How to start a Scholarship Granting Organization (SGO) under the EFTC

This is the complete, start-from-nothing guide to launching a Scholarship Granting Organization (SGO) so that donors can give to you and claim the federal Education Freedom Tax Credit (EFTC, also called the Federal Scholarship Tax Credit and codified at IRC §25F). If you’ve never run a nonprofit, start here — every step below says what it is, who issues it, what it costs, and roughly how long it takes. If you just want the conceptual overview first, read what an SGO is.

Start here: the two layers

The single most important thing to understand before you spend a dollar is that becoming an SGO is really two separate jobs:

• The federal layer (same in every state). What makes your organization a qualifying SGO under §25F: being a 501(c)(3) public charity that meets the program’s operating rules. You can do all of this now, and it does not change based on where you live.
• The state layer (different in every state, and mostly not finalized yet). The federal credit only works if the donor’s state — not you — chooses to participate and then puts your organization on a list it sends to the U.S. Treasury. No participating state, or not being on its list, means your donors get no credit.

Before you begin: cost & time at a glance

Here is the whole journey in one table, so you can see what you’re committing to. Government fees are the firm numbers; professional help is optional.

1. Incorporate the nonprofit

Your SGO has to be a legal entity before it can be anything else. You create one by filing articles of incorporation as a nonprofit (nonstock) corporation with your state — usually the Secretary of State. This is the document that brings the organization into existence.

What you need in place

• A name that’s available in your state.
• A registered agent — a person or service with a physical address in the state who can receive legal mail. You can be your own agent, or pay a registered-agent service (commonly $100–$300/year).
• A board of directors. The IRS effectively expects at least three unrelated directors for public-charity status; your state sets its own legal minimum (often one to three). Three independent board members is the safe baseline.
• IRS-compliant purpose and dissolution language in the articles. To qualify for 501(c)(3), your articles must limit the organization to exempt purposes and dedicate assets to another exempt organization on dissolution. Use the IRS’s suggested language so your exemption application isn’t bounced.

Then adopt your governing documents

After incorporating, hold an organizational meeting and adopt bylaws (how the organization is governed) and a conflict-of-interest policy (the IRS asks about this on the exemption application, and you’ll need it anyway to handle the §25F self-dealing rules). Keep minutes — they’re part of your permanent record.

2. Get an EIN

An Employer Identification Number (EIN) is your organization’s federal tax ID — the nonprofit equivalent of a Social Security number. You need it to open a bank account, apply for tax exemption, and file returns. Apply directly with the IRS (Form SS-4, or the IRS online EIN application). It is free and issued immediately online. Ignore any site that charges you for one.

3. Apply for 501(c)(3) status

This is the step that legally makes you a charity the IRS recognizes — and §25F is explicit that an SGO must be described in section 501(c)(3), exempt under 501(a), and not a private foundation. You apply on one of two forms, filed through Pay.gov:

One subtlety that matters for §25F: make sure your determination puts you in a public-charity classification, not a private foundation. §25F disqualifies private foundations outright, so this isn’t cosmetic — getting classified wrong means you cannot be an SGO at all.

4. Open the bank account(s)

Once you have your EIN (and ideally your incorporation paperwork), open a dedicated nonprofit bank account in the organization’s name. You cannot run an SGO out of a personal account or a shared account — and for an SGO specifically, the separate account isn’t just bookkeeping hygiene, it’s a definitional requirement.

Practically, most SGOs open (and ledger) at least two buckets:

• A scholarship/contributions account — the walled-off account that holds qualified §25F contributions and pays out scholarships. This is what proves you didn’t co-mingle.
• An operating account — for the small slice of administrative money (your 10%) that covers staff, software, and overhead.

Set this up before a single donation arrives. Retrofitting clean fund segregation after money has moved is painful and audit-risky, and the 90% spending test (Step 6) is far easier to prove when the accounts were separate from day one. Bring your articles, EIN letter, and a board resolution authorizing the account when you go to the bank.

5. Register to fundraise

Asking the public for donations is regulated at the state level. Most states — roughly 40 of them — require a charity to register before soliciting their residents for contributions, and if you fundraise across state lines you may need to register in multiple states. A handful of states have no requirement.

• Where: usually the state Attorney General or Secretary of State’s charities division.
• When: before you solicit — not after the money comes in.
• Renewal: registration is typically annual, with a financial report attached.

This is separate from, and in addition to, the §25F state-list step (Step 7). One governs asking for money; the other governs whether your donors get the credit.

6. Build to the §25F bar

Everything so far makes you a nonprofit. These rules make you a qualifying SGO. They come straight from IRC §25F, they’re the same in every state, and you should design your operations around them from the start. We cover them in depth in the 90/10 rule & compliance guide; here’s the working summary.

The 10-student / multi-school rule

You must provide scholarships to 10 or more students who do not all attend the same school. This stops an SGO from being a private conduit for one school or one family. A single-school “SGO” does not qualify.

The 90/10 rule

At least 90% of the organization’s income must go to scholarships for eligible students — leaving roughly 10% for all administration combined. Note the statute says “income,” which is broader than “donations.” (Exactly what counts as “income” for this test is one of the items still awaiting IRS guidance — build your accounting to flex.) This is one of the strictest pass-through standards in the nonprofit world, and it’s the reason SGOs lean so hard on automation.

The 300% AMGI eligibility ceiling

Scholarships may only go to students in households at or below 300% of area median gross income (the AMGI measure used in IRC §42), measured on the prior calendar year’s income and family size. You must verify household income — you can’t take an applicant’s word for it. See scholarship eligibility for the family-facing details.

Qualified expenses only

Scholarship dollars may only pay qualified K–12 education expenses — the Coverdell list cross-referenced at §530(b)(3)(A): tuition and fees, books, supplies and equipment, tutoring, special-needs services, room and board, uniforms, and certain technology and internet costs.

Priority, anti-earmarking, and no self-dealing

• Award priority: prior-year recipients first, then their siblings, before new awards.
• No earmarking: a donor can pick which SGO to support, but cannot direct a gift to a named child. Contributions go into a general pool.
• No self-dealing: you cannot award scholarships to disqualified persons (insiders and their families, under rules similar to IRC §4946). Your conflict-of-interest policy and an insider list enforce this.

7. Get on your state’s list

Here is the part that surprises most founders: you do not apply to the federal government to become creditable. Under §25F, the state makes an advance election to participate by filing IRS Form 15714, and then the state submits a list of qualifying in-state SGOs to Treasury. A donation is only §25F-creditable if your SGO is on a covered state’s list for that year.

What the state process will probably look like

The best preview comes from states that already run their own tax-credit-scholarship programs. Across them, a clear pattern holds: a state agency certifies or designates eligible organizations, and the requirements rhyme with §25F. These are state programs — not the federal §25F process — but they show you the shape of what’s coming:

• Arizona: the Department of Revenue certifies School Tuition Organizations (STOs); a certified STO must allocate at least 90% of contributions to scholarships and cannot limit scholarships to one school.
• Ohio: the Attorney General’s Charitable Law Section certifies SGOs — you must be a 501(c)(3) that primarily awards K–12 scholarships and prioritizes low-income students.
• Indiana: the Department of Education certifies SGOs (application plus 501(c)(3) proof, articles showing a scholarship purpose, and your policies).
• Florida: a two-agency model — the Department of Education designates eligible scholarship-funding organizations while the Department of Revenue handles the credits.
• Iowa: STOs file an annual report (board members, contributions and credits, donor and school detail, students served) and provide a reviewed financial statement.

Expect your state to ask for similar things: proof of 501(c)(3) status, evidence you meet the §25F operating rules, and an application to a designated agency. First, confirm your state is participating; for the mechanics of how states opt in, read how states opt in. And because participation is annual, getting listed is not one-and-done — you stay listed by staying compliant.

8. Stand up donor & family operations

With the legal entity and §25F design in place, you need the machinery to actually take money in and send scholarships out.

Donor side

• Accept cash contributions (the credit is for cash gifts) and verify donor identity.
• Issue substantiation donors use to claim the §25F credit. Tell donors two coordination rules up front: a credited gift cannot also be deducted under §170, and the federal credit is reduced by any state credit claimed on the same donation.

Family side

• Take applications and collect the documents needed to verify household income and family size against the 300% AMGI ceiling.
• Award under the required priority order (renewals, then siblings, then new awards) and your published criteria.
• Disburse to schools/providers for qualified expenses and keep the paper trail.

9. Stay compliant

Being an SGO is an ongoing obligation, not a one-time setup. The recurring load includes:

• Annual IRS Form 990. Tax-exempt organizations file a 990-series return every year; miss it three years running and the IRS automatically revokes your exemption.
• Prove the 90% test each year. Maintain accounting that can demonstrate at least 90% of income went to scholarships — cleanly, on the right base.
• State and (forthcoming) Treasury reporting. Expect annual state reports on donors, credits, scholarships, and schools served — the Iowa model above is a realistic preview — plus whatever federal reporting the §25F regulations ultimately require.
• Charitable-solicitation renewals and, depending on size and state, an independent audit or reviewed financial statement.
• Recordkeeping for income verification and substantiation — the documents behind every eligibility decision and every donor receipt.

Other items aren’t federally mandated by §25F but are standard good governance for an organization handling other people’s money: directors-and-officers (D&O) insurance, written financial controls, and background checks where you work directly with families. Some state programs require audits or reviewed financials above a revenue threshold, so check your state’s rules.

Where software becomes necessary

Here’s the honest bottleneck. The 90/10 rule means everything in Steps 6, 8, and 9 has to be done inside a 10% administrative budget — and most of that work is repetitive, high-volume, and auditable: verifying every household’s income, applying the renewal/sibling priority, keeping qualified contributions segregated, generating a §25F receipt for every donor, proving the 10-student/multi-school test, and producing state and Treasury reports. Done by hand, that work blows past the 10% cap quickly — which is itself a compliance failure.

For the full breakdown of what to look for — and how to think about build-vs-buy — see our guide to SGO software.

The full checklist

Copy this and work top to bottom. The federal section you can complete today, in any state; the state section follows your state’s decision.

For the dated rollout — advance elections, list submissions, and when donations start counting — see the EFTC timeline and key dates.

Frequently asked questions