CDC and 501(c)3

by Erminia Rasmussen
(New Lebano, NY USA)

Reviewed: June 12, 2024

Visitor Question: We are interested and looking into starting a CDC in our town. Do you need to register as a 501(c)3 with the IRS before starting a CDC?

Thank you.

Editors Reply: As our page on how to start a CDC indicates, this is probably one of the later steps in starting a community development corporation.

You will have to incorporate before you can be designated by the IRS as a federal non-profit 501(c)(3) corporation. Becoming a corporation will fall under New York state law. Study that whole page on our website that we referred to above to make sure you want to be a non-profit, as most CDCs are.

To file for incorporation, many states require you to be prepared to state or describe your mission and purpose, to name several incorporators or an entire board, to have a name for your corporation, and to specify a mailing address. Depending on the state, incorporating could be more complex, or maybe even simpler.

So you will need to have at least one organizational meeting to establish all of this; many times CDCs take several meetings to figure out the answers to all of the questions required for incorporation.

Often the main rush to be designated as a federal 501(c)(3) is that you want to have financial donors be able to make tax-deductible contributions to you. If this is important to your first donor or two, try to hold off on accepting their contributions until you have the 501(c)(3).

However, you can and we think you should have a number of productive and exciting discussions with community people and prospective board members before you even incorporate and before you are worried about establishing a bank account and accepting donations.

Don't let the fear of bureaucratic paperwork discourage you from taking action to stir up community interest and support and finding good board members who have a broad array of skills and useful contacts.

Be sure that you understand the differences between a 501(c)(3) and a 501(c)(4) corporation. Almost all CDCs will be (c)(3)s, because a (c)(4) is appropriate for an organization that will do a considerable amount of lobbying. Nonetheless, this is worth mentioning.

If you intend to become a 501(c)(3), find the attorney who will complete and file that paperwork for you as soon as possible. This attorney can help you prevent some mistakes as you move ahead with your planning, and they can become a powerful ally or even a board member after the paperwork is filed. There are attorneys who have some specialty in nonprofit work, and that is what you want.

While it is considerably easier and faster to obtain this IRS designation than in years past, it is also possible to say the wrong thing if you try to fill out the form yourself or engage an attorney who is inexperienced in tax and nonprofit matters.

Forming a CDC is an exciting and important project. Set the stage for adequate financing through making it attractive to donate money.

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