The Technical (OUTSIDE) Steps of Starting an Association
My last blog post titled, “The Technical (INSIDE) Steps of Starting an Association,” was a deeper dive into the nuts and bolts of beginning an association beyond conceptualization. Specifically, the post examined an association’s two necessary internal infrastructure elements: governance and finance. To assure a well-founded association that is poised to grow, members must be in sync (internally among themselves) on these details.
However, there are others outside the organization to consider too, namely the secretary of state where the association resides, the Internal Revenue Service, and the association’s banker.
Incorporation & The Secretary of State
You do not need to incorporate your association, but it is strongly recommended. Incorporating a business (Your association is a business after all, even if it is a non-profit.) creates a legal entity that can sue and be sued. It’s not to say that your association is litigious. It is to protect its members from being sued in the event someone finds a bone to pick with the association’s behavior, like an alleged breach of contract.
Incorporating an organization is not a legal labyrinth. Most states have easy to use websites that can walk you through the process. There is a fee (usually around $200.) and you need to be prepared with a few key pieces of information.
- Who is your “incorporator,” i.e. who is the person filling out the form and who will be the person to receive any communications from the state?
- What is your “purpose,” i.e. why are you forming this organization? Keep it simple and direct.
- Are you a stock corporation or non-stock? A non-profit association will almost always be non-stock because you are not issuing ownership shares.
- Further, as long as you are creating a non-profit entity, it is perfectly fine to do so as a “corporation” as opposed to a partnership or limited liability corporation (LLC).
Once you are incorporated and have received a verified letter from the state along with your official “articles of incorporation,” go on-line to the IRS and fill out an application for your Employer Identification Number (EIN.) You have the option of having the IRS mail you a letter with your EIN or simply getting one electronically generated. Choose the latter. It should take a matter of minutes.
As a non-profit corporation, you will also want to be tax-exempt. Securing a tax- exempt status is usually a (major) one step process because most states will honor a tax-exempt status granted by the IRS rather than forcing you to secure tax exemption from the state too. If your association will engage in any political activity or lobbying, consider applying for 501(c)6 status. If not, you should generally apply for 501(c)3 status. The application process is arduous, but if you pay attention to detail and follow the IRS instructions, you should be fine. And, if the IRS denies your application, you usually have an opportunity to correct any mistakes.
Finally, you need a banking relationship. I advise choosing a bank with a convenient location. Take the time to visit it and meet the person who will help you open your business account. Different banks have different requirements for opening a business account. Be prepared (at least) with your letter from the IRS stating your Employer Identification Number and your letter from the state indicating you properly filed your articles of incorporation. Those items along with a check for your opening balance should do the trick. If you think about it, ask for an endorsement stamp for future deposits. Most of your banking will ultimately be done on-line, but it is nice to have a stamp for the times you need to deposit a paper check. Yes, it still happens.
A Quick Recap
If you are considering starting an association, formalizing an association already on its way, or reexamining your established association’s infrastructure, remember these key INSIDE/OUTSIDE elements.
Aaron Grau is president of Grau & Associates, a boutique association management firm with offices in Pittsburgh, PA and Washington, DC.