Forming and operating a nonprofit can be a highly rewarding way to own a small business for someone with big ideas and a socially conscious mindset. Beyond your dreams of shaping a better future for society, the logistics of starting a nonprofit are complex and time consuming.
To get your nonprofit off the ground, you must create and gather documentation to prove your organization benefits the public and therefore deserves tax-exempt status from the federal government.
Once the bureaucracy is out of the way, you can focus on the business of fundraising, hiring, and actively improving the world around you.
What is a nonprofit organization?
A nonprofit is a business entity organized for purposes other than turning a profit. Officially, a nonprofit organization (NPO) is a business that has been granted tax-exempt status by the US Internal Revenue Service (IRS) because it advances a social cause benefiting the public in some way.
Think: historical preservation, scientific research, animal welfare, economic development.
Nonprofits are prohibited from distributing profits they generate toward anyone or anything other than advancing the organization.
Nonprofits are sometimes referred to as non-stock corporations, or 501(c)(3) organizations—depending on the subsection of the Internal Revenue Code Section 501 that provides for their tax-free status.
What are the benefits of starting a nonprofit?
Some benefits of running a nonprofit startup are:
- The organization can receive federal tax-exempt status, which means it does not have to pay federal taxes on its income.
- Nonprofits are also eligible for local and state tax exemptions.
- Nonprofits can receive donations from individuals and organizations, which can help to fund the organization’s activities.
- They are also eligible for grants from government agencies and foundations.
However there are some drawbacks, too. Nonprofits have to operate for public good, and not for the benefit of shareholders or private individuals. They must conduct regular board meetings, re-invest profits into the organization, and keep detailed financial records to keep their tax status.
How do nonprofit owners get paid?
Compensation for nonprofit owners varies depending on the organization’s structure. In general, nonprofit owners receive a salary, stipend, or commission. They may also be eligible for health insurance and retirement plans.
How to start a nonprofit in 12 steps
- Build a solid foundation
- Create a business plan
- Pick a name
- Choose your structure
- Officially form your nonprofit
- Get an EIN and open a bank account
- Appoint a board of directors
- Draft the bylaws and conflict of interest policy
- Start fundraising
- Build a team
- Launch your nonprofit
- Start marketing your nonprofit
1. Build a solid foundation
Before drafting foundational documents and filing applications with the appropriate tax authorities, it is important for any would-be nonprofit founder to consider the community or demographic the organization will serve. Identifying a community need, and backing it up with population data, is a strong start to building the foundation for your nonprofit organization.
A clear, comprehensive mission statement is crucial for propelling your nonprofit forward and motivating staff, volunteers, and donors.
If written right, it focuses your organization’s efforts and will help its lead players make important decisions in the future. A few key guidelines for writing a mission statement are:
- Draft a statement that is clear, unambiguous, brief, and easy to understand and remember.
- A good mission statement informs others immediately about what the work your organization does and what cause(s) it seeks to advance, ideally in one or two sentences.
- A mission statement can evolve with the goals of the organization.
2. Create a business plan
A detailed business plan will give you an understanding of your organization’s estimated income and your subsequent ability to pay for certain things—such as third-party marketing, employees instead of volunteers, or even a president or CEO.
It will also determine how much your organization will need to rely on donations to supplement internal revenue-generating efforts. A solid business plan will include:
- An executive summary. A description of your nonprofit’s mission, a summary of your market analysis (proving a community need), and a short explanation of how your organization will meet that need.
- Offering. An in-depth description of the services, programs, or products your organization will offer, coupled with a detailed description of your impact goals.
- Marketing plan. Explain how you intend to get the word out about your nonprofit’s services, programs, or products.
- Operating plan. An overview of the organization’s day-to-day operations, along with a description of the organizational structure and an explanation of what each role will achieve.
- Financial plan. A description of the organization’s financial footing—cash flow statements, balance sheets, income statements, a budget, identification of revenue streams, startup cash needs, operating costs, etc.
Check if there are existing organizations addressing the same need as you. You’ll compete for donors and grants if you do the same thing as another organization. Use the National Council of Nonprofits locator tool to explore US organizations and make sure you’re achieving a different mission.
Get the template: Free Business Plan Template & Examples for Startups (2022)
3. Pick a name
You’ll need to choose a unique name for your organization. Ideally, it should relate to the mission and activities of the organization.
4. Choose your type of organization
Nonprofit tax-exempt status is approved and regulated by the IRS on the basis that an organization advances a social cause benefiting the public.
The IRS recognizes roughly three dozen nonprofit organizations, ranging from general charitable organizations to benefit trusts for coal miners and teachers’ retirement fund associations.
Not all nonprofits enjoy an exemption from federal income tax, but not all types can extend tax deductions to their donors.
Five common types of nonprofits include:
- 501(c)(3) organizations. Religious, educational, charitable, scientific, and literary organizations; public charities; private foundations; and amateur sports competitions. Contributions to 501(c)(3) tax organizations are tax deductible.
- 501(c)(4) organizations. Civic leagues, social welfare organizations, and local employee associations. Contributions to a 501(4)(c) are generally not tax deductible.
- 501(c)(5) organizations. Labor organizations. Contributions are not tax deductible.
- 501(c)(7) organizations. Social and recreational clubs. Contributions are not tax deductible.
- 501(c)(9) organizations. Voluntary employee benefit associations. Contributions are not tax deductible.
5. Officially form your nonprofit
Once your foundational decisions have been made and key starting documents drafted, it is time to officially (and legally) incorporate your tax-exempt organization.
Different states require different procedures for incorporating locally, but generally speaking, the process necessitates filing articles of incorporation that include:
- Disclosing the name of your organization.
- Detailing contact information for your appointed board members.
- Determining your legal structure (a nonprofit corporation, LLC, partnership, etc.).
- Filing incorporation paperwork with the appropriate state secretary of state office.
- Applying for tax exemption with the IRS. The main form you will use to register for tax-exempt status with the federal government is IRS Form 1023, also known as the “long form” option. Some organizations will qualify to use a short form, known as a 1023-EZ. To successfully file form 1023-EZ, organizations generally must project that their gross annual receipts will not exceed $50,000.
- Filing registration forms for the necessary Charitable Solicitation Registration for your state, and paying the accompanying filing fee.
If your 501(c)(3) application is accepted, you’ll receive an IRS determination letter that lets you know your tax exempt status has been approved. It will explain your rights and responsibilities as a nonprofit organization.
6. Get an EIN and open a bank account in the name of your organization
Getting an employer identification number (EIN) starts with an SS-4 form from the IRS. You can get this form online, by mail, or by fax. Fill out the form and send it to the IRS once you get it.
Next, open a bank account for the nonprofit. The bank will require your EIN. You’ll also need to provide your organization’s name, address, and contact info.
According to NerdWallet, the top four banks for non-profits are:
- LendingClub: Best online bank
- US Bank: Best brick-and-mortar bank
- Bluevine: Best non-bank option
- Fifth Third Bank: Best regional bank
7. Appoint a board of directors
Your state’s laws and your organization’s bylaws will determine the size and composition of your board. Most boards have between three and 31 members, with the majority being independent (not affiliated with the organization).
Board members are responsible for hiring and supervising the executive director, approving the budget, and ensuring the mission is followed. Once you have a few candidates, you’ll need to vote on them at a meeting of the organization’s members (if you have any).
After the board is seated, you’ll need to elect a president, vice president, secretary, and treasurer. These officers will serve for a set term (usually one year) and will be responsible for leading the board’s meetings and carrying out its decisions.
8. Draft the bylaws and conflict of interest policy
A nonprofit’s bylaws describe how the organization will operate, how decisions will be made, how officers will be chosen, and how the board will meet.
Conflict of interest policies prevent nonprofit officers, directors, and key employees from using the nonprofit for their interests. Boards should approve conflict-of-interest policies and keep them updated.
9. Start fundraising
Early on, your nonprofit will need to have a funding model in place and identify funding sources. Without robust funding at the outset, it is unlikely your nonprofit will be able to run long enough to get off the ground.
Options for fund sourcing might include:
- Grants. Grants are a common way to secure startup cash for nonprofits. However, public and private grants are typically awarded based on a nonprofit’s distinct function, with grantmakers generally focusing their giving on niche services or programs. Additionally, while grants can be a great source for seed funding at a nonprofit’s outset, they are generally time-consuming to apply for and are not often dispensed more than once.
- Startup accelerators. Several startup accelerators for nonprofits can guide new organizations toward obtaining investment, mentorship, office space, fiscal sponsorship, networking, program development, and other resources.
10. Build a team
Good leaders are the key to running a successful nonprofit. You’ll want to identify partners who genuinely share in the organization’s mission and possess deep networks to leverage for the nonprofit’s advantage.
An ideal leadership structure will include a full board of directors and executive director, both of which will be responsible for ensuring the organization’s regulatory compliance, making strategic high-level decisions, and making key hires.
On that note, you’ll also want to build a robust network of paid staff and/or volunteers to accomplish the organization’s goals.
11. Launch your nonprofit
Once all your legal documents have been approved and your seed funding is secured, it’s time to launch your nonprofit officially. But that’s not where the journey ends.
12. Start marketing your nonprofit
Once the ribbon is cut, you’ll need to inform potential supporters that your organization is up and running. This is where marketing comes in.
A proper marketing plan outlines what you will communicate with your stakeholders—potential donors, community partners, etc., and via which channels. For example, young donors may be best reachable through a robust social media presence.
How long does it take to start a non-profit?
Nonprofit formation takes time. A lot depends upon how quickly you can organize your nonprofit organization and create your own tax exemption application forms. In the case of most nonprofits, this stage may be months.
After submitting your forms, the IRS will have three to 12 months to contact you with a decision. If your organization makes more than $50,000 annually, it may be possible to file an expedited Form 1023-EX for processing in two to three weeks.
Start a new nonprofit today
Starting a business is a great way to make a difference if you’re passionate about a cause. It’s a lot of work, but it’s worth it.
Start by choosing a name and mission for your organization, applying for 501(c)(3) status, and creating a board of directors. Once you have that in place, you can start making a difference in your community.