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How to Start a Nonprofit Organization

how to start a nonprofit organization

Starting a nonprofit organization is a worthwhile way to help others and make an impact in your community, but you’ll need more than passion and good intentions to face a maze of complex rules and regulations.

Before getting too far into the process, you first need to make sure you have a feasible idea on your hands and a community that truly needs the services you want to offer, said Kimberly Wiley, an assistant professor of nonprofit management at the University of Illinois Springfield.

“Really make sure there’s a need for what you want to do,” Wiley said.

If you’ve got an idea that you’re determined to pursue, we’ll help you navigate the requirements for starting a nonprofit organization.

How nonprofits work

The word “nonprofit” is somewhat a misnomer, said Heather Tunis, senior consultant at the Center for Nonprofit Management. Despite the designation, nonprofits not only need to make money, they should be profitable.

“‘Nonprofit’ is a tax sector, not a business model,” Tunis said. “In order to run a responsible organization that is doing good work in the world … you need a reserve, you need a surplus.”

For-profit businesses and nonprofit organizations have more in common than you might think — the defining difference is that nonprofits must reinvest profits in the organization, rather than distribute profits to shareholders as some businesses do. Nonprofits must use any money earned to sustain the organization, which includes paying salaries and other operational costs.

Nonprofits are most commonly 501(c)(3) organizations under the IRS’ Internal Revenue Code, making them exempt from federal income taxes. Status as a 501(c)(3) organization also means charitable donations to your nonprofit are tax deductible. Individual and corporate donors are more likely to support 501(c)(3) organizations because of this benefit.

Although 501(c)(3) is the usual status for nonprofits, there are many types of tax-exempt designations. For example, social welfare organizations may apply for 501(c)(4) status, but donations to these organizations are not deductible as charitable contributions.

Nonprofits are typically formed as corporations. This means they must follow the same state and federal guidelines as for-profit corporations, Tunis said. Bylaws are one of several overlapping requirements for nonprofit and for-profit corporations. Your bylaws are the governing document for your nonprofit, establishing the purpose of your organization, compensation rules and responsibilities of the board of directors.

Nonprofit corporations are required to form a board of directors that acts as the governing body of the organization. The board is typically divided into committees that manage the nonprofit’s finances, fundraising and communications, as well as other responsibilities, Tunis said. That board is responsible for issuing certain annual reports detailing their activities, which we’ll discuss later.

“The board of directors becomes financially and legally responsible for the effectiveness and the ethical and legal management of the organization,” Tunis said.

How to start a nonprofit organization in 5 steps

1. Research

Before launching a nonprofit to solve a problem or meet a need in your community, you should make sure there isn’t an existing organization that’s already accomplishing your goal, said Rick Cohen, chief communications officer and chief operating officer for the National Council of Nonprofits.

If so, “rather than compete with them for funding, there are times when you can work together,” Cohen said.

You could partner with an existing nonprofit by creating your own program under its umbrella, which would perform administrative tasks for you and pass donations through to your operation. A fiscal sponsorship could also be an opportunity for you to test your idea before forming a new entity.

However, if no other organization is addressing the issue you want to tackle, what sounds like a positive could be a red flag. There may be a reason no organizations have taken on the cause, Cohen said.

Through your preliminary research, you should also determine community members who could serve on the board of directors to maintain and move your organization forward, Cohen said. Financing is also a major hurdle for new nonprofits, so you should nail down a financial plan before moving on — we list specific ideas, below.

Failing to do substantial research and planning could be your undoing. You don’t want to launch a nonprofit only to close it shortly after, possibly harming the people you’re trying to help, Cohen said. If people come to rely on your services, closing your doors could leave them in the lurch, he said.

2. File the proper forms.

The amount of paperwork required to establish a nonprofit and remain legally compliant often catches people by surprise, Cohen said. Filing requirements vary state by state, and sometimes at the county or city level as well, but there are a few common forms all nonprofits are expected to complete:

Articles of Incorporation

Nonprofits must be incorporated in the same manner as for-profit entities. To become a corporation, you would need to file articles of incorporation, most commonly with your state’s Secretary of State, a step you must take before applying for tax-exempt status.

This single form calls for information about your organization, such as the name, address, names of all incorporators and a statement of purpose. You would also need to designate a registered agent to represent your nonprofit and accept service of process if the organization gets sued. You could be required to list the names and addresses of board members, depending on your state requirements.

IRS Form 1023 for tax-exempt status

To apply for tax exemption as a 501(c)(3) organization, you need to file Form 1023 with the IRS. Your application would also need to include a statement of your receipts and expenses, a copy of your organizing document, which would be your articles of incorporation, a narrative explaining your activities as an organization and a copy of your bylaws. You may need to apply for tax exemption at the state level as well.

You also need an Employer Identification Number to apply for 501(c)(3) status. An EIN is your organization’s ID number with the IRS. To receive an EIN, you can complete Form SS-4 online or submit it by mail.

Corporate filings

Most states require nonprofit corporations to file an annual report with the state. You would submit the report, which includes information such as your organization’s address and registered agent, to the state agency that maintains corporate records of nonprofit corporations, which varies state by state. A filing fee may accompany your annual report.

3. Build your board of directors.

Your board of directors makes decisions about the organization as a whole and should have at least three members for voting purposes. The board votes on the salary for the organization’s executive director or CEO, who is often the founder, so it may be a conflict of interest if you’re on your own board. Board members can earn a salary as well, but the organization’s bylaws regulate their pay.

The board’s responsibilities typically fall into three categories: strategic direction, financial health of the organization and hiring and/or supervising the CEO or executive director. Boards are usually divided into committees that manage individual aspects of the organization. The entire board may meet eight to 10 times a year, while committees tend to meet more frequently.

4. Meet state fundraising requirements.

Before you can accept donations or contributions, you may need to register with a state agency to meet “charitable solicitation” requirements. Your state may require you to describe the types of fundraising activities the nonprofit is involved in. If you employ professional fundraisers, they may also be required to register with the state. You may be required to renew your registration annually and failing to do so could result in criminal penalties.

5. Get the word out.

Once your nonprofit is up and running, you need to market it just like a for-profit business, Cohen said. You need to make sure the people you want to serve know that your nonprofit exists, or your efforts may go to waste.

Financing a nonprofit

Funding is a crucial component of launching a nonprofit. Before you take any action to start an organization, you have to know where the money will come from to support it, Tunis said.

“If you have an idea but no funding, you’re going to fall flat on your face walking out the door,” she said.

When seeking funding, you should put together a business plan to present to potential donors, Tunis said. Your business plan should clearly communicate the mission, target market, budget and fundraising goals for the organization.

“Be very specific and upfront in what you need,” she said. “People will be more impressed and see that you’re really ready to manage this.”

You have several funding options when starting a nonprofit:

Grants

Nonprofits can apply for public and private grants to fund their organization, Wiley said. You can find available grants online through resources like Grants.gov and The Foundation Center. Foundations in your area may provide grants to local organizations, and some may focus on a specific cause or demographic that aligns with your organization, she said.

Grants from corporations can be beneficial, but may be difficult to obtain, Tunis said. Corporations tend to have marketing objectives in mind when choosing nonprofits, and they usually regulate how you can spend the money, she said.

Despite what’s commonly believed, grant money makes up little of most nonprofits’ overall funding, Tunis said. People often start a nonprofit with the thought that they’ll receive any grant they apply for, she said. Foundations, corporations and the government are highly selective when dispersing grants, and those grants usually won’t be large enough to cover many of your costs, Tunis said.

Individual donations

Most nonprofits rely heavily on money from individual donors, Tunis said. Board members can help identify people in the community who would feel emotionally connected to the organization’s mission and be moved to donate.

Fundraising events are one of the least effective ways to raise money, Tunis said. The cost of hosting an event, like a gala or a golf tournament, would likely exceed the donations you’d receive. But if you do host a fundraising event, it should be relevant to your organization.

“You want the event to have the character and flavor of your mission,” she said.

According to Wiley, people should have a clear understanding of where their money is going when they donate to your nonprofit. To sharpen your fundraising skills, she has suggested reaching out to national and state organizations that provide resources for nonprofits, like The Fundraising Authority. Or, she added, a professor at a local college may be willing to sit down with you to discuss best practices. Don’t be afraid to ask for help.

“Lean on fundraising experts,” Wiley said. “They know what they’re doing.”

Microloans

Nonprofits may be able to find small amounts of funding from microlenders, Tunis said — for instance, nonprofit childcare centers are eligible for SBA-backed microloans up to $50,000. Private lenders such as Nonprofit Finance Fund and LiftFund also provide financing for qualifying nonprofit organizations. Nonprofit Finance Fund is a community finance development institution (CDFI), a private financial institution dedicated to serving community-focused businesses and nonprofits. A CDFI in your area could be a good source of funding as well.

If you choose to take out a business loan to finance your nonprofit, you could face strict eligibility requirements, Tunis said. And unlike a grant or donation, you would have to pay back a loan, likely with interest.

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How to remain compliant as a nonprofit organization

After meeting a number of requirements to get started, you still have legal hurdles ahead of you throughout the life of your nonprofit. Make sure you don’t miss the following:

Employment tax

Although nonprofits are exempt from income tax, the IRS expects you to pay employment taxes if the organization has employees. Tax-exempt organizations with employees are responsible for federal income tax withholding and Social Security and Medicare taxes. You may also need to pay federal unemployment tax.

IRS Form 990

Tax-exempt organizations must file Form 990 annually to give the IRS an overview of their activities, governance and financial information. The IRS uses Form 990 to justify an organization’s tax-exempt status.

Organizations with gross receipts of at least $200,000 or assets worth $500,000 must file Form 990 annually, though some political or religious organizations may be exempt. Organizations that earn less and have fewer assets can file Form 990-EZ, and organizations with gross receipts of $50,000 or less can file Form 990-N, which requires minimal information and is filed online.

Find legal assistance.

To keep up with federal and state requirements, it may be in your best interest to work with an attorney, Cohen said. One error or misstep could lead to hefty penalties for your nonprofit, so you may want to find legal help from the start.

“It’s something to work with an attorney on just so they can recommend where you need to register from the beginning, so you don’t run into any trouble down the line,” he said.

As people in your neighborhood come to depend on your nonprofit, they may feel helpless and deserted if you’re forced to shut down because of legal issues. Make sure you stay up to date on all requirements and regulations so you can continue making a difference in the lives of your community members.

 

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