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code

    In order to complete the application you will require the following information:

    1. The Name of the Corporation
    2. The Corporation's Employer Identification Number (EIN)
    3. The Date on which the Corporation was formed.
    4. The Mailing Address of the Corporation.
    5. The Name, Address and Social Securtiy Number of the promoter listed in the Articles of Incorporation.
    6. Estimated Budgets for Next Two Years of Operations

    Qualification for Maryland Exemptions

    In addition to federal exemptions, non-profit charitable organizations may qualify for exemption a number of state and local fees including: Sales & Use Tax as well as Personal and Real Property taxes.

    In order to secure these exemptions, the organization must compelete a Maryland State Combined Taxpayer Registration Application.

    In order to complete the Application you will require the following information and documents:

    1. The Name of the Corporation
    2. The Corporation's Employer Identification Number (EIN)
    3. The Date on which the Corporation was formed.
    4. The Mailing Address of the Corporation.
    5. The Name, Address and Social Securtiy Number of the person to be resposible for the collection and payment of taxes.
    6. A copy of the recognition of exemption from the IRS

    Registering a Charitable Organization in Maryland

    All new charitable oranizations operating in Maryland must register with the office of the Maryland Secretary of State, Charitable Organizations Division and receive a registration letter before soliciting funds in the state.

     

    APPENDICES

     

    Appendix 1: Required Documents

     

    Appendix 2: State & Federal Agencies

     

    Appendix 3: Frequently Asked Questions

    Q: Do I need to incorporate my non-profit?

    A: Not necessarily. If you will not have substantial dealings outside of your membership and do not anticipate soliciting donations from the public, you may organize your venture as an unincorporated association. However, chartering an exempt corporation is relatively simple in Maryland and includes a number of advantages.

    Q: Do I need IRS recognition before accepting deductible donations?

    A: Recognition is not a predicate to exempt status. However, organizations that have more than $5,000 in annual gross receipts are required to apply for recognition of their exempt status with the IRS, and donors may not deduct donations to such an organization unless it has in fact applied for a ruling on its status.

    Application for recognition is optional for organizations with gross receipts less than $5,000. Donors may deduct donations to an such an organization without regard to the fact of an application or timing (assuming the organization in fact meets all technical requirements of charitable exemption)

    However, organizations in both categories are well advised to secure an IRS ruling prior to accepting donations as this provides the greatest security to your organization and donors.

    Q: Are membership dues tax deductible?

    A: A portion of membership dues paid to a qualified non-profit charity can typically be deducted on the member's annual tax return. The deductible portion of the dues is the amount of the dues less the value of any membership benefits received.

    Q: Do I have to collect Sales and Use Tax on goods and services sold to others?

    A: Yes. Although non-profit charitable organizations are exempt from paying sales tax on goods and services purchased for their operations, the organization must collect sales and use tax when selling goods and services to others.