For many, serving the community is a passion. They dedicate their time, money and energy to help those in need. Think about how often you donate to or provide support to your community. If your answer is often or that is your future plan, your next question is, do I qualify as a nonprofit and how to start a nonprofit?
What Is a Nonprofit
When most people think of how to start a nonprofit, they don't always take the time to understand what a nonprofit is. Many think of a nonprofit as a group servicing the community, for example, animal shelters or a group housing disadvantaged individuals.
Those and similar organizations that service the community have applied for a tax-exempt Internal Revenue Service (IRS) designation and are defined as nonprofit organizations, or 501(c)(3) organizations.
Typically, organizations that are religious, charitable, scientific or educational apply for nonprofit status. There are approximately 29 different types of tax-exempt statuses under 501(c) so it’s important to research to make sure you are choosing the correct one.
It’s important to note that the only tax-exempt status that donors will receive a tax-deduction for is the 501(c)(3) status.
As you think of how to start a nonprofit, remember that although nonprofits typically aren’t started with creating a profit in mind,there is no restriction on creating revenue for your nonprofit.
There are restrictions on how the money is spent, depending on the funding source and IRS restrictions, but it is perfectly normal to have a profit at the end of your nonprofit's fiscal or calendar year.
What You Need to Know
A nonprofit’s goal is to service the public. Nonprofits operate differently than for-profit entities because of the different ways they raise funds or even manage theirday-to-day operations. So, what areas should you learn about when deciding if and how to start a nonprofit---before you start the paperwork?
1. Volunteer Coordination
For many nonprofits, hiring full- or even part-time staff, especially in the beginning is just not in the budget. Nonprofits usually opt for volunteers to serve the organization in place of permanent staff. Volunteers are individuals that are donating their time, resources and knowledge to assist with organizational duties.
Although volunteers are not paid employees, they should document their time, receive a job description, an evaluation and even review. They should also acknowledge receipt of a volunteer handbook with clear and concise directives and goals.
2. Fundraising and Grant Writing
Nonprofits raise funds for their programs and services through fund development, which includes grant writing. Fundraising is similar to selling and ultimately you are selling the nonprofit, what you offer and the benefit to others. Your donors will also want to know what they will receive in exchange for their monetary or in-kind support.
Writing skills will be a must as grant writing is a major way a nonprofit receives funding. Nonprofits can request funds to provide monetary support for their mission, goals and programming from many entities, from the government to corporations to philanthropic businesses.
Grant writing is a skill that is necessary to build the finances of the organization.
3. Communication and Relationship-Building Skills
Building relationships and effectively communicating are two essential skills for a person interested in starting a nonprofit. As the leader, you need to tell your story in order for others to understand the importance of supporting your nonprofit.
It’s also crucial to build relationships with the community, donors, businesses and others that can help with monetary and in-kind donations, volunteers and other aspects of the organization.
Pros and Cons to Start a Nonprofit
As you continue learning how to start a nonprofit, weighing the advantages and disadvantages will help to determine if a nonprofit is the best direction for your organization. Remember, the purpose of a nonprofit is to provide a service to the public first. With anything, there is importance in evaluating the pros and cons before making a final decision.
A 501(c)(3) public charity is eligible for federal income tax exemption as a charitable organization and in most states, will also be eligible for exemption from state and local taxes.
Possible Grant Funding
Nonprofits are eligible to apply for private and public grant funding at local, state and federal levels.
Possible Ample Funding
Nonprofits have the opportunity to request funding, both monetary and in-kind, from local and national corporations and businesses.
Donors support may be considered tax deductible, so they are more inclined to contribute
Directors, members, and employees’ personal assets are protected, and they have limited liability.
Nonprofits must keep paperwork and detailed records for both the IRS as well as funders, specifically for grant requirements.
Nonprofits are public organizations and finances, which includes salaries, tax forms and other expenses, must be made available by request for the public to review.
There are fees associated with applying for a nonprofit, which includes IRS and required state filing fees.
Grant funding is extremely competitive, as is receiving funding from individual donors, especially for newly-created nonprofits.
No Political Input
Nonprofits are typically prohibited from providing a contribution to political campaigns and lobbying is extremely limited.
How to Start a Nonprofit
So, you’ve learned what a nonprofit is and what they do, considered the pros and cons and you've decided to move forward with starting a nonprofit. The question now is, how to start a nonprofit? There are several steps to take to ensure you complete the process accurately and efficiently.
Steps to Create a Nonprofit
Getting a nonprofit started is a lot more than just filling out the application and patiently waiting for a response.
1. Choose A Name
Be creative and professional when you create a name for your nonprofit corporation. Your nonprofit’s name cannot be the same as another corporation that is filed with your state’s Secretary of State office. The name must also end with “Incorporated,” “Corporation” or “Limited.”
2. File Articles Of Incorporation
Once you’ve chosen your nonprofit’s name, your next step is to file articles of incorporation with your state. The articles will include your nonprofit’s name and location.
3. Apply For Your IRS Tax Exemption
To apply for your 501(c)(3) tax exemption with the IRS, you must complete the 1023 form. If your nonprofit is smaller, you can research to determine if you qualify for the 1023-EZ. This form is typically shorter, and the cost is less than the regular 1023 form.
The fee for the 1023 or 1023-EZ must be paid before the application can be processed through the IRS.
It’s also important to note that the processing times for the 1023 form vary. It could take three weeks or three months to process your tax exemption application so it’s imperative that you have all the aspects of the form completed at the time of submittal.
Any inaccuracies or missing information could result in a delay or denial of your application and your IRS tax-exempt status.
4. Apply For State Tax Exemption
In some, not all states, nonprofits are required to submit a separate application for state tax exemption. If your state does require the additional form, you will also need to send a copy of your IRS determination letter that shows your federal tax-exempt status has been approved.
In the states that don’t require the separate application, once your articles are filed and your federal tax status has been approved, your state tax exemption status will automatically be approved.
5. Create Bylaws
Your nonprofit’s bylaws are your governing rules, regulations and procedures. They include how you vote on issues within the organization and how you elect your board of directors.
6. Develop Board of Directors
Every nonprofit must have a board of directors. The board works directly with the founder or director to make financial and policy decisions regarding the nonprofit. Most states require the board to have a minimum of three directors.
Your board should have individuals that are connected to the community and to your cause because they are more likely to promote the organization, request the support of their network as well as donate their money and time.
7. Hold First Board Meeting
The first board meeting will be the time to introduce the entire board, elect officers (president, vice-president, secretary and treasurer), and discuss and approve bylaws. There should be minutes taken at each meeting and at the start of the following meeting, the minutes should be approved by the entire board.
8. Acquire Licenses and Permits
If you need any specific licenses or permits for your nonprofit, those need to be obtained as soon as possible. In some instances, you may not be able to begin providing services until the permits and licenses are received.
If you’re unsure of what permits or licenses are needed, contact your state’s licensing agency or consumer affairs department.
Nonprofit organizations are a necessity to the community. Many provide public services, resources and programs that the community would not otherwise receive.
The key to being successful in running this kind of organization is that you have a thorough understanding of how to start a nonprofit, are ready to lead a nonprofit and are prepared for the work it will take to not only start but run a nonprofit.
It will not be easy but for the right person with the right heart and goals, it will be worth it for them and the community they serve.