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.
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. Nonprofit is a tax status designation, not a business model. Despite the designation, nonprofits not only need to make money, they should be profitable.
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.
Nonprofit structure
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. Boards of directors are responsible for the financial and legal management of the organization. The board is typically divided into committees that manage the nonprofit’s finances, fundraising and communications, as well as other responsibilities. That board is responsible for issuing certain annual reports detailing their activities, which we’ll discuss later.
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.
A fiscal sponsorship could also be an opportunity for you to test your idea before forming a new entity. 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.
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. Financing is also a major hurdle for new nonprofits, so you should nail down a financial plan before moving on.
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. If people come to rely on your services, closing your doors could leave them in the lurch.
2. File the proper forms.
Next, you’ll have to file the paperwork required to establish a nonprofit and remain legally compliant. 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 may also be 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.
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. 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.
When seeking funding, you should put together a business plan to present to potential donor. Your business plan should clearly communicate the mission, target market, budget and fundraising goals for the organization.
You have several funding options when starting a nonprofit:
Grants
Nonprofits can apply for public and private business grants to find funding their organization. You can find available grants online through resources like Grants.gov. 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.
Grants from corporations can be beneficial, but may be difficult to obtain. Corporations tend to have marketing objectives in mind when choosing nonprofits, and they may regulate how you can spend the money. Foundations, corporations and the government are highly selective when dispersing grants, and those grants may not be large enough to cover many of your costs.
Individual donations
Most nonprofits rely heavily on money from individual donors. Board members can help identify people in the community who would feel emotionally connected to the organization’s mission and be moved to donate. Donors should have a clear understanding of where their money is going when they donate to your nonprofit.
Microloans
Nonprofits may be able to find small amounts of funding from microlenders, such as 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. 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. One error or misstep could lead to hefty penalties for your nonprofit, so you may want to find legal help from the start.
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.