How to Start a Nonprofit - Our Step-by-Step Guide for Nonprofits
How to Start a Nonprofit - Our Step-by-Step Guide for Nonprofits
Starting a nonprofit is an ambitious goal for many, and sometimes it can seem like creating one can be out or reach, or simply too complicated a process. But that fact is, starting a charitable nonprofit isn't that difficult, even minors are staring their own nonprofits. But it does take some serious dedication, not just for your cause, but for the entire process of setting up your charity and its daily operations.
So whether you’re fueled by a passion for social change, a commitment to community development, or a desire to address a specific issue, the process of establishing a nonprofit is a rewarding adventure that does requires some careful planning.
Our step-by-step guide aims to take the guess work out of how to start a nonprofit, and offers a road map for aspiring changemakers who envision making a positive impact on the world with their new startup.
From crafting a compelling mission statement to navigating the labyrinth of legal requirements, each step in this guide is designed to assist you in navigating all the legal red tape and requirements such an undertaking requires. So, let's dive into the intricacies of turning passion into purpose and dreams into tangible, meaningful change.
Importance of Nonprofits
The nonprofit sector plays a vital role in shaping and enhancing the world we know in positive ways that are often overlooked or not addressed through regular governmental programs or even through for-profit ventures. You can think of nonprofits as picking up the slack that is left and helping situations that fall through the cracks of our current programs.
In essence, understanding the nonprofit sector involves recognizing its many contributions to social, economic, and environmental issues that seem to be plaguing our world today. Its ability to find and mobilize philanthropic resources, engage volunteers, and address pressing issues makes the nonprofit sector an indispensable force in building a more inclusive, compassionate, and sustainable future for every single living creature on the planet, and even the planet itself.
So feel good about wanting to be a part of something larger than yourself, and wanting to give rather than take from the world. Starting and running your own nonprofit is a noble way to spend your life, and in the end all of us benefit from your hard work and positive enthusiasm.
Types of Nonprofits
Did you know there are eighteen different types of 501(c) corporation structures to choose from? Luckily this staggering number can be quickly reduced to just a handful of nonprofit corporate structures, but there are still a few you should understand in order to choose the best type of corporate structure for your charity.
501(c)(3) - Charitable, Religious, Educational, Scientific, and Literary Organizations
The 501(c)(3) is the most common type of nonprofit and will be most likely the one you’ll be using for your own charity. These are the common animal charities or mental health charities most people are accustomed to donating to. The structure is straightforward and like all 501)c) corporations the are tax exempt.
501(c)(4) - Social Welfare Organizations
A 501(c)(4) can be an option if you are looking to improve a specific community and not looking to grow beyond that community. 501(c)(4) organizations focus exclusively on a way to impact the local community whether it be regarding health issues, environmental issues or even civil liberties, human rights. The caveat is that the issues and proposed improvements are within a single community and not on a larger scale.
501(c)(7) - Social and Recreational Clubs
When it comes to starting a 501(c)(7), think organizations like private golf and health clubs, or neighborhood book clubs, or hobby-focused clubs like gardening. These can also be structured into nonprofit organizations and enjoy tax free benefits like any other charitable organization. The one major difference is they can not raise money from the public through donations. All fundraising is done within the group whether it be member ‘fees’ or personal donations.
These are just a few of the many options when it comes to creating your own nonprofit, but they are also the most common and easiest to start. For most organizers looking to incorporate, the 501(c)(3) is often the best option, although it is always best to find professional help if you’re unsure which structure to use for your own charity.
Things to Think About Before Starting a Nonprofit
Now that you’ve decided to move forward and start your own nonprofit, it’s super important to establish a solid foundation by identifying your mission and vision for your charity and assessing the need for your nonprofit within your community or elsewhere.
Identifying Your Mission and Vision
Every charity must have a purpose. This includes not just addressing a problem, but coming up with some sort of sustainable solution to the problem. Your purpose is your mission, and every nonprofit must have a clearly laid out written Mission Statement that goes into detail what problems your charity is addressing, and ways you propose to solve or at least lessen the severity of these issues.
This is the document that will guide your charity from day one. It is also the document that you will share with potential board members and other supporters when starting out and well into the future. So it is important to write this out logically and clearly so when people do read it, they rally to your cause and support your vision.
If you need some assistance in writing a strong mission statement, you can check out this article that can help you formulate your mission statement in a logical order so you can clearly understand, as well as your board, donors and volunteers, exactly what it is your nonprofit is doing both short and long term.
Assessing the Need for Your Nonprofit or Foundation in the Community
According to the Internal Revenue Service, there were more than 1.97 million nonprofits in the United States alone with 1.48 million of those organizations being registered as a 501(c)(3) tax-exempt organization. That’s a lot of nonprofits, and a lot of competition for funding!
So be sure that the nonprofit you are starting is truly necessary as there are still so many opportunities to help the world in one way or another. Overlapping with similar organizations can still be valuable, but be sure yours is doing something specific that no other organization is doing if you want your nonprofit to thrive over time.
One tip here is to start out small with a very specific mission, geographical location, or both. Keeping things narrowly focused can help define your charity and its vision more clearly, plus you’d need fewer resources when first starting out. You can always expand the breadth of your focus at a later date, but starting out trying to solve too many problems at once if often the reason many new nonprofits fail.
How Technology Plays an Important Role Starting a Nonprofit
Every startup today, regardless of profits, uses technology to help them become more productive and to compete. Understanding technology's role in your nonprofit is just as important as your business plan or any other part of the puzzle.
Luckily tech has gotten a lot more user friendly as well as powerful. Platforms like ours can literally allow you to run your entire nonprofit from one convenient portal. And PayBee was specifically created for nonprofits like the one you plan to start with one goal in mind, to assist nonprofits in reaching their goals and expanding their reach through the use of powerful tools and features created specifically for the nonprofit sector.
We allow you to hold interactive fundraising events both on and offline, while also allowing donors to make donations in a variety of ways then automatically issuing them donation receipts, follow up emails for donor management and engagement and a host of other options that are designed to grow your nonprofit the quickest way possible with the least amount of inconvenience to either the users or the supporters.
And using our platform from day one to track all your receipts, assign employees and volunteers duties to help get things going, all the while tracking working hours and progress on daily tasks gives you the freedom to focus on growing your organization rather than be mired in all the red tape associated with starting and running a nonprofit enterprise.
To see just how we can make your life, and the lives of all your volunteers and staff so much easier, try our free demo now and discover why our platform is the only online tool you’ll ever need to run your nonprofit, from start to finish.
Developing a Business Plan for Your Nonprofit Startup
It may seem strange that you will need a business plan for a nonprofit that isn’t seeking to create profits or engage in normal business activities. But there are a lot of reasons why creating a detailed business plan is beneficial for your charitable new startup.
First off just because your not creating your nonprofit to make money doesn’t mean it isn’t a business and needs funding just like any other. It still has obligations like paying rent and employees, and just obtaining enough funding to run daily activities. And even though donations aren’t considered profits, they’re still income and must be handled as such for IRS and tax reporting requirements.
There are also several other reasons why a clear and concise business plan is so important to a new nonprofit. Some are obvious while other are less so. But they are all equally important.
Clarity of Mission and Objectives
You must clearly specify your nonprofits reason for existence. Your plan helps clearly define the nonprofit's mission, goals, and objectives in a way that ensures everyone involved, including staff, volunteers, and stakeholders, understand the organization's purpose and the outcomes it seeks to achieve.
A business plan provides a roadmap for the organization, outlining the strategies and actions needed to fulfill its mission both short and long term while helping guide decision-making and resource allocation necessary to prosper and grow.
A comprehensive plan should include what expenditures you envision your charity will need in order to effectively carry out its programs and services,. Without these types of numbers it’s impossible to understand your basic operation costs and what funding will be needed to cover them.
Although you may not want to hear it, nonprofits, like any other organization face risks like low donor engagement or a sluggish economy. A business plan can help you identify potential risks, enabling the organization to develop strategies to mitigate them. This proactive approach enhances the chances of your nonprofit surviving long term.
Accountability and Evaluation
Just like any business, you need to understand if your charity is actually a successful venture. This is not only for your own benefit, but this information is important to your supporters and board members. Understanding what projections were and where they excelled or fell short makes it easier to make adjustments and hold people accountable for their performance. Regularly assessing your progress and financial status helps your nonprofit stay on track and make adjustments when necessary.
Many new nonprofit ventures fail to look at the long term viability of their organization. A business plan should include long term projections as well as short term ones to understand what the future may look like financially. A well-thought-out plan considers how your organization will maintain its operations over time so that you can better plan potential financing or other forms of funding.
Legal and Regulatory Compliance
Nonprofits must comply with various legal and regulatory requirements. The plan can address these considerations, ensuring that the organization operates within the boundaries of the law and maintains its tax-exempt status.
There are many more reason to have a comprehensive business plan right from the start than just the few we’ve mentioned above. There’s providing direction, helping to secure funding, managing resources efficiently, and demonstrating accountability to stakeholders and a whole lot more. So take the time to create one as you’ll be going back to it for years to come. And if you need a little assistance, check out our article on writing a nonprofit business plan that includes a template to make the process as easy as possible.
Building Your Nonprofit's Board of Directors
Now that you have defined what your charity is and what it’s purpose is along with a proper business plan, the next step is to create a Board of Directors for your nonprofit. Your Board works as a governing body that is responsible for keeping your nonprofit on track and making sure it is sticking to its core mission statement.
Budgets, strategic planing and ensuring financial stability and sustainability are all duties of a board member. As is protecting the organization's assets and reputation and assuring your organization is being run with the highest ethical standards.
Your board can be practically anyone, but often they are volunteers or individuals who bring something special to your organization. Perhaps you can convince a bookkeeper or lawyer to be on your board that is willing not only to help advise your nonprofit, but possibly help with services at a reduced or even free basis.
Often times your board can help with more than governance, but help in grow in a myriad of ways.
They can be influential members of your community and can help with bringing donors or other volunteers to your cause. People like judges, doctors or even pastors usually know a lot of people, and can sway them to take your charity seriously and give you their support.
It also helps when donors are looking into your nonprofit to see names they are familiar with involved, adding creditability to your organization in a meaningful way. Excellent board members can even help with things like donor cultivation and advocating for the organization's mission within the community.
The point here is you want to carefully choose your board of directors because they will have power over your charity, and can influence its direction and daily activities. Try to choose people that are familiar with working on a Board of Directors, or someone with particular industry experience in order to help get your own organization up and running quickly and correctly.
Legal Steps to Start a Nonprofit
Forming a nonprofit organization requires a bit of work and patience. The typical startup can take anywhere from a few months to a year depending on how fast you can get through each hurdle. And there is more than just the IRS requirements, there are also state or local regulations to consider.
The one positive out of this is that it doesn’t take a lot of money to start a nonprofit. On average, many can start one with $1000 or less all in depending on how much of the paperwork you can do yourself, or get done for free. (Remember the Board of Directors tip!) But it can take a bit of time.
Note: We will be going over two important legal steps that should be done at the same time as both require you board of director’s vote and approval; your Articles of Incorporation and Bylaws and Conflict of Interest Policy.
Articles of Incorporation - Incorporating Your Nonprofit
The very first thing you’ll need to do after all of the above steps we’ve covered have been completed is to incorporate your nonprofit like any small business. In order to do this you must first create your Articles of Incorporation which basically serve as the legal foundation and official document that formally establishes your nonprofit entity and is necessary for your organization to operate legally.
Once completed you’ll also need to produce copies for all of your board members who should have a say on what information is included. Once all the board members feel secure in the documents completeness, you must hold an official board of directors meeting in order to conduct a formal vote to approve the articles of incorpo
This vote must also be registered in the meeting’s minutes including the date of approval and any conditions or amendments made during the meeting. These steps are required by law and are the most basic legal steps when forming your new entity. Once your articles have been approved and recorded, the next step is to file them with the appropriate governmental agency.
Incorporating a nonprofit happens on a state level, typically with the state’s Attorney General's office or their Secretary of State's office. Each state has different rules and regulations regarding how to incorporate a nonprofit. So you’ll need to do some initial research on the state your looking to start your nonprofit in to get the exact details.
Luckily the IRS does offer a template that can be used and we highly advise that you do since they require certain language to be included. It’ll also speed up the process of coming up with one on your own. And although what needs to be included in the articles of incorporation can vary by state, generally they should contain the following key elements:
- Name and Location:
- The legal name of the organization and its principal location, this can be your home or an office.
- A clear and specific statement of the organization's purpose or mission. If you wrote out a great mission statement, use that.
- Duration (if applicable):
- Some states require you to specify whether the organization is set up for a limited duration or is intended to be perpetual.
- Nonprofit Status:
- A statement affirming the nonprofit nature of the organization.
- Membership Structure (if applicable):
- If your nonprofit has members, outline the membership structure and rights.
- Board of Directors:
- The names and addresses of the initial board of directors.
- Registered Agent:
- The name and address of the registered agent, who is the person or entity designated to receive legal documents on behalf of the organization.
- Incorporator Information:
- The name and address of the person or entity responsible for preparing and filing the articles of incorporation.
Your Articles of Incorporation will also need to be included when you file with the IRS for your 501(c) tax exempt status which is why you need to complete this step before moving on to any others.
Bylaws and Conflict of Interest Policy – Setting Standards
Your bylaws and conflict of interest policy are two more required documents that do not need to be submitted to state authorities, but are required when you submit the paperwork for your (501(c)(3) tax exempt status with the IRS.
Your organization’s bylaws are literally the laws you will use to govern how your entity will operate. These rules and regulations should include things like how board members will be chosen and elected, how often to hold board meetings, how to handle hiring staff as well as a variety of other operational and administrative details.
A conflict of interest policy is a newer document that is now required by the IRS and was adopted as a way to ensure your organization is taking proactive steps to insure your board members, officers, and key employees aren’t engaging in activities that could allow these individuals to benefit personally from your organization, or in some way jeopardize your charitable mission.
By creating this necessary document you are demonstrating to the IRS that if any instances of theft or fraud do occur, that your organization has a system in place to handle the situation and take immediate protectionary action.
Both of these documents must also be voted on and approved by your board members just like the Articles of Incorporation. So why not just get all the voting out of the way and include all the necessary documents that need to be voted on in the first meeting.
Apply for an Employer Identification Number (EIN)
Once you have your Articles of Incorporation registered through the appropriate state authority, you can apply for an EIN. Thik of your organization’s EIN number as it’s own social security number, because basically that is what it is.
An EIN number is the number identifier you will always use when you do everything from filing taxes to writing a donation receipt. In order to receive any sort of tax exempt privileges, you’ll need to include this number.
Fortunately, the process to apply is super easy and can all be done online here, plus it is completely free. Once you submit the required information you’ll instantly receive you new EIN. So be weary of anyone looking to charge you for this, or websites claiming they can do this for you for a small fee!
To make things easier, we’ve put together a quick list of what you’ll need when applying. Be aware you can only make one request per day, so if you mess up you’ll need to wait 24 hours to resubmit your application. And you can not save and come back later!
Legal Structure and Formation - The IRS will need information about your organization's legal structure, such as whether it is a corporation, association, or trust.
Applicant Information - You'll need to provide information about the person or entity applying for the EIN. This includes the legal name, address, and the responsible party's Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). The responsible party is generally the individual who controls, manages, or directs the organization.
Legal Name and Address of the Organization – Use your organization’s legal name and the physical address of your nonprofit organization as it appears on your articles of incorporation.
Mailing Address - If your organization uses a different mailing address, provide that information as well. You must be able to receive mail according to the IRS rules for legal correspondence.
Contact Information - Include a phone number and, if applicable, a fax number where your organization can be reached.
Type of Entity - Nonprofits are typically classified as 501(c)(3) organizations, but there are other classifications for different types of nonprofits as we discussed previously. Choose the category that best fits your organization's purpose.
Reason for Applying - Provide a brief explanation of why you are applying for an EIN. For a nonprofit, this is usually to establish tax-exempt status.
Date of Formation - Specify the date when your nonprofit was legally formed. This is usually the date of incorporation.
Closing Month of Accounting Year - Indicate the accounting year-end month for your organization.
Principal Activity - Describe the primary activity of your nonprofit. For example, if your organization is focused on education, healthcare, or charitable activities, specify that information.
Applying online is quick and easy but it is possible to apply you can apply by mail or fax by completing the IRS Form SS-4. Applying using Form SS-4 is also free, it just takes a lot longer.
Apply for Nonprofit Status
In order to starting a nonprofit and apply for the holy grail of tax exempt status, you must fill out and submit either IRS Form 1023, IRS Form 1023-EZ, or IRS Form 1024. with the IRS on their pay.gov website. Each form has its pros and cons and it all depends on how you plan on doing your fundraising and what sorts of assets and their amounts your organization has.
Typically most nonprofits will go the Form 1023 route as it offers the largest amount of advantages to most organizations. The drawback is that Form 1023 is a 22 page document that can only be filed electronically here. You’ll need to first open an account on the Pay.gov website, and then follow these instructions. There is a helpful Internal Revenue Service document that goes over how to answer each question correctly and you can find that here.
If you are looking to start a nonprofit with the least amount of cost associated with one, then the Form 1023-EZ is definitely the best way to go for starting out. It only consists of 3 pages and has the lowest filing fee at $275. The biggest drawback to this type of structure is it only affords your nonprofit a tax exemption that is capped at $50,000 in annual receipts and $250,000 in total asset. This can be very limiting depending on what your trying to accomplish.
And if you are looking for the biggest bang for your buck, then filling the 40 page long Form 1024is the way to go. This is also the most expensive filing at $600. Estimates place the time required to properly fill out a Form 1024 at a hundred hours plus. It’s extremely complicated and we always advise using a professional with experience filling out these types of documents.
The fact is they can get kicked back for any reason. And with wait times between a month to almost a year, you don’t want to have to start the entire process over because you filled in the wrong box or didn’t check something correctly. Professionals understand exactly what paperwork is required when starting a nonprofit and are far more efficient, but of course more expensive. But at a hundred hours, maybe you should be using that time to build your nonprofit rather than being weighed down by it.
Register Your Organization with State Authorities
Just because you are now a legit tax exempt entity on a federal level, that doesn’t always mean you enjoy the same perks on a state or local one. This is usually the case, but each state has different laws regulating nonprofit organizations, and you’ll need to research to see how they are handled within the state yours is registered in.
Often times even when states recognize your tax exempt status, they will still require your nonprofit to submit tax forms as well as special form like a charitable solicitation registration, to operate as a nonprofit within the state. Contact an attorney or someone that specializes in the nonprofit sector to be sure what your specific localities’ requirement are.
Maintaining Nonprofit Compliance
Now that your nonprofit is up and running, you want it to stay that way. Maintaining nonprofit compliance isn’t difficult, but you need to be aware of what’s necessary in order to do so.
The first thing you need to do is make sure all your accounting and financial records are accurate and current. This information is required when you file your nonprofit’s taxes both with the IRS and with the state, which you are required to do yearly just like your own income taxes if you reside in the United States.
The IRS offers four different forms depending on how large your nonprofit is, these include Form 990, 990EZ, 990-N, and 990-T. If you have any questions on which form you’ll need to use, there's a help page on their website. But when it comes to financials, we do advise that nonprofits use a certified public account in order to be sure their filings are accurate, and since these numbers are publicly available, accurate and transparent.
Depending on which state you are receiving donations from, your charity may be required to submit yearly paperwork showing that you are still a legal nonprofit and demonstrate your charity is still viable. This changes greatly from state to state so please contact the proper local entities for this type of information.
Frequently Asked Questions
Do I need a board of directors for my nonprofit?
Yes, most nonprofits in many jurisdictions are required by rules and regulations to have a board of directors in order to oversee the nonprofit's activities, and ensures it operates in line with its mission statement and the law.
How do I choose a name for my nonprofit?
Choose a name that reflects your mission, is unique, and complies with state regulations. Be sure it is clear on what your organization does so people aren’t confused on what your organization is trying to achieve.
Can I get paid as a founder or board member of a nonprofit?
Yes, but be aware that your organization’s financials and tax filings are public record, including salaries. This can cause some donors concern, and if overpaid, can raise flags with governmental agencies that may require an audit to better understand the discrepancies.
Do I need insurance for my nonprofit?
While it's advisable to protect against liabilities and risks, it is not a federal requirement. It is however possible that there are state or local requirements and you’ll need to contact the proper agencies to determine if you are required to have it or not.
How do I dissolve a nonprofit if needed?
If the organization needs to close, follow the dissolution procedures outlined in your bylaws and state regulations. You will need to create an Articles of Dissolution document that needs to be officially voted on and passed by your board. You will most likely need to file articles of dissolution with the state Attorney General's office or something similar on a state level. On the federal level, you’ll need to file Form 990 with the Internal Revenue Service along with your Articles of Dissolution document. You can then pay off any credit or loans and transfer all assets to a similar charity.