Starting a nonprofit offers philanthropic-hearted individuals many benefits, including more credibility, donors and grants. It is not for everyone. This guide will help you decide if a nonprofit is the right choice for you. It will also explain the different types of 501(c), the best designations to use, and how to form your nonprofit.
Learn how to create a nonprofit by following along. If you need the help of an experienced legal team to make starting your nonprofit a less stressful ordeal, contact us for a consultation. We have years of experience in business consulting.
What is the Right Nonprofit for You?
The benefits of establishing a non-profit organization are numerous. This includes the ability to ask for donations from those who wish to have their contributions tax-exempted, to apply for grants and to avoid spending valuable donations on corporate income taxes.
There are also some disadvantages. Nonprofits are required to maintain their tax exempt status by constantly undergoing IRS financial scrutiny. They must also conduct board meetings, keep detailed records, and loop profits back into the organization.
Nonprofits can be classified into a variety of types.
There are a number of 501 (c) designations available for nonprofits. Three types of organizations that are commonly used include 501 (c)(3), and 501 (c)(4). Each has its own benefits and restrictions, and is therefore best suited to specific types of organizations, such as charitable, political, lobbying, and social or recreation clubs. These types of 501(c), nonprofits are examined in more detail.
501(c), the best option for charitable nonprofits
The most common nonprofit is a 501(c). The organizations raise funds by asking for donations and grants. Some 501(c), for example, are organizations that deal with global issues, like the need for medical research, education and religious support. Private foundations can also be 501(c3) organizations. These foundations do not run charitable programs; instead, they fund other 501(c3)(3) organizations by way of grants.
The types of services that 501(c3)s can provide are restricted. They cannot engage in any political or lobbying activity. They can engage in certain lobbying activities, but must limit their funding to 10% of the organization’s operational budget. If they exceed this threshold, their tax-exempt 501(c3) status may be lost.
501(c), the best option for political or lobbying nonprofits
Social welfare organizations are those with a 501(c),4 tax-exempt status. They should have a public benefit as their purpose. Unlike 501(c), nonprofits, 501(c),(4) organizations are free to engage in political or lobbying activities. For example, they can endorse candidates for office and promote legislation. For this reason organizations who want to take a stand on a particular issue would be wise to apply for 501(c).
Donors of 501(c), but not 501(c), nonprofits cannot deduct their contributions. These nonprofits are required to inform donors who have been solicited that their donations are not tax deductible. These organizations are exempt from federal income taxes, but they’re not tax-exempt.
Best for Social or Recreational Clubs
Nonprofit organizations that operate social or recreational clubs are granted 501(c). These are membership-based organizations, funded by fees and dues. 501(c 7) organizations can include amateur sports clubs, country, dinner and hobby clubs, community associations, and other types of groups.
Nonprofits that fall under 501(c),(7) must receive at minimum 50% of their funding through members. Nonmembers can donate up to 35%, and the remaining 15% can be raised by public use of social club facilities or services. Most 501(c), however, do not pay federal income taxes on membership contributions. They may, however, be taxed for contributions from non-members.
Other Nonprofit Organizations
There are 28 different 501(c), although the majority of nonprofits are 501(c). It is therefore important that you do your own research in order to determine which 501(c), designation will best help you achieve your goals and have the desired impact. The IRS provides an list of updated 501(c), and their definitions, to help you begin your research.
How to Start a Nonprofit
Do your research before you begin your nonprofit to make sure you can achieve your goals. Start by building a solid foundation to attract donors. Be prepared to submit the paperwork required to receive your tax-exempt status. Then, you will need to file the articles of incorporation as well as all other paperwork required to become a recognized tax-exempt organization. Last but not least, you should take action every year to maintain your tax-exempt status.
Here are the five steps to starting a non-profit.
Research Need and Feasibility
It is important to do research before committing to start a non-profit to determine if you are able to and if the mission that you want to accomplish will actually serve a need in your community. If you start a nonprofit that isn’t feasible or necessary, your mission can fail quickly.
Answer the following questions to assess your nonprofit’s feasibility:
- Have I got the finances to start a non-profit? The cost of starting a nonprofit ranges between $2,500 to $5,000. These costs include legal, business registration and startup costs.
- Do I have the necessary people to launch a nonprofit organization? In order to start a nonprofit, you will need a board of directors and a sufficient number of volunteers or staff members who can put together your programs and manage them. List the skills of those you want to work with you in starting your nonprofit. Note any gaps in your skills to fill them with further brainstorming.
- Is my cause being supported with enthusiasm? If you don’t have a community that is excited about your cause, they are unlikely to donate money to support your programs.
- Will the economy support an organization that is a nonprofit? People in your community who are struggling to feed themselves and their families are unlikely to support your cause financially.
- Are you able to dedicate yourself to your nonprofit organization? Like any business, nonprofit organizations require time and energy to launch and maintain. Founders rarely work part-time in these organizations. Consider your current responsibilities to determine if you are able to take on an ambitious project.
- What are the strengths, weaknesses and threats that my organization will face? Take into account internal factors that may impact your organization’s success. Consider, at a minimum, skill gaps in your team, partnerships or large donors; the organization’s capacity to handle dips and donations; your experience, unique ability to meet beneficiary requirements, and how you compare with your competitors.
Answer the following questions to assess your nonprofit’s needs:
- Does my organization meet a true unmet need or is it just a ploy to get people to donate? Needs and wants are two different things. If your mission does not fill a need in your local community, you may want to reconsider your cause. Donor dollars could go to another organization that fulfills a need, before they reach your cause.
- What are the competitors doing to meet this need? You can use a non-profit locator tool in order to determine what organizations are currently meeting the same or similar needs within the community that you plan to serve. Redundancy in services means you’ll have to compete with other organizations for donors and grants if another organization fulfills your mission within your service area.
- What makes my service different from those of my competitors’? Consider adjusting your mission if you find that an organization already fulfills your target mission.
After assessing the need and feasibility of launching your nonprofit, and fulfilling its mission you can decide if you want to proceed to step 2, which requires investing resources. You should stop your nonprofit project if you don’t think it is feasible or necessary. Instead, find an alternative way to support your cause. Other options include donating the funds to another non-profit.
Build a strong foundation
The basic steps in establishing a foundation include choosing a name for your organization, forming a board of directors, and defining your mission, values, and purpose. This section will provide some advice on how to accomplish each of these foundational steps in order to launch your nonprofit.
Write your values statement
Your values statement should focus on the principles that your organization will adhere to at every stage of its development, and in all decisions made by staff, executives and board members. List the behaviors that you believe are most important for fulfilling your mission ethically and successfully. Define how these behaviors will be implemented by your entire nonprofit in their daily operations.
Write your mission statement
Your team will be motivated to remain focused and determined by a mission statement. The mission statement should explain what you do, why you do and how you do. In one sentence, describe the services that you offer, and then include the values of your organization, as well as the result that your mission is aiming to achieve. Include the passion that motivated you to start your nonprofit. Write concisely at an eighth grade reading level for best results.
You should write your purpose statement
Your mission statement explains why your organization is needed, regardless of the work done by competitors. It tells your donors and partners that you are more important than or on top of any competitors.
Describe your organization in 50 words or fewer. Describe the type of service that your nonprofit provides. Next, describe your services. Answer how the services of your nonprofit are different from your competitors. You should be specific to create a compelling image, while still allowing for room to expand your service offerings over time.
Select your nonprofit name
Names of nonprofits should reflect the values, mission and purpose statements. To brainstorm your name, consider the category of services your organization provides–humanitarian, for example–and descriptive words that represent your purpose, mission and/or values. Make sure that your name fits in domain names, social media handles, and is easy to say and write.
Check to see if your chosen name is already in use. Use a tool such as GoDaddy’s Domain Search Tool to check if your domain name is already taken. Check with the business registration agency in your state to make sure your company name hasn’t been used in that state.
Select your board of directors
List the skills and expertise you will need to fulfill your mission successfully. To fulfill their mission, most nonprofits require financial, marketing and legal expertise, as well as industry-specific knowledge. Create a list next of people who share your interest and have these qualifications. Contact these people to ask about their involvement in your nonprofit. Ask them to volunteer first before they commit to a board position.
3. Do you need to file articles of incorporation?
By filing articles of incorporation you request that your state recognize you as a legal business. Once your initiative has been approved, it is now a legal business. Your business is still not tax-exempt. You must find out which office in your state handles business filings before you can file your articles. This office’s name is different in every state, as are the documents and steps required to complete this filing.
You must apply for an employer identification number in order to legally do business in your state. EIN assistant makes it easy to apply online for your EIN. Download Adobe Acrobat prior to filing, so that you receive your confirmation online rather than waiting for it in the mail.
4. Apply for tax-exempt status
You will need to follow different procedures depending on what type of 501(c), or tax-exempt organization, you are forming. For example, to apply for tax-exempt 501(c),(4) status, you first need to register your 501 (c)(4) using Form . You must then file Form 1024A to request the tax-exempt designation. To apply for tax-exempt status under 501(c), you will need to file Form 1023, or 1023-EZ.
The 501(c3) is the most common 501(c). For more information on forming this type of nonprofit, and the steps required to request federal and state tax exemption status, please read How to File a 501(c3)(3) Application Online.
5. Keep your tax-exempt status
The process of maintaining your tax-exempt standing is a continuous one. To do this, you will need to consider your bylaws and records as well as state and federal filing regulations. This is a quick checklist that you should use when creating your plan to maintain tax-exempt status over the long term:
- Stick to your bylaws. Your bylaws provide a guide for how you can run your nonprofit in an ethical, legal and effective manner. These bylaws include information about how often your board should convene, how to avoid conflict of interest, and how donors’ dollars should be used. Use your bylaws for all decisions to keep your organization healthy and tax-exempt.
- Keep detailed records. Records about your non-profit’s activities should be kept throughout the year. To maintain your tax-exempt designation, you must keep detailed financial records. These should include all organization expenses, income, grants received and given, bank statements, and canceled checks. To maintain your tax-exempt designation, you must prove that your organization uses funds only for the intended purpose of donors.
- Filing federal tax forms on an annual basis is essential. You must file a -990 form (or 990 EZ if you have annual revenues less than $50,000) every year. This form explains how your nonprofit manages funds raised and helps to avoid conflicts of interest. This form is made available to all potential donors. It not only helps you maintain your tax-exempt designation, but also attracts new donors because it proves your credibility and ethical usage of funds.
- Fill out state tax forms every year. Many states demand that nonprofits file state-level requests to solicit funds from residents of the state. Other states, like Texas and California require that you file for corporate tax exempt. If your state requires it, you must file this paperwork every year with your 990 form attached. This will enable you to maintain your tax-exempt state status and to continue to raise funds for your nonprofit.
Bottom line on starting a nonprofit organization
For 501(c), forming a nonprofit tax-exempt organization offers benefits that allow 501(c), organizations to use their donor dollars more efficiently and make a greater positive impact. These include increasing the number of donors and grant recipients and reducing taxes owed. However, the nonprofit formation process can be challenging–requiring time, effort and even legal expertise. We recommend that you consult an experienced nonprofit attorney to ensure your success.