For someone with big ideas and a socially conscious mindset, forming and operating a nonprofit can be a highly rewarding way to own a small business. 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 need to 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?
A nonprofit is a business entity organized for purposes other than turning a profit—hence the name, nonprofit. Officially, a nonprofit organization (NPO) is a business that has been granted tax-exempt status by the US Internal Revenue Service (IRS) on the basis that 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 tax code’s Section 501 that provides for their tax-free status.
Types of nonprofit
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 types of nonprofit organizations, ranging in specificity from general charitable organizations to benefit trusts for coal miners and teachers’ retirement fund associations.
Note that while all nonprofits enjoy an exemption from federal income tax, not all types are able to extend tax deductions to their donors.
Five common types of nonprofits include:
How to start a nonprofit
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.
1. Draft a mission statement
Having a clear, comprehensive mission statement is crucial for propelling your nonprofit forward and motivating staff, volunteers, and even 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 to what extent 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.
- Programming. 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. An explanation of how you intend to get the word out about your organization and its programs, services, 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.
3. Pick a name
You’ll need to choose a unique name for your organization. Ideally, it should be one that relates to the mission and activities of the organization.
4. 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 nonprofit. 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, generally, organizations must project that their gross annual gross receipts will not exceed $50,000.
- Filing registration forms for the necessary state charity licenses, and paying the accompanying filing fee.
5. 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:
6. 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 carry forward the organization’s goals.
7. Launch your nonprofit
Once all your legal documents have been approved and your seeding funding is secured, it’s time to officially launch your nonprofit. But that’s not where the journey ends.