Forming a nonprofit corporation is a noble goal. But if you’re just starting out, the process can feel incredibly confusing. Compared to other entity types like LLCs or even standard corporations, a nonprofit has detailed start-up requirements and complicated maintenance procedures.
In this guide, we’ll walk you through the ins and outs of forming a nonprofit in Alabama so you can get back to what truly matters: your cause.
What Is a Nonprofit Corporation?
A nonprofit and for-profit corporation both have similar “nuts and bolts,” so to speak. Both businesses have a board of directors, CEOs, bylaws, annual board meetings, and the like. But what makes a nonprofit stand out is its purpose. A business corporation typically organizes for financial gain; a nonprofit exists not to make money but to further a cause or reach a goal. Additionally, a business corporation gains investors by offering stock, which has the incentive of dividends and financial gain. Nonprofit corporations solicit contributions that don’t generate any income for those investors.
Well-known nonprofits include groups like Doctors Without Borders, Alcoholics Anonymous, and even your local YMCA.
It’s important not to confuse “nonprofit” with “no income.” Most nonprofits generate income from donations or day-to-day services. The distinction is that nonprofits use 100% of their income to pay expenses and reinvest in their cause. For example, the YMCA uses member dues and community donations for exercise programs, youth sport development, and maintaining their equipment and facilities. They also pay their employees.
Because of this, nonprofit corporations may apply for and receive a tax-exempt status (typically a 501(c)(3) designation), eliminating the corporation’s responsibility for income taxes at the federal and state levels.
Should you form one?
Before you dive into the rest of this guide, you should do a little soul-searching: should you even form a nonprofit in Alabama? The goal is a noble one, but it certainly isn’t for everyone. And some concepts simply aren’t right for the nonprofit sector.
Here are some questions to ask:
- Will I be able to convince others to buy into this cause? How hard will it be to attract donors?
- Are there other existing nonprofits with the same goal?
- If so, do they operate in Alabama? Nationwide? Should I form a local chapter of their nonprofit instead?
- Can I further this cause better or differently than they are?
- Can I hire employees for this cause, or will I rely on volunteers? How will I successfully recruit their help?
If you find yourself stumped by any of those questions, you may want to step back and get some help…or simply do some more thinking before diving in. But if you have answers to most of those questions, then you’re well on your way to starting an Alabama nonprofit organization.
Starting an Alabama Nonprofit: Step by Step
Technically, the process for creating an Alabama nonprofit entity is pretty simple. It’s really just a matter of picking a few people and filing some paperwork (it’s the requirements immediately after forming the nonprofit that get complicated).
1. Pick & Claim a Name
Choosing a name is one of the most crucial decisions for starting your business. You want to pick a name that’s memorable, likable, and most importantly, compliant with Alabama state law.
Alabama has pretty simple laws for nonprofit names:
- Your name must include the words “corporation” or “incorporated” or an abbreviation of those words
- Your name cannot include abbreviations that apply to other entity types, like “Inc.” or “Partnership”
- Your name must be “distinguishable on the record,” or distinct from the names of other state businesses
- Your name cannot include language that implies that your business is conducting activities prohibited by law
If you want more information on Alabama nonprofit names, check out the Names of Entities Section of the Alabama Business and Nonprofit Entities Code.
As a result, you have a lot of leeway to pick a name that will resonate with your target audience, potential donors, and of course, with you. The ideal Alabama nonprofit name describes what the organization does, sounds good when said out loud, and just “sticks” in the minds of people who see it.
Whenever you pick a potential name, you should check whether it’s available using the Business Entity Search by Entity Name tool. Typically, if you type in your desired name and no exact matches show up, then your name is available to use. This seems like a very basic step, but it’s crucial to streamlining your filings.
Once you nail down an available name that you like, you should reserve it using the Name Reservation Request Form for Domestic Entities. In Alabama, this is actually a required step. The reservation lasts for 120 days, protecting your name until you’re ready to form the nonprofit officially.
You can find a full explanation of how to reserve an Alabama business name here.
2. Assemble your initial board
A nonprofit corporation is only as impactful as the people leading it. That’s why your initial board of directors is extremely important; you’ll want to pick a team of people that are just as passionate about your cause as you are.
More importantly, it’s helpful to choose a group with complementary strengths. For example, a medical outreach group might have a board of directors with three doctors, a nurse, a financial expert, a creative visionary, and a lawyer. The right board of directors will help your nonprofit thrive.
Alabama doesn’t have a bunch of rules about who can serve on your initial board. The only explicit requirement is that your board must have at least three directors. As long as you meet that three-director minimum, you can set out how many extra directors you’ll have (and their qualification requirements) in your company bylaws. You can also dictate how each director is appointed, how long they’ll serve, how they’ll resign, and how you’ll replace them.
3. Appoint a registered agent
Every Alabama entity—nonprofits, corporations, and LLCs alike—must appoint a registered agent. This individual accepts “service of process” from the state on your behalf. Basically, if the state ever needs to notify you regarding a lawsuit or an upcoming annual report due date, they’ll contact your registered agent. The agent forwards that notice to you.
Alabama has pretty lenient criteria for a nonprofit’s registered agent, as found in The Alabama Business and Nonprofit Entities Code:
- Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The registered agent must be a resident of Alabama OR a business registered to do business in Alabama
- An agent must be continuously maintained
So you might ask, “Can I serve as my nonprofit’s registered agent?” Technically, you can. But we don’t recommend it. That puts your personal details (and often private details like your address and primary email) on the public record. You’ll also be busy running your nonprofit and pursuing your goals; you won’t want to tie yourself down to a registered address (especially for a tedious thing like service of process). We recommend consulting an individual you trust.
Or, if you prefer, you can hire a registered agent service instead. For a pretty small annual fee, these services will act as your agent. That frees you up to focus on running your nonprofit.
4. File your Certificate of Formation
Up until now, your nonprofit has just been an idea; it’s not recognized by the state government. Technically, businesses don’t “exist” until they file the appropriate paperwork. For Alabama nonprofits, that means filing the Certificate of Formation.
This four-page document (plus an attachment of your Name Reservation) requires some foundational information about your nonprofit. Here’s the data you’ll need to have on hand:
- Name of the nonprofit (attach your name reservation certificate)
- Whether or not your business has members
- Street address of your principal office (and your mailing address, if different)
- Name, county, street (and mailing, if needed) address of your registered agent
- Name and full address of the individual filing the form
- Purpose of the corporation
- Name and address (street and mailing) of each incorporator
- Number of initial directors (minimum of three)
- Name and address of each director
- Any additional provisions you wish to include
- Date of filing
- Signature of individual filing the form
While the form is somewhat long, it isn’t too complicated; most of it is pretty basic information that you’ll probably have on hand by the time you reach this step. The only potentially “tricky” bit is remembering to attach a copy of your name reservation certificate. If you leave that out, your filing will be rejected, and you’ll have to file again.
If you’d rather, you can also file this form online. The base filing fee for this document is $200; $100 goes to the Secretary of State and $100 goes to your county (but the Secretary of State delivers this fee for you, so you won’t have to pay using two separate checks). If you file online, the convenience fee takes your total cost to $208.
Processing speed: 10 business days after your paperwork is received
Expedited processing: $100 for 3-day turnaround
Congratulations! Your nonprofit is now a recognized entity in Alabama!
Prepare for & Hold Your First Board Meeting
After your Certificate of Formation form is complete, it’s time to truly get your nonprofit’s activities underway. And that means it’s time for the first board meeting.
No two board meetings will look exactly the same; after all, every nonprofit has different tasks to accomplish. Alabama does require that you meet at least once every year (you can dictate more meetings in your bylaws or the president can call for special meetings, if desired). You can also set up how voting will work within each meeting. The Members and Directors Subdivision of the Alabama Nonprofit Corporations Chapter lists some recommended procedures for voting, members, and directors of a board. But your bylaws will ultimately dictate each of these items.
Your very first board meeting, however, will look a bit different. Here’s what you’ll need to accomplish:
- Draft and approve the nonprofit’s bylaws: The bylaws dictate exactly how your nonprofit will be run. This includes a detailed rundown of your corporate purpose, how your board will be selected and replaced, how you’ll raise funds, how you’ll hire employees or solicit volunteers, and much more (including a provision for how to amend the bylaws). To save time, you may choose to write a draft before the meeting and revise it when your full board is present. The important thing is that the board approves the final bylaws, making them the governing document for your nonprofit.
- Draft and approve a conflict of interest policy: Occasionally, one of your nonprofit’s contributors will have personal affairs that intersect with the activities of your nonprofit. A conflict of interest policy dictates exactly what happens in those situations, protecting both the nonprofit and the individual contributor.
- Appoint someone to take minutes at each meeting: Every Alabama nonprofit corporation must establish and maintain a corporate record. That’s why every board should appoint someone to take minutes, or a summary of every board meeting, documenting what was said and what decisions were made.
- Finalize responsibilities for each board member: If one board member will be responsible for fundraising while another raises awareness for the cause, you should assign those roles at the initial board meeting.
- Appoint officers for the nonprofit (if needed): Some corporations choose to have their officers, such as the CEO or CFO, be members of the board. Others appoint non-board members to fill these roles, creating a division between the governance and day-to-day operations. Either choice is fine, but these vital roles should be filled.
This initial meeting will be a very full, technical day (or even series of days!), but nailing down these aspects will help you establish a nonprofit that’s compliant with Alabama state law and efficiently run.
Take Care of Taxes
Taxes as a nonprofit are a tricky beast; frankly, we recommend getting advice from a tax lawyer, accountant, or similar consultant to make sure you cover all your bases! But let’s take a quick look at the basics for nonprofit taxes.
First, apply for tax-exempt status on the federal level
If you don’t file for tax-exempt status, you’ll technically be liable for corporate income taxes. And that’s the last thing a non-profit wants. That’s why you’ll need to start out by filing Form 1023 or Form 1024, which are the applications for charitable, religious, or educational groups and other nonprofits respectively. After that application is completed, you’ll play the waiting game. The IRS can take up to 180 days to approve or reject your application, so we highly recommend completing the application correctly the first time.
Once your application is approved, you’ll receive a letter of tax-exempt status from the IRS. Then a lot of entities can use this letter to apply for tax exemption at the state level. Doing so will get you an exemption from the state sales tax. To apply for this exemption, you’ll need to submit the Application for Sales Tax Certificate of Exemption.
Obtain an EIN
An EIN, or an Employer Identification Number, is an important identifier to get; it acts a bit like a Social Security Number, but for a business entity. Unfortunately, you aren’t assigned one automatically.
Thankfully, it’s free to apply for an EIN online with the IRS. Even if you don’t plan to have employees right away, it’s a good idea to have this number from the get-go. Miscellaneous forms, such as license applications or even bank accounts, may request this number.
Account for employment & miscellaneous taxes
No two businesses are alike, so each nonprofit will have slightly different taxes. That said, Alabama nonprofits with employees need to account for withholding taxes and unemployment insurance taxes on both the state and federal levels. Alabama offers information on these taxes at the Department of Revenue and the Department of Labor.
There are also miscellaneous industry-specific taxes in Alabama, such as fees for cigarettes, alcohol, and more. In most cases, these taxes won’t apply to your nonprofit, but it’s still a good idea to double-check with the Alabama Department of Revenue just to be sure you’ve covered all of your responsibilities.
That’s the basic gist of nonprofit taxes in Alabama. We still recommend consulting with a tax professional, as they’ll be able to give you specialized advice for your unique situation.
Register for Licenses and Permits
Licenses and permits are especially important for nonprofits. And there are three major categories of potential permits and licenses: fundraising, lobbying, and licensing. Let’s walk through Alabama’s requirements for each of those three areas.
A lot of states require nonprofits to register in order to solicit charitable contributions from donors. Alabama is one of them. Before you ask for any donations or start a fundraiser, you’ll need to register with the Attorney General. After that registration is complete, you’ll be set to raise funds for your cause.
If your nonprofit will be lobbying for its cause (i.e., attempting to influence the awarding of contracts within the government offices), then you will need to ensure that each person lobbying has the appropriate registration. This might just be you, or you might have multiple individuals within your nonprofit register to lobby for your cause. As part of this registration, lobbyists need to complete regular training with the state. If the training sessions are not attended, lobbyists can lose their access to influential politicians and their staff.
To learn more about lobbyist registration and compliance, please check out the Alabama Ethics Commission.
3. General licensing
Nonprofits are tax-exempt, but they aren’t exempt from licensure requirements, whether that’s for an industry-specific license or a state general business license. So you’ll need to get the licenses that apply to your unique organization.
Alabama, unlike some states, doesn’t have a general business license that every entity in the state needs to get. So most license requirements come at the industry level instead. Alabama upholds all federally regulated industry licenses, and the Business License page by the Alabama Department of Revenue is a great place to check out the state-level license requirements. It’s up to you to learn if there are any licenses for your industry, so be sure to complete this step!
If you have to apply for a license or permit, we recommend inquiring about the requirements for renewing that license. That way you’ll know exactly how and when to renew it.
Meet insurance requirements.
We highly recommend that every business entity maintain at least some sort of general liability policy — even nonprofit entities. There’s always a chance that something can go wrong (no matter how careful you are). A natural disaster can happen, a break-in might cost you some important equipment, or an accident during day-to-day operations might cause a broken bone and damaged property. A general liability policy will protect your business if something like that happens.
Alabama state law also requires you to get a workers’ compensation insurance policy if you have one or more employees working for your nonprofit. You can learn more about this requirement with the Department of Labor.
Top Resources for Alabama Nonprofits
Nonprofit work isn’t always easy, but you never have to go it alone! There are dozens, if not hundreds of nonprofit resources available to Alabama organizations.
On the national level, there’s the National Council of Nonprofits. They exist to advocate for and strengthen nonprofits throughout the country by providing nearly comprehensive resources, teaming up with each state’s nonprofit network, and keeping you aware of the trends in policy and public opinion. It’s also a great place to peruse the latest reports and data about charitable giving and advocacy in the U.S.
On the state level, you can always turn to the Alabama Association of Nonprofits. You’ll need to join to get the full benefits of this organization, but it’s well worth it. AAN members get access to an exclusive discount program for certain goods and services. You’ll also receive all-important networking opportunities, technical assistance, communication about the latest grants and fundraising opportunities, and much more. And in return, the AAN will advocate for you and other state nonprofits, helping to drive lasting change in the state.