Forming a Nonprofit Corporation in Tennessee: The Charter, the Board, and 501(c)(3) Exemption

Forming a Tennessee nonprofit is two projects: a state filing that creates the corporation under the Tennessee Nonprofit Corporation Act, and a federal application asking the IRS to recognize it as tax-exempt. The IRS reviews the charter filed in the first, so the two are worth planning together.

Public benefit, mutual benefit, or religious

Every Tennessee nonprofit charter must state either that the corporation is a public benefit corporation or that it is a mutual benefit corporation, and a religious corporation must also say so (Tenn. Code Ann. § 48-52-102(a)(2), (3)). The Act defines each type by how it was formed, so the charter's designation controls (§ 48-51-201(33), (41)). A religious corporation is a public benefit or mutual benefit corporation organized and operating primarily or exclusively for religious purposes (§ 48-51-201(44)), and a few provisions of the Act do not apply to religious corporations unless their charter or bylaws provide otherwise (§ 48-67-102(a)).

The designation has consequences. Public benefit corporations face closer Attorney General oversight, especially on dissolution (§§ 48-64-103, 48-64-301(a)(1)(E), (F)). And if the charter and bylaws say nothing about dissolution, a mutual benefit corporation's assets go to its members (§ 48-64-106(a)(7)), which the 501(c)(3) rules do not allow.

What the charter must say

One or more incorporators form the corporation by delivering a charter to the Secretary of State (§ 48-52-101), and the corporation exists when the charter is filed unless a delayed effective date is specified (§ 48-52-103(a)). Beyond the designation, the charter must state (§ 48-52-102(a)):

• A name that meets the Act's name requirements.
• The initial registered office (with its county) and registered agent.
• The name and address of each incorporator, and the initial principal office.
• That the corporation is not for profit.
• Whether the corporation will or will not have members.
• Provisions on the distribution of assets on dissolution.

The Secretary of State's form is SS-4418, Charter Nonprofit Corporation, and the $100 filing fee is set by statute (§ 48-51-303(a)(1)). The statute also requires a copy of the charter to be filed with the register of deeds in the county of the principal office, if it is in Tennessee (§ 48-51-303(d)).

The language the IRS looks for

To qualify under 501(c)(3), an organization must be both organized and operated exclusively for exempt purposes, and failing either test means it is not exempt (26 C.F.R. § 1.501(c)(3)-1(a)(1)). The organizational test is applied to the charter itself. The charter must limit the corporation's purposes to one or more exempt purposes and must not expressly empower it to engage, beyond an insubstantial part of its activities, in activities that do not further those purposes (§ 1.501(c)(3)-1(b)(1)(i)). A charter with purposes broader than 501(c)(3) fails the test even if the corporation actually operates only for exempt purposes (§ 1.501(c)(3)-1(b)(1)(iv)).

The assets must also be dedicated to an exempt purpose: a corporation fails the test if its charter or state law would distribute its assets to its members on dissolution (§ 1.501(c)(3)-1(b)(4)). Because a Tennessee nonprofit has the purpose of engaging in any lawful business unless its charter states a narrower one (§ 48-53-101(a)), the purpose and dissolution clauses are worth drafting deliberately.

The board, officers, members, and bylaws

• Directors: the board must consist of three or more natural persons, and the number cannot be reduced below three (§ 48-58-103). Directors need not be Tennessee residents or members unless the charter or bylaws require it (§ 48-58-102).
• Officers: every corporation must have a president and a secretary, and one person can hold several offices, but not both of those (§ 48-58-401(a), (d)).
• Members: a corporation is not required to have members (§ 48-56-103). A member is anyone who, on more than one occasion, has the right under the charter or bylaws to vote for directors, whatever the person is called (§ 48-51-201(30)).
• Organization and bylaws: after filing, initial directors named in the charter hold an organizational meeting to appoint officers and adopt bylaws. If none are named, the incorporators hold it to elect directors and complete the organization, and they may act by written consent instead (§ 48-52-105). The incorporators or the board must adopt initial bylaws (§ 48-52-106(a)).

No distributions, and how conflicts are handled

Except for narrow cases, a Tennessee nonprofit cannot make distributions (§ 48-63-101). A distribution is a direct or indirect transfer of assets, income, or profit to members, directors, or officers, but reasonable compensation and reimbursement of reasonable expenses for services are not distributions (§ 48-51-201(13)). The corporation also may not lend money to or guarantee the obligation of a director or officer, with limited exceptions (§ 48-58-303). The federal rule runs parallel: no part of a 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual (26 U.S.C. § 501(c)(3)).

Directors must act in good faith, with the care an ordinarily prudent person in a like position would use, and in a manner they reasonably believe is in the corporation's best interests (§ 48-58-301(a)). A transaction in which a director or officer has a conflicting interest is protected from challenge on that ground if it was approved by qualified directors after required disclosure, approved by members under the statute, shown to be fair to the corporation, or approved by the Attorney General or a court with the Attorney General joined (§ 48-58-702(b)). Board approval requires a majority, but no fewer than two, of the qualified directors voting (§ 48-58-703(a)).

Claims for breach of fiduciary duty generally must be brought within one year of the breach or its discovery, with a three-year outer limit except for fraudulent concealment (§ 48-58-601(a)). The separate director immunity for 501(c)(3)-exempt nonprofits is covered in the questions below.

Summers v. Cherokee Children & Family Services, Inc., 112 S.W.3d 486, 525, 529 (Tenn. Ct. App. 2002), shows the Attorney General's role. The Court of Appeals affirmed a receivership and the dissolution of two public benefit corporations, framing the central issue as whether they fulfilled their nonprofit purposes or were operated for private financial gain, and it held the business judgment rule inapplicable on those facts. The conflict-of-interest statute discussed in that opinion has since been replaced.

Applying for federal exemption

A 501(c)(3) organization formed after October 9, 1969 is not treated as described in 501(c)(3) unless it gives the IRS notice that it is applying (26 U.S.C. § 508(a)). The regulations say that notice is a completed Form 1023 or, if applicable, Form 1023-EZ, filed within 15 months from the end of the month the organization was organized (26 C.F.R. § 1.508-1(a)(2)(i)). A separate regulation automatically extends that 15-month deadline by 12 months (26 C.F.R. § 301.9100-2(a)(2)(iv)), which is where the IRS's 27-month window comes from. If Form 1023 or 1023-EZ is filed within 27 months after the end of the month of formation and approved, exemption generally runs from the formation date, provided the organization's purposes and activities before the determination were consistent with exemption. Otherwise it generally runs from the filing date, unless the IRS grants relief for a late filing (Rev. Proc. 2026-5, § 6.09; Instructions for Form 1023, rev. December 2024).

Form 1023-EZ, a streamlined application, is available under the IRS's 2026 revenue procedure only if the organization projects annual gross receipts of $50,000 or less for the current and next two years, had gross receipts of $50,000 or less in each of the past three years it existed, and has total assets of no more than $250,000. Churches, schools, hospitals, supporting organizations, and LLCs, among others, cannot use it. The user fee is $275 for Form 1023-EZ and $600 for Form 1023 (Rev. Proc. 2026-5, § 6.05 and Appendix A).

An organization that does not tell the IRS it is not a private foundation is presumed to be one (26 U.S.C. § 508(b)), and Tennessee law separately requires a private foundation to follow the federal rules on minimum distributions, self-dealing, excess business holdings, and taxable expenditures (Tenn. Code Ann. § 48-51-501(a)). Your CPA can help work through the classification.

Staying exempt: politics, lobbying, and annual returns

A 501(c)(3) organization may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office, and no substantial part of its activities may be attempting to influence legislation (26 U.S.C. § 501(c)(3)). A charter that expressly empowers the corporation to engage in campaign activity, or to devote more than an insubstantial part of its activities to lobbying, fails the organizational test (26 C.F.R. § 1.501(c)(3)-1(b)(3)). An eligible public charity may instead elect the dollar-based lobbying limits of § 501(h) by filing IRS Form 5768.

According to the IRS, which annual return an exempt organization files depends on gross receipts and assets: an organization with gross receipts normally of $50,000 or less may file the Form 990-N e-Postcard, and private foundations file Form 990-PF. An organization that fails to file a required return or notice for 3 consecutive years has its exemption revoked automatically, and it must apply to be reinstated (26 U.S.C. § 6033(j)(1)(B), (2)).

Tennessee taxes and charitable solicitation registration

• Franchise and excise tax: persons with not-for-profit status are excluded from both taxes, except that excise tax applies to unrelated business taxable income and franchise tax applies to net worth attributable to those activities (Tenn. Code Ann. §§ 67-4-2007(a), 67-4-2105(a)). Not-for-profit is defined by reference to federal categories, including organizations described in § 501 (§ 67-4-2004(32)).
• Sales and use tax: organizations that have received a 501(c)(3) determination from the IRS and are currently operating under it are exempt on purchases made directly by the organization, but the exemption requires a certificate issued by the Commissioner of Revenue (§ 67-6-322(b), (d), (e); Tenn. Comp. R. & Regs. 1320-05-01-.51). The Department of Revenue takes nonprofit exemption applications through TNTAP.
• Charitable solicitations: a charitable organization that intends to solicit contributions in Tennessee must register with the Secretary of State before soliciting (Tenn. Code Ann. § 48-101-504(a)(1)). An organization that does not raise or receive more than $50,000 in contributions from the public in a fiscal year is exempt from registration, unless part of its fundraising is conducted by professional solicitors, professional fundraising counsel, or commercial coventurers. Once contributions pass $50,000, it must register within 30 days. An organization relying on this exemption must file an exemption statement, annually within six months after its fiscal year ends (§ 48-101-502(a)(2), (d)). A newly registered organization files quarterly financial reports in its first year (§ 48-101-504(c)). Religious and qualifying educational institutions are also exempt (§ 48-101-502(a)(1)).
• Raffles: the Secretary of State's guidance states that only qualified 501(c)(3) or 501(c)(19) organizations that have applied to the Secretary of State and been approved by the General Assembly may hold a raffle.

The annual report, and what happens at dissolution

Each nonprofit corporation files an annual report with the Secretary of State by the first day of the fourth month after its fiscal year ends (§ 48-66-203(a), (c)). The fee is $20 (§ 48-51-303(a)(33)). A 501(c)(3)-exempt corporation that is currently operating does not have to list its directors and officers on the report (§ 48-66-203(a)(4)). Failing to file within two months after the due date is a ground for administrative dissolution (§ 48-64-201(1)).

When the directors of a corporation without members approve dissolution, they adopt a plan saying who will receive the assets after creditors are paid (§ 48-64-101(c)). A corporation with members sends them a copy or summary of the plan with the meeting notice (§ 48-64-102(e)). A public benefit corporation must give the Attorney General written notice, with a copy or summary of the plan, at or before the time it files articles of dissolution, and it cannot transfer assets as part of the dissolution until 45 days after that notice or until the Attorney General consents or says in writing that no action will be taken, whichever is earlier (§ 48-64-103(a), (b)). After the transfers, the board sends the Attorney General a list of who received the assets (§ 48-64-103(c)).

If you are comparing a nonprofit with a for-profit corporation, the steps for forming a Tennessee corporation cover the charter, shares, and S election on the for-profit side. If you are starting a Tennessee nonprofit, my office can prepare the charter and bylaws and work through the federal exemption application with you.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal or tax advice for any specific organization.