Nonprofit compliance means meeting the federal, state, and local legal requirements that keep your organization’s tax-exempt status intact. From getting your EIN to filing annual Form 990s, staying compliant protects your mission, your donors, and your team. This checklist walks you through 21 essential steps every nonprofit leader should know.
- Lose your paperwork, lose your status. Failing to file Form 990 for three consecutive years can cost your nonprofit its IRS tax-exempt status.
- State rules vary widely. Each state has unique board composition, solicitation, and registration requirements that go beyond what the IRS requires.
- Compliance is an ongoing job, not a one-time task. From board meeting minutes to donor acknowledgment letters, the work continues year-round.
Starting a Nonprofit: What Founders Need to Know
Starting a nonprofit is a powerful way to turn your skills and passion into lasting impact.
But here’s what many founders don’t realize until they’re deep into the process: building the organization is only half the job.
Keeping it legally compliant takes ongoing attention and care. The good news is that compliance doesn’t have to feel overwhelming. With the right structure and guidance, you can stay organized and in control.
Here’s a clear, actionable checklist of 21 nonprofit compliance essentials to help your organization operate with confidence.
Getting Your Legal Foundation Right
1. Request an EIN
An Employer Identification Number (EIN) allows a nonprofit to open a bank account, hire employees and process payroll taxes, obtain insurance, and enter into contracts in the organization’s name.
Additionally, many grantmakers and financial institutions require an EIN as part of the application or verification process, making it a critical step for nonprofits seeking funding or formal operations.
You can apply for an EIN directly on the IRS website.
2. Open a Separate Bank Account
Opening a dedicated bank account is a prudent practice for nonprofits to ensure proper financial management, compliance, and transparency.
A separate bank account also aids in maintaining compliance with legal and regulatory requirements, including proper record-keeping, financial reporting, and audit processes.
3. Establish Board of Directors
Nonprofits are legally required to establish a Board of Directors in order to ensure proper oversight and compliance with relevant laws, regulations, and ethical standards. Although a minimum of three Board Directors is ideal, the number of required Directors varies by state.
A Board of Directors provides the governance structure for a nonprofit organization, ensuring that executive decisions are made according to legal parameters and have the best interests of the organization’s mission at heart.
This board is also responsible for the following –
- monitoring finances,
- approving budgets and executive salaries,
- reviewing nonprofit policies and procedures,
- advocating for the community served by the organization,
- and other important duties as outlined in their governing documents.
4. Hire a Nonprofit Attorney
Attorneys are the most qualified to assist your nonprofit with obtaining tax-exempt status as well as all other compliance matters.
Here is a list of attorneys committed to the nonprofit sector:
5. Prepare Your Organizing Documents and Policies
Nonprofit attorneys can help nonprofit founders prepare required and recommended legal documents including –
- Articles of Incorporation,
- ByLaws,
- Conflict of Interest Policies,
- Whistleblower policies,
- Employment Contracts,
- Document Retention policies,
- and other organizational documents.
Click here to check out a few sample templates for several nonprofit policies.
Applying for Tax-Exempt Status
6. Complete a Tax-Exemption Application
501(c)(3) Organizations
Health clinics, Christian outreach ministries, youth development services, grantmaking organizations, and certain other charitable organizations normally seek tax-exemption under IRS Code Section 501(c)(3).
To qualify for 501(c)(3) status, an organization must be organized and operated exclusively for purposes that the IIRS defines 501 as charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.
Form 1023 is the IRS application used by organizations seeking recognition of tax-exempt status under Section 501(c)(3). In most cases, an organization must apply and receive IRS approval to be treated as a 501(c)(3) public charity and to have donors’ contributions considered tax-deductible.
Other Tax-Exempt Organizations
However, not all tax-exempt organizations use Form 1023. Some organizations apply using Form 1024 or Form 1024-A (for other 501(c) categories), while others may be eligible to self-declare their exempt status without submitting a formal application to the IRS. In addition, certain organizations—such as churches, their integrated auxiliaries, and conventions or associations of churches—are not required to file Form 1023 to be recognized as tax-exempt.
Pay.gov
For organizations that do apply under Section 501(c)(3), Form 1023 must be submitted electronically through Pay.gov.
The IRS also offers Form 1023-EZ, a streamlined online version available to smaller organizations that meet specific eligibility requirements.
To file, you must create a Pay.gov account, search for “Form 1023,” complete the application, and pay the required user fee. The application must be complete and include all required schedules and supporting documentation to be processed.
You can review the IRS instructions for Form 1023 here: Instructions for Form 1023.
Note: It can take the IRS at least 6 months to process your application to grant or deny your tax-exempt status. Plan accordingly.
7. Know Your State’s Filing and Compliance Requirements
Federal compliance is just the beginning. Every state has its own requirements covering:
- Board size and composition
- Language required in your Articles of Incorporation
- Annual charitable solicitation registration (required in many states for nonprofits that fundraise within the state)
Hurwit & Associates maintains a state-by-state filing requirements guide — bookmark it.
8. Get Familiar with StayExempt.Org
The IRS created StayExempt.irs.gov specifically for nonprofit leaders. It covers how to maintain your tax-exempt status, avoid unrelated business income issues, stay within lobbying limits, and more.
If you’re new to nonprofit compliance, start here.
Annual Tax Compliance
9. Know Which Form 990 to File
Most nonprofits must file an annual information return with the IRS, but the exact form depends on the organization’s gross receipts and assets.
- Smaller eligible organizations may file Form 990-N, also called the e-Postcard;
- Others may file Form 990-EZ or the full Form 990.
- Private foundations generally file Form 990-PF, and
- Organizations with unrelated business income may also need to file Form 990-T.
A nonprofit’s annual return is generally due by the 15th day of the 5th month after the end of its fiscal year. For example, if the fiscal year ends on December 31, the filing deadline is May 15.
Important: if a nonprofit fails to file for three consecutive years, it automatically loses its tax-exempt status.
For more detail, see IRS Publication 4839.
10. Consider Insurance
Insurance protects your organization, your board, and your team. At minimum, talk to an attorney about:
- Directors and Officers (D&O) Insurance — protects board members from personal liability
- General liability coverage — covers third-party claims for injury or property damage
Nonprofit Quarterly has a helpful overview of why nonprofit insurance matters.
11. Monitor Your Public Support Percentage
Here’s something many new nonprofit leaders don’t know: to remain classified as a public charity rather than a private foundation, certain 501(c)(3) organizations must satisfy one of the IRS public support tests, which generally look at whether they receive enough support from the public over a five-year period.
Private foundations are subject to additional rules and excise taxes, so this classification matters.
Note: some organizations, such as churches and certain schools, are not required to meet the public support test. The IRS website explains the public support tests in more detail here: IRS public charity support test.
12. Check the IRS Exempt Organizations Master File
The IRS maintains a public database of every tax-exempt organization, updated monthly. Once your status is approved, access the Exempt Organizations Business Master File to confirm your EIN, classification, accounting period, and activity codes are all listed correctly.
Financial Management and Operations
13. Apply for Property and Sales Tax Exemptions
Many cities, counties, and states offer property tax or sales tax exemptions for nonprofits, but the rules vary by jurisdiction and the exemption is usually not automatic.
For property tax matters, start with your county assessor or local property tax office. For sales tax exemptions, contact your state tax agency or department of revenue, since those exemptions are typically administered at the state level. For questions about nonprofit registration, state compliance, or charitable solicitation requirements, check with your state charity regulator or secretary of state.
A qualified tax professional can also help confirm eligibility and avoid filing mistakes, especially if your organization operates in multiple jurisdictions or has employees, unrelated business income, or special property holdings.
14. Join Your State Nonprofit Association
Your state nonprofit association is often the most practical, affordable compliance resource available. They offer training, templates, advocacy support, and peer networks.
Find yours using the Council of Nonprofits’ state association map.
15. Track Donations
You are legally required to keep records of donor names, addresses, and contribution amounts. Here are some common tools nonprofits use:
- Microsoft Excel or Google Sheets — workable for very small organizations (note the security limitations with these options)
- QuickBooks for Nonprofits — popular for bookkeeping integration
- Blackbaud Raiser’s Edge — robust donor management platform (now powered by AI)
- DonorPerfect — strong for mid-size nonprofits
16. Create a Donor Acknowledgment System
You are legally required to acknowledge donations of $250 or more. Your written acknowledgment must include:
- The organization’s name
- The cash amount contributed (or description of non-cash gifts)
- A statement that no goods or services were provided in exchange (if applicable), or a description and good-faith value of any benefits provided
IRS Publication 1771 has the full requirements.
17. Determine Your NAICS Code
A North American Industry Classification System (NAICS) code identifies the primary industry your organization operates in. You may need it for grant applications, business registration, industry benchmarking, data reporting, and some tax or compliance filings.
You can look up your NAICS code at census.gov/naics.
Grants, Staff and Governance
18. Understand Grant Compliance Requirements
If your nonprofit receives grant funding, compliance goes beyond just spending the money correctly. Grantors typically require:
- Expenditure responsibility reports (documenting exactly how funds were used)
- Financial audits demonstrating proper fund management
- Adherence to specific program restrictions and timelines
Read every grant agreement carefully before accepting funds, and build your reporting schedule into your operations calendar.
19. Work with a Nonprofit Accountant
A nonprofit accountant who specializes in tax-exempt organizations is essential for setting up payroll, maintaining financial records, and preparing your annual returns. This is not a task to hand off to a general bookkeeper who doesn’t know the 990.
A few firms that work with nonprofits:
- Charity Accounting
- Jitasa Group
- Evergreen Alliance
- The Visionary Accounting Group
- CNRG Accounting Advisory, LLC
Ask any firm you interview whether they specialize in your type of nonprofit (public charity, private foundation, faith-based organization, etc.).
Meetings and Licenses
20. Hold Regular Board Meetings and Document Minutes
Some states mandate a minimum number of board meetings per year, so check your state’s rules. Beyond legal requirements, regular meetings and well-documented minutes are essential for:
- Demonstrating accountability and transparency
- Protecting board members legally
- Maintaining a clear historical record of decisions
Minutes should capture attendance, motions made, votes taken, and any major decisions, not a word-for-word transcript (although, word-for-word isn’t too hard these days if using AI transcription).
21. Obtain a Business License If Required
Some cities require nonprofits to obtain a business license to legally operate, especially if you’re selling goods or services, renting property, or holding fundraising events.
Failure to obtain a required license can result in fines, penalties, and legal exposure. Check with your city or county clerk’s office to confirm whether this applies to you.
Frequently Asked Questions
What happens if a nonprofit doesn’t file Form 990?
If a nonprofit fails to file Form 990 for three consecutive years, the IRS will automatically revoke its tax-exempt status. Reinstatement is possible but requires a formal application and, in some cases, a fee.
Does every nonprofit need to file Form 990?
Most do, but the specific version depends on your size and type. Small organizations may qualify for the 990-N (e-Postcard). Private foundations use Form 990-PF. Check IRS.gov or ask your accountant which version applies to you.
What is the public support test for nonprofits?
Certain 501(c)(3) public charities must show that at least 33.33% of their financial support comes from the general public over a five-year period. Organizations that fall below this threshold may be reclassified as private foundations, which face additional taxes and restrictions.
Do nonprofits need a business license?
It depends on your city. Some local governments require nonprofits that engage in commercial activities, fundraising events, or property rentals to obtain a business license. Check with your local government to confirm.
How often should a nonprofit board meet?
It varies by state. Many states require at least one annual meeting, but best practices typically suggest quarterly meetings for active organizations. Your bylaws should specify meeting frequency.
What is the difference between Form 1023 and Form 1023-EZ?
Form 1023 is the standard IRS application for 501(c)(3) tax-exempt status. Form 1023-EZ is a shorter version available to smaller organizations that meet certain eligibility criteria. An attorney can help you determine which form is right for your nonprofit.
Why Nonprofit Compliance is Important
Running a compliant nonprofit isn’t just about checking boxes. It’s about protecting everything you’ve built. This includes your tax-exempt status, your donor relationships, your team, and ultimately your mission.
The organizations that thrive long-term are the ones that treat compliance as part of their culture, not an afterthought.
Start with the basics, build good systems early, and don’t try to do it all alone. The right attorney, accountant, and state association can make this entire process a lot less daunting.
Disclaimer
This material is for informational purposes only and is not intended as tax, legal, financial or accounting advice. Consult your own advisors before making significant financial commitments.
No Professional Advice (Investment, Tax, or Legal)
The content provided by The Little CPA is for informational and educational purposes only. The Little CPA does not offer investment, tax, legal, or any other type of professional financial advice. None of the information on this website constitutes a recommendation, solicitation, or offer to buy or sell any securities or financial instruments. While we discuss financial concepts and strategies, these are general in nature and do not take into account your specific objectives, financial situation, or needs.
No Professional-Client Relationship
Your use of this website or engagement with this content does not create a CPA-client, attorney-client, or financial advisor-client relationship. The Little CPA is not your fiduciary. A professional relationship is only established through a formal, signed engagement letter specifically tailored to your individual circumstances. You should consult with a qualified professional who is familiar with your unique financial situation before making any significant financial or legal decisions.
General Information Only
This material is prepared by The Little CPA as a resource for self-research and general education. While we strive for accuracy, the rapidly changing nature of tax laws and financial regulations means this information may not be complete or applicable to your specific situation. We disclaim all liability for any actions you take based on the information found here.
Past Performance & Risks
Any examples of tax savings or investment returns are for illustrative purposes only. Past performance does not guarantee future results. All financial decisions carry inherent risk, and the user assumes all responsibility for any losses or outcomes resulting from their personal financial choices.
Third-Party Risk References to specific software, banks, or storage providers are not endorsements. We are not liable for any issues, data breaches, or financial losses that may arise from your engagement with third-party vendors.
