Nonprofit organizations or NPOs are institutions that are created to offer a service or public social benefit instead of generating profit for their founders. Therefore, nonprofits aim to improve the overall quality of life for the community or the natural world. All profit made by nonprofit organizations should benefit the organization’s mission instead of enriching stakeholders which is how for-profit companies work.
Additionally, successful nonprofit organizations apply for tax-exempt status, which makes them exempt from paying federal income tax and allows tax deductions for charitable donations. Some common examples of organizations in the nonprofit sector include political organizations, social clubs, churches, schools, humanitarian programs, and public charities.
Starting a nonprofit organization may seem like a tedious and complex process; however, a methodical step-by-step approach will help you ensure success. Consequently, it’s one of the most satisfying ways that individuals can use their time, but it requires solid dedication and thorough planning.
The following step-by-step guide will show you how to start a nonprofit organization.
1. Select a name for your organization
Once you’ve decided on the nonprofit’s purpose and you’ve identified a way to fulfill the unmet need in your community, it’s time to start thinking of a name for your organization.
This initial step is crucial as a nonprofit needs a name that ultimately establishes its brand and image. Therefore, the name should comply with state naming requirements and should be easy to find by donors and potential members. Also, consider checking whether the business name is available as a web domain in the event you plan on creating a website to boost nonprofit credibility and exposure.
Read more: Best Business Name Generators
2. Nominate a registered agent
Every nonprofit organization will need to nominate a registered agent. Registered agents are also referred to as resident, statutory, or service of process agents.
The nominated individual will be responsible for accepting important legal documents on behalf of the nonprofit organization. Therefore, the registered agent is ultimately your business’s point of contact with the state.
You may nominate anyone as your nonprofit’s registered agent provided there over the age of 18 and reside in the state. The individual must also consent to the appointment.
Read more: Best registered agent services
3. Recruit your board members
The next crucial step in the process of incorporating a nonprofit with the state is selecting board members or a board of directors. The board of directors is responsible for governing the operations of the organization.
While each state has specific requirements, in most cases, you need to nominate three directors as well as an additional three members to fulfill the roles of president, secretary, and treasurer. The directors will serve an initial term of service until a successor is nominated.
4. Consent to bylaws and conflict of interest policy
Creating, ratifying, and approving essential governing policies is the next step in the process of starting a nonprofit organization. Two of the important documents needed are the Bylaws and the Conflict of interest policy.
- The Bylaws are a collection of rules that determine how the organization will run.
- The Conflict of interest policy is a collection of rules and regulations set in place to ensure that decisions taken by the board of directors or members are always in the nonprofit’s best interest and not to further the personal agendas of any nonprofit member.
These governing documents will need to be adopted and ratified during the organization’s first board meeting when officially appointing directors and officers. While they do not need to be filed with the state, they need to be kept in a safe place for reference as and when needed.
5. Select a nonprofit startup corporation structure
There are different types of organizational structures. So this step in the process depends on you deciding on the legal form for your organization.
Typically, charities take the legal form of a nonprofit public benefit corporation. However, other nonprofits are established as trusts or associations. You should seek legal advice to determine what legal form is best for your nonprofit. Thereafter, you’ll need the necessary forms available on your Secretary of State Corporations Division website in order to incorporate your nonprofit.
Other types of corporations or types of nonprofits include mutual benefit and religious corporations. Mutual benefit corporations are formed typically to benefit their members. This includes business leagues and social clubs. Religious organizations are usually churches and other places of worship.
6. Prepare and file nonprofit Articles of Incorporation
You will need to file the Articles of Incorporation with your state in order to register your nonprofit organization. This step is also essential to gain tax exemption eligibility and to apply for tax-exempt status or 501c3 status.
Additionally, the Articles of Incorporation must contain the following information as clearly and concisely as possible:
Your articles must clearly state the purpose of your nonprofit.
Think of it as your organization’s mission statement. In order to qualify for tax exemption, your nonprofit corporation must be limited to one or more of the following categories: Charitable, Religious, Scientific, Educational, Literary, Preventing cruelty to animals/children, Fostering international/national, non-professional sports competition, and Testing for public safety.
The dissolution clause clearly states what your nonprofit’s assets are being used for and what should become of the assets if the organization is dissolved. Your nonprofit’s assets must only be used for the purposes approved under section 501c3 so you can meet the IRS provisions for tax-exempt status.
To learn more about meeting IRS requirements for tax exemption, refer to this IRS sample document.
In addition to the purpose and dissolution clause, your articles must also include pertinent information about your nonprofit such as:
- Your organization’s business name
- Your organization’s initial registered office
- The names and addresses of your Board of Directors
- The name and address of the registered agent
7. File an initial report
Once you form and register your nonprofit organization, you could be required to submit initial reports to your Secretary of State. The due dates for initial reports will differ from one state to the next but often fall within a 90-day bracket.
8. Secure an EIN (Employer Identification Number)
An EIN is an Employer Identification Number. It’s also referred to as the Federal Tax Identification Number. The government uses the EIN to identify business entities within each state. So essentially, it is a social security number for your nonprofit.
An EIN is useful in various instances, such as opening a business bank account, submitting 990 tax returns, and hiring employees for your nonprofit. In order to receive an EIN, you’ll need to obtain it from the Internal Revenue Service or the IRS website.
The EIN is completely free of charge, and the quickest way of obtaining it is by putting in your application online.
9. Apply for federal tax exemption
In order to receive federal income tax exemption, you need to apply for 501c3 tax-exempt status, under the Internal Revenue Code. While the process can feel like a daunting and tedious step, obtaining tax exemption comes with a number of benefits.
This includes being able to apply for funding from both government and private foundations in addition to being exempt from income tax. In order to put in your application for tax exemption, you need to review the criteria for your application and ensure that you meet the eligibility requirements laid out by the Internal Revenue Service.
You’ll need to complete IRS Form 1023 or the template and submit it to the Internal Revenue Service website to begin the process. If you run a small business organization, completing IRS Form 1023-EZ is recommended. This is a simple and short application form, which is also less time-consuming.
Also, ensure that your organization has elected the board of directors, filed the Articles of Incorporation, adopted governing policies, and obtained an EIN number prior to putting in your application.
Once the application has been received, the Internal Revenue Service will review it. There are only two possible outcomes thereafter.
- The first is that your application will be approved. You’ll receive a determination letter stating that your organization is one of the existing organizations that is now one of the exempt organizations.
- Alternatively, your application may be declined, and if so, you’ll receive a letter of explanation detailing why the application was not successful.
10. Apply for state tax exemption
Depending on the state in which you are incorporating your nonprofit, you may or may not need to apply for state income tax exemption. Additionally, you could also be required to file to obtain sales tax exemption in your state.
11. Other applicable permits and licenses
To legally operate your nonprofit organization in your state, you need to secure the relevant licenses and permits. Since this varies on a local, state, and federal level, you should refer to the Small Business Administration Business License & Permit look-up tool. When using the tool, ensure that you type in your locality and business type.
Additional state registration and reporting requirements
Depending on the state in which are incorporating your nonprofit organization, you may or may not be required to register with the state prior to participating in charitable solicitation or fundraising activities.
You could also be required to register your nonprofit organization in other states if you plan on engaging in any type of fundraising activities outside of the nonprofit’s incorporated state.
12. Submit an annual report
An annual report documents the accomplishments of the nonprofit organization during the previous year. Additionally, it also looks ahead towards the future. While not all nonprofit organizations in every state will need to find an annual report, it is recommended that you do so to gain further credibility with federal and state governments.
Costs of starting a new nonprofit
The costs of starting a nonprofit organization will differ from one state to the next. It may cost anywhere between $275 or in excess of $900 in both state and federal filing fees.
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
- Focus on growing your nonprofit
- Manage risks
- You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Read more: Best website builders
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
It is possible to start a nonprofit without any money. One of the best ways to do so is using fiscal sponsorship. Fiscal sponsorship is a partnership with an existing organization or existing 501c3 corporation that takes a new nonprofit under its wing while the company is in the process of being incorporated or awaiting tax-exempt status.
There are various types of nonprofit organizations, however, the three main types of charitable organizations include private foundations, private operating foundations, and public charities. Each of the different types of nonprofits comes with its own set of advantages and disadvantages.
While founders or executive directors of nonprofit organizations are not allowed to profit or gain from the corporation’s net earnings, they are allowed to earn money in other ways. One of those ways includes receiving a salary or compensation for their time and service to the nonprofit. However, if being paid a salary, it must be disclosed to the IRS.
Nonprofit organizations are allowed to participate in charitable solicitation and fundraising activities. They are also allowed to receive donations and sponsorships from both government and private foundations. Another way in which nonprofits can raise funds is by selling goods and services.
Nonprofits are required to elect a Board of Directors. The board should include a minimum of three directors, an incorporator who will be responsible for signing the Articles of Incorporation, as well as additional members to serve the roles of president, secretary, and treasurer. The job descriptions of each board member must be clearly outlined in the company’s governing policies.