Giving back to your local community is a rewarding experience that can have a major impact on those in need. Maybe you started small by gathering food, toiletries and other basic necessities for local residents after a storm. You reached out to friends and neighbors who were happy to donate money and goods to your cause.
Maybe you’ve been making such an impact that you’re thinking about how to expand your efforts to help neighboring communities as well. Meanwhile, donors are asking if they can deduct the cost of the donated items on their tax return. Perhaps a few people have asked what the name of your organization is and where they can find more information. Or, maybe you’ve had a dream to help a specific cause or need. Do any of these resonate? It might be time to start a nonprofit.
Projects that help others are incredible for both the givers and receivers, but if you want your charity to be official to make the most impact possible, it’s important to cover your bases. Here are the steps for how to start a nonprofit organization with purpose. The steps involve careful planning and legal compliance so it can be successful from the start.
Before you pick a name and logo or set up a website for your nonprofit, spend some time conducting a needs assessment to identify gaps in services within the community.
As you’re learning how to start a nonprofit, ask yourself some questions. Is there a big enough need for your services? Are any other nonprofits already meeting these needs for the community? Researching existing organizations is critical to ensure your nonprofit addresses unmet needs and isn’t just reinventing the wheel.
Nancy Eberhardt, executive director at Pro Bono Partnership, an organization that helps nonprofits with legal support in the tri-state area, explains that nonprofits need to check the industry. Just like any other for-profit business, it’s important to make sure there is a need in the community for the charitable service you intend to provide. Also, you might have a harder time obtaining funds from donors if the charitable group you want to support already has access to the resources you intend to offer.
The National Council of Nonprofits suggests contemplating the following questions in order to determine if your nonprofit is a go:
- What problems will the new nonprofit solve?
- Who will it serve?
- Are there similar nonprofits (or for-profits) fulfilling the same needs/serving the same people?
- Are these similar nonprofits financially stable?
- What will make your nonprofit better equipped to solve these problems?
While gathering this information may seem overwhelming, it’s a necessary step to figure out how to start a charity. And remember, none of this has to be set in stone. “You don’t have to have everything figured out,” says Eberhardt, “but it’s important that you’ve at least thought about it and have some ideas.” This initial research can help point you in the right direction and narrow your focus for your new nonprofit organization.
Crafting a Mission: How to Create a Nonprofit With a Clear Vision
Once you’ve determined that starting your nonprofit makes sense at this time, you’ll want to brainstorm about the organization’s core values and goals. While this might seem simple, it’s still important to write down the exact mission of the nonprofit. By outlining the services the organization will provide and who you will serve, this unique statement will establish your nonprofit’s identity. It can also help keep you focused as you move forward to meet your goals and transform your community.
Keep your mission statement succinct and digestible. Make sure it encompasses your organization’s fundamental purpose, philosophy and values. It can also include some language that is inspirational, motivational, informative and even emotional.
Building Leadership: How to Form a Nonprofit Board of Directors
Now it’s time to gather the necessary support for your nonprofit. You’ll want to find a solid group of people to have by your side to serve on your board of directors. Members of the board should not only be aligned with the mission but should also have the skills necessary to support the organization.
A nonprofit board of directors is its governing body, helping with strategic decision-making. They play a key role in managing the nonprofit with regard to financial, marketing and legal operations. Your board members often help support the organization financially through fundraising.
A president, secretary and treasurer are all key roles, and the people filling these positions should be capable and willing to complete the required job, says Eberhardt. Will the treasurer be able to oversee the money, including finding someone to prepare the annual tax return? Will the secretary be able to keep track of the records and filings? Having a strong governing body in place will help you figure out how to start a nonprofit organization and set you up to incorporate your organization in the next step.
Legal Steps: How to Incorporate and Obtain Tax-Exempt Status
It’s critical to understand and adhere to federal and state regulations to ensure your nonprofit can continue to operate legally. Follow these steps to incorporate your nonprofit organization on both the state and federal levels. This will help ensure you receive tax-exempt status:
1. File a Certificate of Incorporation With the State.
The articles of incorporation for the organization will typically include the name of the entity, the principal address, the charitable purpose and other basic information. Each state has different rules and regulations for filing. For example, one state might require the board to have at least three members, and another state may require only one. A charity can incorporate in a different state from where they are based.
2. Apply for a Federal Employer Identification Number (EIN) From the IRS.
An employer identification number (EIN) is a nine-digit number assigned by the Internal Revenue Service (IRS) and the number an organization uses when filing paperwork. Filing for an EIN can be done on the IRS website, and the task is relatively simple. Once the basic information is completed, you will receive a PDF with the new EIN. This is a document that should be stored in a safe place but kept handy because the entity’s EIN will be used on many documents going forward.
3. Apply for Tax-Exempt Status From the IRS.
Many people are familiar with the term 501(c)(3), which refers to the section of the tax code set up for entities with charitable purposes. What people may be less familiar with are the 28 subsections under section 501(c). Because of the various ways a group can help a community, the IRS has designated multiple other subdivisions under section 501(c). For example, section 501(c)(4) is for social welfare organizations, section 501(c)(7) is for social and recreation clubs and section 501(c)(19) is for veterans’ organizations. A complete list can be found on the IRS website.
Form 1023 is the application needed to apply for section 501(c)(3) status. The cost to file is $600, and the form itself is 28 pages long, although many organizations can skip some of the pages. Smaller organizations that want tax-exempt status (those with revenue less than $50,000 a year) can file Form 1023-EZ. The cost to file Form 1023-EZ is $275.
“Very often, a new nonprofit wants to collect money right away, or it has a pending grant that is dependent on it receiving its tax-exempt status,” says Tracy Snow, partner at Lowenstein Sandler. “The founders should form the organization as soon as possible, but the application can take months for the IRS to review and approve. The good news is that once you incorporate, as long as you file the tax-exempt application within the next 27 months, your exemption is retroactive to the date of incorporation.”
4. File for Charitable Registration.
You’ll need to file for a charitable registration in your state, plus others where you will solicit. Generally, when starting a nonprofit, you should register with the attorney general’s office in the state where the charity is incorporated. You should also register with any states where it solicits donations, whether in person or by mail, email or telephone.
5. Apply for Sales and Use Tax Exemption With Your State.
While 501(c)(3) organizations do not pay income tax, they still need to pay sales tax when they purchase items for the organization. Another form to consider obtaining is a sales tax exemption form. Rules vary by jurisdiction, but in general, a sales tax exemption will allow sales tax-free purchases for businesses that are registered nonprofits.
Planning for Growth: How to Start a Nonprofit With a Strong Strategy
Like a for-profit business, you’ll want to formulate a strategic plan for your nonprofit organization. Your plan should highlight the goals, objectives and action plan for moving forward. The plan should consist of the following: products, programs and services; a marketing plan; the organizational structure, an operational plan; and an impact plan.
To ensure financial sustainability, the strategic plan should also include a financial plan, including a fundraising strategy and donor profiles. An estimated budget is also essential for any new business. While you might not be sure how your nonprofit is going to solicit donations in the foreseeable future, it’s important to estimate income for the next three years in order to know which form to use when you apply for tax-exempt status.
Making an Impact: How to Launch and Evaluate Your Nonprofit’s Programs
Now that you have an official nonprofit, you’re ready to get started.
Launch Programs
You can begin launching programs that align with the mission and address identified needs for the community you serve. To get your nonprofit officially up and running, you might need to rent a space, hire staff, order supplies, launch a website and social media pages, build relationships with various organizations and community members and start getting the word out.
Keep Ongoing Records
Throughout this process, it’s critical to keep thorough records and maintain compliance. It’s also important to evaluate and assess the organization’s impact and effectiveness. Most states require nonprofit corporations to file an annual report. The report is straightforward and includes confirmation of the nonprofit’s address and registered agent, as well as a payment. You can complete the annual report online, and it is often due at the end of the fiscal period.
File a Tax-Exempt Form
Nonprofits do not pay income tax, but all nonprofits must file Form 990, or a Return of Organization Exempt from Tax. Form 990 asks for detailed information about revenue and expenses for the current and prior years, a current balance sheet, as well as the names and titles of everyone on the board, including any salaries of those individuals. It’s due five and a half months after the end of the fiscal year but can be extended for an additional six months.
Some organizations with income less than $50,000 can file Form 990 E-Z or Form 990-N, a short electronic form also referred to as an “e-postcard.”
If a nonprofit fails to file a 990 for three consecutive years, it will automatically lose its tax-exempt status. By making sure all paperwork is well documented, incoming board members can easily understand the process and continue to keep the organization running smoothly. This way, everyone involved can spend as much time as possible focused on the mission at hand.
Turning Your Passion Into a Successful Nonprofit Organization
Ready to make a difference? Start building your nonprofit today with purpose, clarity and impact in mind. A simple idea to help a neighbor can sprout into a larger endeavor that can make a major difference in your local community and beyond.
By following the key steps in this nonprofit startup guide, you can establish a new organization. The trick is to approach the process with diligence, passion and a commitment to making a positive difference.
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