Looking to start a nonprofit organization is an excellent way to serve your community and create a change. In fact, over 1.5 million new nonprofit organizations are registered by individuals and groups each year in the hopes of trying to make the world a better place to live.
However, forming a nonprofit corporation is not always an easy task, especially if it is your first time.
That’s why we’re sharing this simple, step-by-step guide to getting started, from processing out the right forms and getting incorporated to setting up your nonprofit for success.
Want to Start a Nonprofit?
Here is what you need to know,
First and foremost, we appreciate your desire to better your community and assist others.
Creating a nonprofit organization can be a rewarding and impactful initiative for both you and the communities you hope to serve.
Of course, establishing a nonprofit necessitates careful thought and planning. Here are a few things to think about to ensure your success:
How a Nonprofit Makes Money?
With a nonprofit, the organization’s profits are never distributed to the founders or individual members of the organization. Instead, any profit brought in is used to serve the people, animals, initiatives or communities of the group.
In this structure, the profits are put back into the group to cover operating expenses, philanthropic events, charity activities and similar expenses.
Advantages and Disadvantages of Nonprofit Organizations
Before you begin, determine the advantages and disadvantages of nonprofits. That way, you’ll be able to make an informed decision about whether starting one is the right step for you.
Advantages of Starting a Nonprofit:
1. Tax-Exempt Status
A nonprofit qualifies for favoured tax status; it is exempt from federal, state and local taxes. This tax-exempt allows nonprofit organizations to use more of their financial resources on accomplishing their goals.
2. Limited Liability
A non-profit organization limits personal liability; the members of the nonprofit receive protection from personal liability. For instance, if a legal judgment exceeds what the nonprofit can pay, the claimant won’t be able to collect the remainder from the organization’s members.
Unless a director or an officer causes some kind of harm or fraudulent activity, he/she won’t be held personally liable.
Another benefit for a nonprofit is that it is eligible for government and private sector grants and can receive contributions from individuals. Despite the extensive application process, a grant helps founders with limited funds begin to scale their institutions.
4. Founders are Kept Separate from the Organization
In case there is a lawsuit, fine, debt, or similar legal matter involved with the organization, the personal assets of the individual founders are kept separate from the business structure, meaning they’re risk-free.
There is an advantage here in the fact that board members and employees of a non-profit organization receive similar protections. The only issue that pierces this shield is if the individual in question acts unethically or illegally.
5. Allows You to Do a Good Deed
While working in a for-profit business could just mean a paycheck for some, being a part of a nonprofit makes people feel like they’re contributing to society. Founding a non-profit organization gives them a chance to feel like they are contributing to eliminate an existent problem in society.
6. Motivation and Leadership
People working for nonprofits claim to feel motivated throughout their work because they feel like their contribution is treasured.
Since they generally work for the betterment of society, they gain a sense of satisfaction which motivates them to further keep contributing. Along the way, they develop leadership skills as well.
Disadvantages of Starting a Nonprofit:
1. Lack of Funds
In non-profit organizations, the major source of funds is donations. You’re asking people to donate either cash or other assets out of the goodness of their hearts. And, in all honesty, everyone won’t like the idea of donation. That means funds could be a big issue in nonprofits.
2. Low Pay
A nonprofit doesn’t reward you as much for your work as a for-profit corporation would. It is because the profit generated by a nonprofit must be put back into the company operations; being a part of profit-sharing isn’t possible.
3. Paperwork and Administrative Costs
Compared to the paperwork required in starting a for-profit, the paperwork involved in starting a nonprofit is more. It requires you to fill up tax forms and nonprofit incorporation to qualify. To ensure that all the paperwork is filled out correctly, it is better to hire an accountant and a lawyer. All of this adds up to more fees and requirements.
4. Loss of Tax Status
A non-profit can lose its tax status. If it misses its annual reporting deadline, it may not be allowed to continue qualifying for its tax-exempt status. The deadlines, in this case, are very strict.
5. Competition for Funding
As mentioned earlier, non-profit organizations rely on grants, donations, and authorized investments to fund their affairs. With thousands of agencies competing for these resources, there is no guarantee of receiving the fund of your choice. You should have a proper business plan and vision if you want to get noticed.
6. Public Scrutiny
Since a nonprofit is dedicated to the public, its finances are open to public inspection. This means that the public can get copies of tax returns and can find out their salaries and expenditures. This could be used for the good of the organization.
What Do You Need?—Starting a Nonprofit Organization Checklist
As the Founder of a nonprofit, you’ve got a lot of work to do. But, fear not—you can do this! Let’s jump into your guide to getting started.
- Do the Research
Throughout the research process, be sure to save all of the qualitative and quantitative data you accumulate. It will certainly come in handy as your “base data” when you get into monitoring and evaluating your organization’s work in the future. After all, to measure your impact you need to know what the playing field was like when you started!
Before you launch into your plans and operations, you have to know that what you’re doing is an effective way to address the issue you have identified.
If you’re thinking about starting a new nonprofit you need to first make sure the work you will be investing your time and capital in is addressing an existing need. As humans, we are inclined to help others, but it is critical to embrace this instinct strategically, assessing what needs others have and in what ways those needs could be best fulfilled.
- Clarify Your Purpose & Business Plan
If you want to attract nonprofit board members, starting capital, or potential support, you must have a clear idea of what you want to do and how you want to do it. You must give your community clear reasons to volunteer with or to donate to your cause. Every developing organization should prepare two primary documents: 1) your mission, vision, and values, and 2) your business plan.
It is important to remember that these documents do not have to be prepared in a final version. Once your board of directors is assembled, you will most likely have productive conversations and wise input from your team that will help you iron out kinks. Let that support help you grow in the best ways!
What to Include in your Business Plan:
- Executive Summary
- Mission, Vision and Values
- Program, services and impact
- Marketing Plan
- Operational Plan
- Financial Plan
- Build Your Team
Building your team is an essential startup step, but also a step that will continue long into your nonprofit development process.
A Working Board. With a working board, your board members are doing the actual work of the organization. There is no paid staff, and board members carry heavier responsibilities to make sure work gets done—from fundraising to project implementation.
It is critical that in this role, board members are committed to doing the work, not only making important decisions.
A Governing Board. With a governing board, you have a board of directors that oversees the operations, legality, and finances of the nonprofit organization. While board members can take on unique responsibilities or participate in working groups, the nonprofit has a paid staff that performs the day-to-day tasks.
Which board is right for you? If you’re a low budget nonprofit startup with smaller goals in your first year or two, a working board could be a great option for you. This way, you would not have a payroll, but you could get the ball rolling through the work of your dedicated board members and other volunteers who want to support the cause.
Look for potential board members that:
- are genuinely passionate about the mission
- bring more than just their wallet to the board room (i.e., they want to participate in meetings and activities)
- come from diverse backgrounds and have different speciality areas
- will eventually make up an odd number (this helps when it comes to voting)
You do not want:
- too many family members
- business partners
- board members who are low on time (make sure they realistically have the time and energy to commit to the initiative)
Keep in mind that the board must:
- Make sure the organization is in good legal standing when it comes to registration and legal documentation;
- Oversee staff by hiring the CEO, mentoring (no micro-managing) staff, and contributing to strategic, fundraising, and/or monitoring and evaluation plans (if a board member is knowledgeable on the specified area); and
- Ensure that the organization is in good financial standing and review financial reports prepared by the CEO.
- Register your Nonprofit with your State
State Registration v. 501(c)(3) Status: What’s the Difference
Oftentimes Founders assume that they just need to file for 501(c)(3) status—let’s clarify: you must register your nonprofit as a corporation with your state. The federal government/IRS will treat you as a tax-exempt organization, and your state government will address you as a corporation. Your state tax exemption can be arranged once you have your 501(c)(3) status.
Each state has their own requirements to register the nonprofit as a tax-exempt nonstock corporation. The word “nonstock” simply means that your corporation will not be issuing stocks.
On the other hand, 501(c)(3) status is filed with the Internal Revenue Service using IRS Form 1023 or IRS 1023 EZ.
Incorporate the Nonprofit: This incorporation process will be done with the Secretary of State of your state and requires four primary steps:
- Pick a name for your nonprofit
- Create and File the Articles of Incorporation
- Pay the fees
- Prepare your bylaws
- File for an Employer Identification Number (EIN) with the IRS
After incorporating, you are then required to get an EIN (Employee Identification Number) with the IRS. That’s right—EINs are important for for-profit and not-for-profits. An EIN is basically the Social Security Number of your nonprofit.
The EIN application is not long, but you will want to have the CEO/Founder file, or an attorney can file on your behalf. It is required to file the EIN under one individual’s name using their taxpayer identification number (SSN, ITIN, or EIN).
Once you submit the online application through the IRS website, you will receive your EIN immediately. You will be able to open a bank account with your EIN. There is no cost to obtain an EIN.
- File for 501(c)(3) Status with the IRS
Tax-exempt status is one of the biggest influencing factors when individuals decide whether to be a for-profit or not-for-profit organization. Becoming a tax-exempt 501(c)(3) comes with two major benefits:
- You may be exempt from paying federal and state taxes (such as sales and property taxes); and
- Your donors could get a tax deduction for their contributions.
Remember, there are many (29 to be exact) tax-exempt statutes with the IRS. While most of us think of public charities as the central kind of nonprofit, there are other statutes that will not be able to offer tax benefits to their owners.
You must make sure you fall into one of these categories to be tax-exempt:
- Testing for public safety
- Fostering certain national or international amateur sports competitions
- Preventing cruelty to children or animals
Once you have satisfied the requirements for a tax-exempt classification, there are parameters you must be wary of to keep your status. For example, a 501(c)(3) charitable organization cannot substantially serve the private interests or benefit of private individuals or organizations, and it cannot financially support, endorse, or oppose any political candidates (as there would be conflicts of interest).
- Market and Grow Your Nonprofit
Once officially established, your nonprofit can begin collecting donations, distributing funds and getting to work. Every nonprofit organization is different, so how you market your nonprofit is up to you.
Many nonprofits start an official Facebook page and host local events to raise funds. Others launch a blog to drum up traffic and attract volunteers. The opportunities are endless when it comes to scaling your nonprofit to new heights.
Of course, growth is made easier when you are able to keep your organization’s finances in check. Consider utilizing accounting software for nonprofits to manage donations and expenses with ease.
- Maintain Compliance
Remember that a 501(c) organization must satisfy certain conditions in order to maintain tax-exempt status. This means following state and IRS requirements regarding compliance. This may require consulting with professionals such as lawyers or tax advisers in order to keep your status.