How To Start A Nonprofit In 8 Steps
Everyone sees problems in the world, but some see solutions as well. Perhaps you are one of those people who have both a passion for solving a problem in a community and a plan to accomplish it. You can move from wanting to help others to forming your own nonprofit.
This primer will show you the eight steps needed to start your 501(c)(3), including:
- Incorporate your nonprofit.
- Select your board of directors.
- Create your articles of incorporation.
- Create your bylaws.
- File for federal tax-exempt status.
- File for state tax-exemptions.
- Register to fundraise where required.
- Invest in donor management software.
1. Incorporate your nonprofit
You’ve taken the first step by recognizing a need in the community. Now, it’s time to follow the legal process to start your organization.
A 501(c)(3) is a corporation formed for not-for-profit purposes. The not-for-profit purpose is declared when that nonprofit corporation is formed. The difference between a nonprofit corporation and a for-profit corporation is what the organization does with its profits. While for-profit businesses may distribute profits to shareholders, nonprofit organizations must reinvest profits in the organization’s cause.
Start by establishing a legal structure—the nonprofit corporation—at the state level. Select a business name that is legally available in your desired state of incorporation. Filing for an Employment Identification Number (EIN) comes next. An EIN is a unique nine-digit identification code issued by the Internal Revenue Service (IRS) to an organization. It is used for filing tax returns, opening a bank account, and hiring employees.
2. Select your board of directors
Selecting a well-rounded board of directors sets your nonprofit up for success. Collectively, the board of directors strategizes, sets policies, and makes decisions for the nonprofit. Individually, each board member should have certain qualities and attributes that add value to your organization. The IRS requires a minimum of three members on the board who are not related to each other by blood or marriage, but additional board members are permitted.
As you recruit your board members, look for individuals who share your organization’s values, have prior experience working with a nonprofit, and have influence and connections within your local community.
3. Create your articles of incorporation
The board’s first duty is to review and ratify your articles of incorporation. Incorporation creates your nonprofit corporation’s legal entity and carries several benefits for the organization. Each state has different requirements for articles of incorporation, and many states provide templates for emerging nonprofits to follow. However, the IRS requires specific language in your corporate formation documents that may not be included in state templates.
It’s crucial to include this IRS-required language in your organization’s articles of incorporation if you plan to file for 501(c)(3) federal tax-exempt status. Make sure your articles of incorporation follow both state and IRS requirements.
4. Create your bylaws
Your nonprofit’s bylaws will become the main governing document of your nonprofit and will act as a guide and decision-making tool for the board of directors. They will serve as supplemental rules to those already required by the state and IRS. What’s more, bylaws are required if you pursue federal tax exemption.
After you create your bylaws, develop a written conflict of interest policy. Check if your state of incorporation has specific requirements for what must be included in the policy. A strong conflict of interest policy will help ensure your organization is well governed and protect your leadership.
Review and approve all of these documents at your first board meeting. In addition, use the time to elect officers and establish roles. Remember, your nonprofit’s first meeting is an opportunity to set the tone for your organization and create a shared vision for its future, so keep this meeting as focused and productive as possible.
5. File for federal tax-exempt status
Once you’ve formed your nonprofit, the next step is to apply to the IRS for tax-exempt status. Tax-exempt status will provide tax deductions for donors to your organization, an exemption from federal corporate income taxes, and a discount on bulk-rate postage for your nonprofit. Federal tax-exempt status also lets your nonprofit seek grant funding from foundations.
There are 29 different types of organizations that are tax-exempt under Section 501(c) of the Internal Revenue Code. The most popular and widely known of the 501(c) exemptions is the 501(c)(3). Commonly referred to as charitable organizations, 501(c)(3) organizations may receive tax-deductible contributions, a valuable benefit to offer donors to your nonprofit organization.
The IRS does impose some restrictions on 501(c)(3) nonprofit organizations. Those restrictions include:
- 501(c)(3) organizations may not be organized for the benefit of private interests, such as the founder, the founder’s family, or others directly or indirectly controlled by such private interests.
- 501(c)(3) organizations must be organized and operated for the specific exempt purposes identified in Section 501(c)(3) of the Internal Revenue Code.
- 501(c)(3) organizations may not participate in electioneering, which includes participating in campaign activity for or against political candidates.
How to apply for tax-exempt status
You apply for tax-exempt status by submitting an application to the IRS using Form 1023 or 1023 EZ. It’s not unusual for the Form 1023 application and attachments to exceed 50 pages.
Ensure that you’ve included everything that is required, and be sure to follow IRS formatting instructions. IRS processing times may take anywhere from 2 weeks to 6 months, so be patient.
While waiting for your determination letter from the IRS, it’s generally best not to fundraise. When the IRS approves an application, tax-exempt status is recognized back to the date the nonprofit was created. However, donors to the organization do not have the advance assurance of the tax deductibility of their contributions because the organization’s exemption is pending and may not be approved within the tax year.
Once you are confirmed as tax-exempt, you’ll need to take some additional steps before you can begin fundraising in most states.
6. File for state tax-exemptions
Some states will grant you tax-exempt status once you receive your IRS determination letter. In other states, you may be required to submit an application for state tax exemption. The precise details of each state’s nonprofit tax exemptions vary. Some offer exemptions from corporate income, sales, use, and other taxes they levy on nonprofits. Other states offer only some of these exemptions.
Consider seeking tax exemption in each state where your nonprofit will operate. State tax exemption usually requires submitting an application to the state department of revenue and must be renewed every one to five years.
7. Register to fundraise where required
Once you’ve received your 501(c)(3) determination letter from the IRS, you’ll need to register to fundraise in your state of incorporation, and perhaps others, too. Generally, you must register or seek exemption from registration before soliciting donations in each of the 41 states that require registration.
Additional prerequisites for registration in some states include registered agent service. Properly registering is an important part of nonprofit compliance that will allow you to engage in fundraising (also known as charitable solicitation) across state borders.
States generally define solicitation as asking for funds for charitable purposes, regardless of the method. This means that donation requests made by mail, by email, via grant applications, at events, and through a donate button on your website are all solicitations. In the age of online fundraising, charitable solicitation can happen anywhere.
Solicitation occurs when the request for a donation is received. If you don’t know where your solicitations are being received, you may need to register in multiple states. Some states offer registration exemptions to small nonprofits and certain categories of nonprofits. State-by-state research is required to see if your nonprofit may be eligible for exemption. Most nonprofits will be required to register.
Fundraising registration is an ongoing obligation. Your organization will generally need to file a secretary of state annual report in each state where you are registered or exempted. Typical documents submitted with this annual report include your IRS Form 990 tax return and compiled or audited financial statements.
Fundraising disclosure statements
In addition to charitable solicitation registration requirements, 25 states require that nonprofits include fundraising disclosure statements when communicating with donors. Typically, disclosures must be included in written solicitations, donor confirmations, donor receipts, and donor reminders of contributions. However, each jurisdiction’s requirements differ.
Complying with fundraising registrations and disclosures in multiple states can be time-consuming, but they are the law. They are also an opportunity to demonstrate your new nonprofit’s legitimacy, transparency, and accountability to your community and potential supporters.
8. Invest in donor management software
After you’ve satisfied all of your legal requirements and started fundraising, we recommend investing in donor management software. Donor management software will help you keep all your donor information organized in one centralized location. Top software solutions like Bloomerang offer features such as:
- Donor profiles to store crucial donor information such as their full names and contact information
- Constituent timelines to track all interactions your nonprofit has had with donors
- Marketing and engagement tools that allow you to create personalized donor outreach using segmentation
- Reporting and analytics features you can use to run reports and track donor behaviors and trends over time
- Wealth screening tools that automatically scan your database to identify potential major donors
- Integrations with other top nonprofit software platforms so you can seamlessly transfer data between all of your solutions
The goal of this software is to help you centralize all of your data into one place. In other words, you can track your nonprofit’s financial success, manage donor relationships, and more easily access the different marketing, fundraising, and event registration tools you’re using.
Make your dream a reality
These steps will not only allow you to form your nonprofit but will also allow you to position it to thrive. Now that you know how to translate your dream into reality, it’s time to combine your passion with your plan and form your nonprofit! Want more tips on setting your nonprofit organization up for success? Check out our Nonprofit Startup Bootcamp.
Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
Schedule a live demo with our team, and we’ll show you how easy it is to create and automate reports, utilize online and offline fundraising tools, quickly integrate and access all your data, and ultimately create more time to engage your donors.