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Before he turned 30, Millard Fuller became a self-made millionaire. While most people his age might spend money on buying a mansion or a few sportscars, he and his wife Linda decided to move to Koinonia Farm, an agricultural Christian community dedicated to practicing biblical teachings. During their time on the farm, the Fullers were involved in a housing ministry project, which sparked an idea for the development of one of the world’s most well-known non-profits: Habitat for Humanity. In 1973, the Fullers began their first housing project in Africa. After seeing great success, they returned to the U.S. and started the now-famous organization. Since then, Habitat for Humanity has helped more than 46 million people. In 2022, alone, the nonprofit assisted 7.1 million people in building or improving their homes.
Starting a nonprofit organization can be an incredibly rewarding way to make a positive impact on the world. Whether you’re passionate about environmental conservation, social justice, or any other cause, creating a nonprofit can be a powerful way to create change and help others. However, it can also be a daunting process, with many practical and legal considerations to take into account.
In this article, get a comprehensive overview of the steps involved in creating a successful nonprofit organization. From identifying a need in the community to securing funding and establishing partnerships, learn the key elements of every step of the process.
- Starting a nonprofit involves identifying the need for your organization and getting clear on your vision, mission, and goals.
- Nonprofits require careful planning and research, including choosing a business structure, creating a board of directors, and applying for tax-exempt status.
- Key considerations when starting a nonprofit include defining your target audience, developing a budget and fundraising plan, and establishing sound financial management practices.
- Maintaining tax-exempt status requires ongoing compliance with Internal Revenue Service regulations and reporting requirements, as well as responsible financial management and governance practices.
What Is a Nonprofit Organization?
A nonprofit organization, or NPO, is a type of organization that exists to serve a particular mission or purpose, rather than to generate profit for its owners or shareholders.
Distinguishing features of a nonprofit organization include:
- Mission-driven: Nonprofits are dedicated to serving a particular cause or mission, such as environmental conservation, education, or poverty relief.
- Tax-exempt: Nonprofits are exempt from paying federal and state income taxes, as long as they meet certain criteria.
- Non-distribution constraint: Nonprofits cannot distribute profits or assets to individuals, owners, or shareholders. Instead, all funds must be used to further the organization’s mission.
- Board of directors: Nonprofits are governed by a board of directors, who oversee the organization’s operations and make key decisions.
- Public accountability: Nonprofits are accountable to the public and are required to file annual reports with the IRS and other regulatory bodies.
- Volunteer-driven: Nonprofits often rely heavily on volunteers, who contribute their time and expertise to support the organization’s mission.
Benefits of Starting a Nonprofit Organization vs. Other Business Structures
There are several benefits to starting a nonprofit versus a traditional business entity. These include:
- Tax-exempt status: Nonprofits are exempt from paying federal and state income taxes, which can save significant amounts of money and allow more resources to be dedicated to the organization’s mission.
- Access to funding: Nonprofits are eligible for a variety of grants and donations, which can provide a steady stream of funding without the need to repay loans or give up equity.
- Public support: Nonprofits often enjoy strong public support and goodwill, which can help attract volunteers, donors, and other supporters.
- Credibility: Nonprofits are seen as legitimate and trustworthy organizations that are dedicated to serving the public good, which can help attract support and resources.
- Mission focus: Nonprofits are mission-driven organizations that are focused on serving a particular cause or community, rather than maximizing profits. This can be appealing to individuals who are passionate about a particular issue or cause.
- Limited liability: Nonprofits can be structured to limit the personal liability of the organization’s founders, directors, and officers.
- Personal fulfillment: Starting and running a nonprofit can be incredibly rewarding, as it provides the opportunity to make a positive impact on society and serve a cause that is personally meaningful.
Types of Nonprofits
There are several types of nonprofit business structures that can be used to organize and operate a nonprofit organization. The most common types include:
- Charitable organization: A charitable organization is a nonprofit that exists to support a particular cause or group of people, such as a charity for cancer research or a foundation that supports underprivileged children. Charitable organizations are typically organized as 501(c)(3) organizations under the Internal Revenue Code, which provides tax-exempt status to organizations that meet certain requirements.
- Trade association: A trade association is a nonprofit that represents a particular industry or group of businesses. Trade associations may provide advocacy, networking, and other services to their members, and are typically organized as 501(c)(6) organizations.
- Social welfare organization: A social welfare organization is a nonprofit that is dedicated to promoting social welfare, civic improvement, or community development. These organizations are typically organized as 501(c)(4) organizations, which are tax-exempt but have different rules for political activity and lobbying.
- Membership organization: A membership organization is a nonprofit that provides services or benefits to its members, such as a professional association or a labor union. Membership organizations are typically organized as 501(c)(5) organizations.
- Religious organization: A religious organization is a nonprofit that is dedicated to promoting religious beliefs and practices. These organizations are typically organized as 501(c)(3) organizations, although churches and other religious organizations may be exempt from filing for tax-exempt status.
- Private foundation: A private foundation is a nonprofit that is funded by a single individual, family, or corporation, and is dedicated to supporting charitable causes. Private foundations are typically organized as 501(c)(3) organizations, but may have different rules for governance and grantmaking than public charities.
- Public charity: A public charity is a nonprofit that receives a significant portion of its funding from the general public or from government grants. Public charities are typically organized as 501(c)(3) organizations and must meet certain requirements to maintain their tax-exempt status.
How to Start a Nonprofit: A Step-by-Step Guide
Starting a nonprofit organization can be a challenging yet rewarding experience. If you have a passion for a particular cause or community and want to make a difference, launching a nonprofit could be the perfect way to do so. Here are the key steps you need to take to get your nonprofit up and running:
1. Conduct a Needs Assessment to See if Your Idea Is Viable
Before you can start a nonprofit, you need to identify the needs of the community or group you plan to serve. Conducting a needs assessment involves gathering data to determine the problems and issues that exist, as well as the gaps in services or support. This information will help you develop a mission statement and strategy for your nonprofit.
Four actionable items to consider when conducting a needs assessment:
- Research: Look for data and studies related to the issue or problem you want to address. Gather demographic data on the community or group you want to serve. Research existing programs and services that address the same issue.
- Surveys and Interviews: Conduct surveys and interviews with members of the community or group you plan to serve. This will help you gather firsthand information about their needs and experiences.
- Focus Groups: Bring together small groups of people from the community to discuss the issue and potential solutions. This will give you a better understanding of the challenges and opportunities related to the problem.
- Site Visits: Visit the locations where the community or group you plan to serve spend their time. Observe the environment and the challenges they face. This will help you identify gaps and opportunities that may not be immediately apparent through other forms of research.
Questions to consider:
- What is the problem or need that your nonprofit will address?
- Who will benefit from your services or support?
- What are the existing organizations or groups that serve this community?
- What gaps or opportunities exist in the current offerings?
2. Get Clear on the Organization’s Vision, Mission, Core Values, and Top Goals
Once you have identified the need for your nonprofit, it’s time to get clear on the organization’s vision, mission, core values, and top goals. Your vision should outline the ultimate goal or impact you hope to achieve, your mission statement should detail the purpose of the organization and the services or support it will provide, and your core values are the guiding principles that will shape your nonprofit’s culture and decision-making. Alongside these, it’s important to write a business plan that covers your top goals, which should be specific, measurable outcomes you hope to achieve.
Here’s how to get clear on the guiding principles of your nonprofit:
- Define your nonprofit’s vision statement: Clearly state what you want to accomplish and what impact you want to make on the community you serve.
- Brainstorm and refine the statement with your team or stakeholders.
- Consider if your vision is measurable and realistic.
- Develop a mission statement: This should be a concise statement that outlines the organization’s purpose and services or support it will provide.
- Consider the needs assessment and how your nonprofit will address those needs.
- Ensure the mission statement is clear, concise, and easy to understand.
- Identify core values: These are the guiding principles that will shape your nonprofit’s culture and decision-making.
- Identify the values that align with your nonprofit’s purpose and goals.
- Consider how these values will be reflected in your nonprofit’s policies, procedures, and practices.
- Set top goals: These should be specific, measurable, and achievable outcomes you hope to achieve in the short and long term.
- Break down long-term goals into smaller, achievable milestones.
- Ensure goals align with your nonprofit’s mission and vision.
- Refine and finalize the statements: Once you have developed initial drafts of your statements, share them with your team or stakeholders for feedback and revisions.
- Consider if the statements accurately reflect your nonprofit’s purpose and goals.
- Refine the statements to ensure they are clear, concise, and compelling.
Questions to consider:
- What is the ultimate goal or impact you hope to achieve with your nonprofit?
- What services or support will your nonprofit provide to achieve this goal?
- What values will shape your nonprofit’s culture and decision-making?
- What specific outcomes do you hope to achieve in the short and long term?
3. Select the Best Type of Nonprofit Business Structure
There are several types of nonprofit business structures, and each has its own set of benefits and drawbacks. Here are some of the most common types of nonprofit business structures:
- 501(c)(3) nonprofit corporation: This is the most common type of nonprofit business structure. It is tax-exempt and allows donors to deduct their contributions on their tax returns. A 501(c)(3) nonprofit corporation must have a charitable, religious, educational, scientific, or literary purpose.
- Tax-exempt status
- Donors can deduct their contributions on their tax returns
- Eligibility for grants and other forms of funding
- Limited ability to engage in political activities
- Can’t distribute profits to members or shareholders
- 501(c)(4) social welfare organization: A 501(c)(4) nonprofit corporation is similar to a 501(c)(3) but with fewer restrictions on political activities. It is tax-exempt but does not allow donors to deduct their contributions on their tax returns.
- More flexibility to engage in political activities
- Can lobby for legislative change
- Donors cannot deduct contributions on their tax returns
- Must disclose certain financial information to the IRS
- Unincorporated nonprofit association: This is a simple, informal structure for a nonprofit. It does not require registration with the state and is often used for small, short-term projects or events.
- No registration or legal fees
- Easy and quick to set up
- No limited liability protection for members
- Not a good option for long-term, complex projects
- Charitable trust: A charitable trust is a legal arrangement in which property or funds are held by a trustee for the benefit of a charitable organization. It is often used for large, long-term projects or endowments.
- Can provide long-term stability for a nonprofit
- Can be used to manage large sums of money or property
- Complex legal requirements and ongoing administrative tasks
- Limited flexibility in how funds can be used
- LLC (limited liability company) with a social purpose: An LLC is a for-profit business structure, but it can be used to achieve social goals. Some states allow for the creation of an LLC with a social purpose, which allows for-profit companies to operate with a social mission.
- Flexibility in how the organization is structured and operated
- Ability to generate revenue through business activities
- Not eligible for tax-exempt status
- Must pay taxes on profits
LLCs are typically not used for nonprofit organizations. However, there are some exceptions where an LLC can be considered a nonprofit or be exempt from paying certain taxes.
Some states allow for the creation of low-profit limited liability companies (L3Cs), which are a type of LLC that is organized for charitable or educational purposes.
4. File All the Proper Paperwork
Once you have selected a business structure, you’ll need to file the necessary paperwork to get your nonprofit up and running. This includes registering with the appropriate state agency, applying for tax-exempt status with the IRS, and filing for any necessary licenses or permits.
To start a nonprofit, there are several legal requirements that need to be met. Here are the key paperwork and legal steps to follow:
- Draft articles of incorporation: This document outlines the purpose and structure of the nonprofit and includes important information such as the organization’s name, address, and initial board members.
- Obtain an employer identification number (EIN): An EIN is a unique number that the IRS assigns to identify your organization for tax purposes.
- File for tax-exempt status: Submit Form 1023 (or 1023-EZ for smaller organizations) to the IRS to apply for tax-exempt status under section 501(c)(3) of the tax code.
- Register with state agencies: Nonprofits must register with their state’s attorney general or secretary of state and may need to file additional paperwork depending on the state’s requirements.
- Obtain any necessary licenses and permits: Depending on the nature of your nonprofit’s activities, you may need to obtain licenses or permits from local or state agencies.
- Establish bylaws: This document outlines the rules and procedures for how your nonprofit will operate and includes information such as the roles and responsibilities of board members, meeting procedures, and how decisions will be made.
- Set up a board of directors: The board is responsible for overseeing the nonprofit’s activities and making major decisions.
- File annual reports and maintain proper documentation: Nonprofits are required to file annual reports with the IRS and maintain accurate financial and operational records.
5. Get Your Taxes in Order
As a nonprofit organization, you may be eligible for tax-exempt status, which can save you money on federal and state taxes. However, you still need to file an annual tax return with the IRS, even if you don’t owe any taxes.
Here is a list of things you need to do to become exempt from taxes as a nonprofit:
- Apply for 501(c)(3) status: This is the most common form of tax exemption for nonprofits. To apply, you will need to complete IRS Form 1023 and pay a filing fee.
- Meet the requirements: To be eligible for tax exemption under 501(c)(3), your nonprofit must operate exclusively for charitable, religious, educational, scientific, or literary purposes.
- File annual reports: Nonprofits are required to file annual reports with the IRS, which includes Form 990. This form provides information on the nonprofit’s finances, governance, and programs.
- Understand unrelated business income tax (UBIT): Nonprofits may be subject to UBIT if they earn income from an unrelated business activity. This tax is calculated on the net income from the activity.
- Know state and local tax laws: Nonprofits may be subject to state and local taxes, including sales tax and property tax. It’s important to research and understand the tax laws in your state and local area.
- Keep accurate records: It’s important to keep accurate records of all income and expenses, including donations and grants. This will help ensure compliance with tax laws and make filing tax forms easier.
- Seek professional advice: Tax laws can be complex, and it’s recommended to seek the advice of a tax professional who specializes in nonprofit tax law.
Tax-exempt status does not mean that a nonprofit is exempt from all taxes. Nonprofits may still be subject to certain taxes, such as payroll taxes and excise taxes. It’s important to research and understand the tax laws that apply to your nonprofit to ensure compliance.
6. Develop a Fundraising Strategy
Fundraising is a critical aspect of nonprofit success. Nonprofits rely on the generosity of donors to carry out their missions. Creating a fundraising plan is essential to keep the organization afloat and to grow it over time.
To get started on a fundraising plan:
- Set fundraising goals: Determine how much funding your organization needs to support its mission. Set clear, measurable goals for how much money you need to raise and by when.
- Identify funding sources: Explore potential funding sources, including individual donors, sponsorships, corporate philanthropy, grants, and fundraising events.
- Develop a donor engagement plan: Determine the best ways to communicate with donors and develop relationships with them. Establish regular communication channels, such as newsletters and social media, to keep donors informed of your organization’s progress.
- Plan fundraising events: Plan events that align with your mission and will attract donors. Consider partnering with other organizations, recruiting volunteers, and promoting the event on social media.
7. Launch the Nonprofit by Creating Buzz
Once you have completed all the necessary steps, it’s time to launch your nonprofit. Launching is exciting, and it’s important to get the word out to attract donors, volunteers, and supporters.
To generate momentum:
- Develop a launch plan: Identify the best ways to launch your nonprofit, including press releases, social media, and word of mouth.
- Create a website: A website is essential for promoting your nonprofit, sharing your mission, and accepting donations.
- Establish social media accounts: Use social media platforms like Facebook, Twitter, and Instagram to promote your nonprofit and engage with potential supporters.
- Start outreach efforts: Reach out to potential donors, volunteers, and supporters to build momentum for your organization.
Questions to Consider:
- What is the most effective way to launch your nonprofit?
- How can you create buzz and excitement around your launch?
- How can you use social media to promote your organization and engage with potential supporters?
8. Maintain Your Status as Tax-Exempt
Maintaining tax-exempt status as a nonprofit requires ongoing compliance with state and federal regulations. Here are some actions that can help you maintain your status:
- File all necessary tax forms: Your nonprofit will need to file annual tax returns with the IRS, even if you are tax-exempt. The type of form you need to file depends on the size of your organization and the amount of revenue you generate. For example, small nonprofits with less than $50,000 in gross receipts can file Form 990-N (also known as the e-Postcard), while larger nonprofits will need to file Form 990 or Form 990-EZ.
- Keep accurate records: You should maintain detailed records of all financial transactions, including donations, expenses, and investments. You will need to be able to demonstrate to the IRS that your organization is using its funds for tax-exempt purposes.
- Follow state regulations: Each state has its own rules and regulations for nonprofits, so it’s important to stay informed about the requirements in your state. For example, some states require nonprofits to file annual reports or register with the state attorney general’s office.
- Avoid prohibited activities: Nonprofits are restricted from engaging in certain activities, such as political campaigning or excessive lobbying. Violating these rules can result in the loss of tax-exempt status.
- Conduct regular reviews: Your nonprofit should conduct regular reviews of its governance and financial practices to ensure compliance with regulations and best practices. This can include audits, internal reviews, and board assessments.
- Consult with experts: It’s important to seek advice from legal and financial experts who specialize in nonprofit law and accounting. These professionals can help you navigate the complex regulations and ensure that your organization remains in compliance with all rules and regulations.
- Identify a need in the community or group you plan to serve.
- Develop a mission statement and strategy for your nonprofit.
- Choose a name for your nonprofit and ensure it’s available for use.
- Recruit a board of directors and officers.
- File articles of incorporation with the state.
- Obtain an employer identification number (EIN) from the IRS.
- Apply for tax-exempt status with the IRS by filing Form 1023 or 1023-EZ.
- Register with your state’s charities regulator.
- Obtain any necessary business licenses and permits.
- Develop a budget and fundraising plan.
- Establish financial and record-keeping systems.
- Comply with all legal and regulatory requirements.
- Regularly evaluate and update your nonprofit’s mission, goals, and programs to ensure they align with your intended impact.
Frequently Asked Questions About Starting a Nonprofit
What is the process for incorporating a nonprofit organization?
To incorporate a nonprofit, you need to file articles of incorporation with your state’s secretary of state or corporations division. The articles should include the organization’s name, purpose, registered agent, and board of directors. You will also need to obtain an employer identification number (EIN) from the IRS.
What are the requirements for obtaining tax-exempt status?
To obtain tax-exempt status, you must first incorporate your nonprofit and obtain an EIN. Then, you need to file Form 1023 or 1023-EZ with the IRS, along with a filing fee. The form requires information about your organization’s activities, governance structure, and financials. You will also need to submit annual filings, such as Form 990, to maintain your tax-exempt status.
Can a nonprofit make revenue or profit?
Yes, a nonprofit can make a profit, but the profits must be reinvested in the organization’s mission rather than distributed to individuals. Nonprofits can generate revenue through donations, grants, and fees for services or products, among other sources.
What are the responsibilities of a nonprofit board of directors?
The board of directors is responsible for overseeing the organization’s operations and ensuring it adheres to its mission and values. Specific duties include setting policies and strategic goals, hiring and evaluating the CEO, approving budgets and financial statements, and ensuring compliance with legal and ethical standards. The board also plays a key role in fundraising and community outreach.
Learn About Another One of the Best Business Structures
If you’re not sure if a nonprofit is the right business structure for you, it’s worth considering the limited liability company (LLC) structure. LLCs provide many of the same benefits as nonprofits, such as personal liability protection, without the strict regulations and requirements that come with a nonprofit. With an LLC, you have more flexibility in how you run your business and can distribute profits among members. In general, an LLC cannot be a nonprofit because it is a for-profit business structure. However, there are some limited exceptions where an LLC may be formed for nonprofit purposes, which include:
- Low-profit LLC (L3C): This is a special type of LLC that is recognized in some states and is designed for businesses that have a charitable or educational purpose. The L3C structure allows the business to attract investments from foundations and other organizations that are interested in socially responsible companies and investments.
- Benefit LLC: Some states allow LLCs to elect to be a Benefit LLC, which is a hybrid between a for-profit and nonprofit entity. The Benefit LLC structure allows the business to pursue a social or environmental mission while still generating profits for its owners.
It’s important to note that forming an LLC for nonprofit purposes may not be the best option for everyone. If you are considering starting a nonprofit, it’s recommended to consult with an attorney or other qualified professional to determine the best business structure for your specific situation.
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