Do you dream of changing the world? Of building something with lasting impact? But need to understand how to build it? Let’s explore how to start a nonprofit organization and see if it’s the right method for your dream.
In learning more about how to start a nonprofit organization, I consulted the National Council of Nonprofits. Their organization outlines 5 steps to building a non-profit business:
Step 1: Research
Contrary to the name, it actually takes quite a bit of money to get a nonprofit started. It also requires a ton of paperwork and official government filings. If that is not something you want to deal with, it is not the only way to impact your community or the world. You can make a difference with a standard business model as well.
However, if you do choose to build a nonprofit, you will need a firm plan for financing the endeavor – from making sure you have sufficient startup capital to a plan for a continual income stream (donations, fundraising, etc.).
“There are currently more than one million charitable nonprofits in the United States, but many struggle to attract increasingly limited funding.” (National Council of Nonprofits).
Here are some questions to ask yourself when deciding if a nonprofit is the best decision for your dream:
- Is there a demonstrated need for a new nonprofit with the mission you are envisioning? “There is intense competition for limited dollars in terms of foundation grants and individual donations. In order to attract funding, you will need to demonstrate that there is sufficient need for your organization’s services and that your organization is best equipped to address that need.” (National Council of Nonprofits).
- What is the potential market and demand?
- Conduct a survey, speak with other non-profit owners, talk to donors if possible. Learn as much as you can to determine if you have what you need to run your new organization.
- What will the costs, paperwork, and timing be to get started? There is a great chart of costs by state to help give you an idea of paperwork, costs, and timeframes at Harbor Compliance. You can also view a listing of costs by state at Nonprofit Hub. Be sure to consult with an attorney as well to determine costs to incorporate your non-profit (can be $500+).
- What is your plan to finance the startup and get funding for the future?
- Can my nonprofit demonstrate its impact to donors in order to gain funding and grants?
Now that you have done a bit of research on how to start a nonprofit, is this structure the best solution for your mission/vision? Are you willing to put in the extra work and effort to make this happen? Can it be done with a regular business structure instead?
Step 2: Build a Solid Foundation
Once you’ve decided that nonprofit is the way to go, you need to create your plan of attack:
- Who will be joining you? Who will be volunteering, employees, and board members (required for nonprofit corporations)? Will you need an ongoing method to attract volunteers?
- Why is a nonprofit the only way to operate your vision? Can it be accomplished another way?
- How will you create and sustain your nonprofit?
- How will you get continuous funding to stay open?
Step 4: Incorporation and State Requirements
Once you have a solid plan and feel confident this is the right choice, you can begin the paperwork process.
Incorporate your business or establish a Trust. Check with your state’s association of non-profits for state-specific requirements.
LawforChange is also a great resource to learn about requirements as well. You will want to hire an attorney to handle this for you to make sure everything is done completely and correctly. Don’t cut corners here, there could be long-lasting repercussions if you do.
You can also view how to start a nonprofit: filings, compliance, and statutes information by state at Hurwit & Associates
Step 5: Filing for Tax-Exempt Status
Once you have your corporation, you’ll need to file for tax-exempt status with the IRS (a.k.a. 501(c)(3)). Since I am not an attorney or IRS representative, please visit IRS StayExempt Tutorials, Publication 557, and Publication 4220 for details and processes.
Several forms will need to be completed to start your organization and for ongoing requirements.
**Note** You will be on the IRS radar with a non-profit, so please don’t try to take short cuts after you’ve gotten tax-exempt status, or you will likely be audited (I’ve seen it happen).
Here is what the National Council of Nonprofits says regarding ongoing compliance:
- Before starting operations, review state and local laws to ensure compliance on topics including, but not limited to:
- Goods or services provided (e.g., health care);
- Types of clients served (e.g., fingerprinting of employees dealing with children);
- Types of employees hired (e.g., educators or health care providers); and
- Location (e.g., zoning in certain areas)
- Registering (if necessary) before starting any fundraising
- Registering (if necessary) before engaging in any lobbying
- Securing (if necessary) permits and licenses required because of:
- Completing state tax exemption requirements (usually must wait until IRS acts)
- Registering (if necessary) for unemployment insurance and reporting to officials
- Registering (if necessary) to secure any additional tax exemptions (e.g., property tax, sales tax collections, exemptions from paying sales tax)
- Initial internal issues
- Fundraising (e.g., that required legal disclosures are made)
- HR and employment issues
- Risk management
- Structural – staff, space, services
- Setting up systems and policies
- Regular activities
- Tax withholdings
- Board meetings
- Quarterly – e.g., reporting taxes withheld (federal/state/potentially local)
- File annual report with state government
- File Form 990 information return with IRS (and any similar form required by the state)
- Re-register any required items (e.g., charitable solicitation)
Obtaining non-profit status is a lengthy and somewhat complicated process but it can be done. You just want to be absolutely sure it’s the right step for you. If you can achieve the same impact and benefit through a regular business, you may want to consider that instead. See How to Start a Business and Business Startup Costs for a comparison.
However, if you decide this is the best step, go for it! Millions of organizations do it every day and you can too. Just be sure to have a rock solid plan for funding and growth.
Best of luck!