24: What 501(c)3 is and WHY it matters

Show Notes:

In today’s episode of our podcast, we are going to discuss what 501(c)3 is — something that you might have heard of many times now, and why it matters. I know that today’s content might be a bit dry, but if you are ever inspired to start an organization or an ensemble like Jennifer Kane, Founder and Artistic Director of NOVA Women’s Choral Project and our guest in episode 16, or to start a publishing company like our next week’s guest Brittney Boykin — oh, that’s a spoiler alarm! —  this episode is something for you.

In short, 501(c)3 is a specific tax category for nonprofit organizations in the U.S. Once your organization meets the requirements of section 501(c)3, people giving you money for your charitable cause will receive a tax deduction for their donation, as permitted by laws.

I know the language sounds a bit crazy here, but don’t worry as I will break everything into simple and bite-sized information for you. We are going to do so in three big parts today:

Part I: the historical background of 501c3


This practice actually predates the formation of the nation as the first European settlers chose to start voluntary charitable initiatives without the governmental intervention.

Part II: why it is important for your charitable cause to meet those requirements

Other than your donors will receive tax-deductibles, a lot of major grants do require that the applicant organizations / ensembles have met the 501c3 requirements.

Part III: a very quick overview of how to apply for and obtain the status

— if you have a startup ensemble or organization.

  • STATE LEVEL: being a not for profit company (being incorporated) in your state, and meet your state’s requirements
  • FEDERAL LEVEL: apply for a EIN (which takes 5 minutes!) and use the 1023-EZ form for your 501c3 application if you don’t expect to receive more than $50,000 donation annual for three years

Links Mentioned in Today's Episode

Chaowen: 0:02
Hi everyone, this is Chaowen recording in May 2023. After finishing the first season of The Conductor’s Podcast, I have decided to give this podcast project, a dedicated website with more user friendly functions. So now we have a brand new website called theconductorspodcast.com. Straightforward, right? And now we also have its own Instagram handle. It’s also the same, theconductorspodcast. So all the show notes have been moved to the new side, and I invite you to come check out all the resources and happy listening.

Chaowen: 0:50
For us artists with a startup nonprofit ensemble, or organization, the most immediate benefit is that very often, you have to be a 501C3 recognized organization to apply for major grants.

Chaowen: 1:10
Hey there, welcome to The Conductor’s Podcast. I’m your host Chaowen Ting, a conductor with over 20 years of experience working with professional symphony orchestras, opera houses, new music groups and vocalist. I’m also founder of Girls Who Conduct and have mentored hundreds of conductors from across the globe. I created The Conductor’s Podcast to share all the behind-the-scenes secrets with you while I interview conductors, musicians and business gurus from around the world. This is a space created for conductors, conducting student musicians and non musicians who are curious and interested in learning more about the profession, craft, industry and business.

Chaowen: 1:57
Shy away from the real talk> No way. Money, hardship, growth and the roller coaster of a conducting career are all topics we discuss here. I will give you a simple, actionable step by step strategies to help you take action on your big dream. Move through the fear that’s holding you back and have a real impact. Now, pull up a seat make sure you’re cozy, and get ready to be challenged and encouraged while you learn.

Chaowen: 2:32
Hi there, Happy March and welcome to Episode Number 24 of The Conductor’s Podcast. I’m your host, Chaowen Ting and I’m thrilled that you’re tuning in with me today, as we are talking about something that is extremely important for performing arts organizations here in the United States. In today’s episode, we are going to discuss what 501c3 is. That something that you might have heard of many, many times now, and why it matters.

Chaowen: 3:07
I know that today’s content might be a little bit dry. But if you’re ever inspired to start an organization, or an ensemble like Jennifer Kane, our guest in Episode Number 16 and founder and artistic director of the Nova Women’s Choral Project, or to start a publishing company like our next week’s guest, Brittany Boykin, oh, that’s a spoiler alarm, this episode is something for you.

Chaowen: 3:37
In short, 501c3 is the specific tax category for nonprofit organizations in the United States. Once your organization meets the requirements of section 501c3, people giving you money for your charitable costs will receive a tax deductible deduction for their donation as permitted by laws. I know the language sounds a bit crazy here, but don’t worry, I will break everything into simple bite sized information for you.

Chaowen: 4:13
We are going to do so in three big parts today. Part one, the historical background of 501c3. And in part two, we will talk about why it is important for your charitable cause to meet those requirements. And in part three, we are going to talk about a very quick overview of how to apply for and obtain the status. If you have a startup ensemble or organization, this is for you. We have a lot to cover today. So let’s dive in.

Chaowen: 4:50
As always, if you’re listening from the car or at the gym, you can find all the information in the show notes at chaowenting.com/24 [now theconductorspodcast.com/podcast/24].

Chaowen: 5:03
Let’s start with part one, the historical background of 501c3. If you are unfamiliar with this practice in the United States, or come from a different background, such as the European tradition, tax deductible donation might be something that is very foreign to you. In a nutshell, instead of the government subsidizing or giving money to museums, public radio, opera houses, or a symphony orchestra, like the practice in some other countries, the laws in the United States gave this right or privilege back to the people.

Chaowen: 5:48
So instead of letting the government choose which programs or areas will receive tax payers money, people can directly donate to charitable causes that they support. And depending on how much money they donate to this charitable organizations, they receive tax deduction, meaning that they pay less federal income tax. So think this way, if you are in a school, and the teacher collects $20, from each student and buy things that were benefits the entire class, such as purchasing books for the class library, or gets cleaning supplies, or buy little prizes as a way to motivate the students. That’s the model in many European countries, and even for some charitable sectors in Taiwan, where I’m originally from.

Chaowen: 6:48
In the US, the teacher will tell you that you can buy whatever you think will benefit the class. It can be healthy snacks for the student, or bookshelves or organizing cabinets for the classroom, or even COVID testing kit. And the more money you spend buying things for the class, the less tuition you will pay for your students. So in this model, you see that you get to decide how much you want to give to what area that is important to you. Now, both structures have their pros and cons. Just like everything else in life.

Chaowen: 7:30
In the United States, this practice of volunteering or donating to a charitable cause actually predates the foundation and the formation of the country. When the first European settlers came to the land, they started many, many associations, like hospitals, fire departments, or orphanage even without a government. When the nation’s government was formed, this practice was kept partly because people feared and rejected a giant, bureaucratic government’s program. But also because early government was rather unstable to take care of those sectors. So now we know a little bit about the historical background of such a legal structure.

Chaowen: 8:23
What does that even mean to us artists? First of all, it’s a bit easier to start your own charitable initiative, which receives monetary donations. American people are more used to and also encouraged to donate to a cause. From cancer research to elephant rescue, from stopping domestic violence to supporting public charity or charter schools. Anyone can take action and start to change the world.

Chaowen: 8:59
However, it also means that one, things benefiting or only matter to a small group of people will have much more difficulty raising money. And two, especially for artists, to focus on things that will please your donors, instead of something that is about your own artistic pursuit, or you’re about completing, accomplishing your artistic vision. To elaborate on the first point, just think that it’s much harder to raise money for research on the rare disease, since people don’t feel how it could be important to them, or simply don’t know about this kind of things. For artists, if you have a very, very small group of audience, like maybe contemporary dance, I’m just making it up, it might be more difficult to receive donations comparing to a ballet company, dancing nutcracker.

Chaowen: 10:00
It also ties to my second point that a ballet company might be reluctant to explore new shows, or even to commission new choreography. If they are out of resources, and can benefit so much from just dancing the most famous shows like The Nutcracker or Swan Lake and so on. We also see this in example, like examples like opera houses and symphony orchestras. Do you want to have a system full of best sellers, including La Boheme and Carmen? Or do you want to play Tchaikovsky and Beethoven instead of promoting a lesser known leaving composer.

Chaowen: 10:42
Now, in part two, we are going to talk about why it is important for your charitable movement to meet those 501c3 requirements. First and foremost, I want to be clear that not every nonprofit organization meets 501c3 requirements. A lot of them don’t want to or don’t need to, depending on their goals. You also don’t even need a nonprofit organization to start receiving donations. People can donate their money for to anything, right. And you can always fundraise for whatever that you’re passionate about. We’ve seen lots of examples of people raising money to help a family in need, animal rescue, or an educational project.

Chaowen: 11:31
For example, if you Google benefits of having 501c3 status, you will find a list of things from tax deductible contribution, which we just talked about, to tax exempt financing, or exemption from federal income tax, and federal unemployment tax, and so on. For us artists with a startup nonprofit ensemble, or organization, the most immediate benefit is that very often, you have to be a 501c3 recognized organization to apply for major grants.

Chaowen: 12:18
We talked about it earlier that because of this kind of legal structure, nonprofit organizations are always raising funds, you’re always in need of money. Since we don’t have a stable governmental subsidy coming in every year. Without a relatively expected financial support fund and government, nonprofits need to seek donations from corporate or private donors. Many major donors or a grant will require you to have at least three year history since becoming a 501c3 nonprofit organization to show that you are growing and are doing what you promised that you would do.

Chaowen: 13:07
They are still of course, a few grants that will allow a fiscal sponsorship, which I will explain in the next part. But those grants tend to be smaller. So thinking about that, you don’t have to have a 501c3 status to have an ensemble as long as you have enough money to run what you want to do. And as long as the people giving you money, don’t care about receiving federal income tax deductibles. That means if they give you $5,000, $50,000, they can claim that those numbers on their tax return, so they pay a little less tax. But if you want to apply for major grant, it’s the best that you have a good standing 501c3 status. And then the next part, I’m going to explain to you step by step how to do that.

Chaowen: 14:19
Now, coming to the third part of today’s episode, I will give you a very quick overview of how to apply for and obtain a status. And also, if you don’t feel like going through the process right now, what your options are. The steps for any startup ensemble or organization to obtain the status is actually quite simple and straightforward. But the details of each step largely depends on the state you’re in. Basically, they are just two steps at the state at the state and on the federal level.

Chaowen: 15:03
We will first talk about the state level. At the state level, the organization needs to become a nonprofit company. And this process is called incorporation. Where you form a legally established business, you are incorporated. That’s just what that means. And this is a state business, so you will need to follow the rules and the laws in your state. At the state level, you also want to make sure that your business is classified as not for profit. This is usually part of the application process. When you apply for incorporation, you will choose that your business is not for profit, and there are requirements that you need to meet. Depending on which state you choose to incorporate, there are different requirements. And you should incorporate in the state in which that you want to run business. So if you are doing a charitable campaign in Missouri, you should incorporate in Missouri, if you’re having a new orchestra in New York, you should do it in New York.

Chaowen: 16:26
For some states, when you incorporate, you will need to submit your bylaws or other documents. For the state of Georgia, however, that’s where I am currently in, it’s super easy. All you need to do is to check the box during your application to certify that you are following the state rules have a nonprofit business and really not much document as needed. This information, however, will be available at your State Chambers of Commerce, or here in Georgia, on the website of the Secretary of State’s Corporation division, you can always go go online to say incorporation requirements in the state of blah, blah, blah. When you search online, just make sure that you follow the dot g o v website instead of some other commercial services. So you are not paying extras because once you Google those information, a lot of the commercial services will pop out. And they are giving you information or help for a certain fee at times. So just really, really make sure that you read everything that is on the official D O T government’s G O V website to make sure that you’re meeting the most updated requirements.

Chaowen: 17:53
A few little things about the state incorporation. The first is about the business name, you are required to search first to make sure that there is not another business in your state that already have the same name before you start the process. Sometimes you might be required to post an advertisement at the local newspaper to make sure that no one else wants to dispute you using the name. But that can always be easily taken care of. The second thing that I wanted you to note is that you will be asked to submit articles of incorporation. And within that process, you will need to put down at least three people as your officers. Those can be anyone, your business partners, or even your family members, friends, people supporting you wanting to legit use your name. You will need their social security number and their address.

Chaowen: 18:56
And of course, you need to keep your business status active by completing an annual registration to certify that your business is still in good standing. And that basically means that once a year, you need to login to the website, put a check there that you are still running the business and pay the annual registration fee. That’s it.

Chaowen: 19:19
But if you don’t do that, after a while, depending on your state, it could be three years or it could be I don’t know different years, your business will be considered not in operation anymore.

Chaowen: 19:34
The next thing and actually the last thing is once you’re incorporated, your business address is public. If you don’t want your home address to be known, you can pay for a P.O. Box for that purpose. You will also start receiving things in the mail telling you that you need this or that for your business to fulfill certain legal requirements, such as a wash hands sign for the employees, or you need to feel some extra forms. A lot of them are scame. And just always check who sent those mails. And Google if they’re legit, if you can’t tell right away.

Chaowen: 20:15
I hate to tell you that, but when I first had my own nonprofit organization incorporated, I really bought a employees must wash hands before returning to work side. And it was so expensive. I think I paid almost $100 for it, and it was so dumb.

Chaowen: 20:35
Now, that’s about it at the state level, and we are moving on to the federal level. At the federal level, once you’re incorporated in your state, as a nonprofit business, you can apply for a 501c3 status with the IRS after you apply for an EIN number, and we will talk in more details now.

Chaowen: 21:01
So the first thing you want to do at the federal level, is to apply for an EIN number. That is like your social security number for a business. Or, you know, in some other countries, it’s like your ID number. You can get the EIN number right away when you apply it online. At the IRS website. Once you have an EIN you are ready to apply for the 501c3 status, how exciting. Becoming a 501c3 nonprofit organization used to be a very lengthy and troublesome process. And it was the best to involve a lawyer. But a couple years ago, the IRS opened a new 1023-EZ streamlined application, an express application for organizations receiving less than 50,000 donation for the past three years.

Chaowen: 22:03
If you’re already a business, or if you’re a new business, that you project, you won’t receive more than $50,000 donation annually in the next three years. This is actually the majority of us, right. For me, it’s really hard to think when I’m just starting now that I will receive more than $50,000 annually in my first three years. Especially when you’re just starting out that you still need time to prove to the world that you’re actually good at making changes to the world, you’re actually doing what you propose to do.

Chaowen: 22:48
So this 1023-EZ form is actually really, really easy to fill out. And also much much cheaper than the traditional form 1023. This same light application that I’m recommending is called 1023- EZ, letter E as egg and what a Z as the zoo. You can google and find it really quickly on the IRS website. They are just a few questions that you have to answer. And once you click the submit button, you have pay for the application fee, and then you wait for the result.

Chaowen: 23:28
When I first applied using this 1023-EZ application. We got it approved in six weeks, the IRS officer called and asked me to submit a projected three year financial statement. And it was fairly quickly approved after I submitted the info. However, when I recently went through the process for NANOWorks Opera, it took about six months because we know the IRS are really really backed up since the pandemic. And also many many artists have been home for the past two years and started to initiate their own nonprofit initiatives movement, just like small businesses are booming.

Chaowen: 24:17
One little thing which is not really a requirement for you to start a business, but something that you probably need is to get a business bank account. Go around and ask about it as each bank will have different rules and fees around opening a business account. If you are going through the 501c3 process, I will suggest waiting until you have the status approved as some bank will give a nonprofit account discount or even waiver on the maintenance fees. But if you choose not to go through this process yet, you don’t need to start a business account for sure.

Chaowen: 25:00
So this is just a little bit the overview about how to obtain the 501c3 status. Basically, in your state, you need to become a state recognized business. And that process is called incorporation. So you need to be incorporated as a state nonprofit business. Once you are a business in your state, you can go through the IRS application using the 1023-EZ form, which is super quick and straightforward.

Chaowen: 25:43
However, if you choose not to obtain a 501c3 status, but your business is doing charitable works, you can seek a fiscal sponsor. It’s like borrowing someone else’s status and receive donations through them. Just think if you want to buy a concert, like a pop concert tickets, but you have to be a paid member of a service to get first priority. When you’re not a member, but your cousin is you might use your cousin’s accounts to get the benefit and buy the tickets under the name. A fiscal support is a little bit like that, use someone else’s 501c3 status to receive tax deductible donations, and they may charge you a fee for this service. A fiscal sponsor can be anyone in your state that does similar work and is willing to support you.

Chaowen: 26:41
A youth orchestra for example, under a professional symphony orchestra is probably fiscally sponsored, as it’s really not worth it for the youth orchestra to obtain their own incorporation and 501c3 status that you know, it takes time and effort to go through the process. Or it can be a friend of yours, who’s opera company has the status and you’re just starting something new, and that you use their status as a favor in between friends.

Chaowen: 27:14
The major company providing such services for artists is called Fractured Atlas. They charge a fee for using the service, but also takes care of all legal aspects for you, such as issuing tax deductible receipts to your donors. So it might be worth investigating if you choose to.

Chaowen: 27:39
All right, I know all this information is a lot to take in at once. Again, you can find all the information in the show notes at chaowenting.com/22 [now theconductorspodcast.com/podcast/22]. And if you’re enjoying this podcast, I would really appreciate it a lot if you can share it with just one friend. Someone you think would benefit from the podcast as much as you do. Go ahead and subscribe to the podcast if you haven’t already. And we are available on all platforms from Apple podcasts to Spotify, Google, Amazon music, Alexa or Stitcher and many more. Take care and I’ll see you next week. Bye for now.