This discussion is based on California law, but the general principles should apply in any state. Check your state statutes.
Community-based organizations ("grass-roots movements") have three principal choices of organization:
Form a nonprofit (unincorporated) association, register with the state, and apply for exemption from state and federal taxes.
Form a nonprofit corporation by applying to the state and apply for exemption from state and federal taxes.
A corporation is a legal "person" that can enter contracts, incur debts, pay taxes, etc. In this way those who control and manage the corporation have "limited liability" -- directors, officers, employees, and members are not personally liable the corporation's debts.
Typically, business (for profit) corporations are authorized by their articles of incorporation to engage in any lawful business activity. Nonprofit corporations, however, must restrict their purposes to those defined in the Internal Revenue Code as nonprofit. "Nonprofit" does not mean you cannot make a profit -- your nonprofit corporation can profit from its activities. "Nonprofit" means the corporation cannot be set up to benefit particular persons, and, if the corporation is dissolved, any remaining assets must be distributed to a similar tax-exempt nonprofit group.
The unincorporated association is a common form of organization of labor unions, fraternities ("lodges"), and small local groups with a single limited purpose (a garden club, for example). Unincorporated associations may own property, sue and be sued, and are eligible for exemption from state income taxes in California and from federal income taxes. Nevertheless, associations do not have many of the legal rights and obligations of corporations.
If your group does not presently need to attract tax-deductible contributions, does not need to apply for public or private grants, and has no legal need to adopt the corporate form (e.g., providing limited liability to directors, members, etc.), then an unincorporated association may be adequate.
The general provisions governing unincorporated associations in California are found in the California Corporations Code beginning at section 20000. The general provisions governing nonprofit associations are found beginning at section 21000. (For the text of California statutes go to California Codes.)
Nonprofit organizations may be exempt from having to pay federal or state income tax, but exemption does not automatically occur with state recognition as a nonprofit organization. State laws governing tax exemption for nonprofit organizations tend to imitate the federal law (but, do not assume anything).
The U.S. Revenue Code recognizes multiple types of organizations that can be exempt from federal taxes, but the two main types fall under sections 501(c)(3) and 501(c)(4) of the code. To qualify under either type your organization must be formally established, as either a nonprofit corporation or nonprofit association. Tax-exempt status for either type precludes endorsement of candidates for public office.
501(c)(4) This type of corporation is for mutual benefit organizations in which the benefit is to a finite group, i.e., community organizations. This type of corporation may influence legislation. The corporation is entitled to a standard bulk mail rate. Donations are not tax deductible.
Getting State Recognition
Apply to the state for recognition as a corporation or association. For a state-by-state list of nonprofit organization assistance, see states A - M and states N - Z. Also see How Do I Incorporate as a Nonprofit Organization?
In California apply to the Secretary of State. You will need to submit articles of incorporation (or articles of association) and bylaws and pay a filing fee.
In California unincorporated associations may (but are not required to) file various documents with the Secretary of State, such as the "articles of association," similiar to articles of incorporation. These public filings help greatly in establishing the credibility of the organization. (see California filings for unincorporated associations at the California Secretary of State website).
The application fee for incorporation is $30; for registration as an unincorporated association it is $10.
Obtaining Tax Exemption
California tax exemption application. Obtain California Franchise Tax Board Form 3400 (equivalent to the IRS form SS-4). See the website of the Franchise Tax Board.
Federal tax exemption application. IRS Publication 557, Tax-Exempt Status for Your Organization, has a good overview of requirements. Also check the IRS website.
From the IRS get packet 1023 for a 501(c)(3) corporation (or association), or packet 1024 for a 501(c)(4) corporation (or association). These packets contain model articles of incorporation and by-laws.
You will probably have an easier time getting exemption approval from the IRS if you have already obtained approval from the state tax authority.
Federal identification number. Get a federal ID number from the IRS (SS-4 form).
Opening a bank account. The bank will need the federal ID number you obtain from the IRS (you don't need to be fully incorporated to open the account). The federal ID number obligates the nonprofit corporation to pay taxes on account interest. Alternatively, you may open an account using a Social Security number, in which case the SSN holder is obligated to pay taxes on account interest.
If you are dealing with a bank that doesn't know you, the bank may ask to see the articles of incorporation (or association) and/or bylaws.
Annual reports. All nonprofit corporations, regardless of income, are required to file IRS Form 990. Nonprofit corporations other than faith-based organizations that receive more than $50,000 in income during a year must file IRS Form 990 for that year. This is a long and complex form. Nonprofit corporations that receive less than $50,000 in a year (regardless of the amount) file a much simpler Form 990 electronically. The electronic Form 990-N ("ePostcard") is an eight-question return.
The Gilbert Center
How to Form a California Nonprofit Corporation, Anthony Mancuso, Berkeley: Nolo Press (800.992.6656). (Frequently updated, excellent guide. One form of this publication comes with a diskette containing model bylaws, forms, etc.)