Starting a nonprofit can seem like a long and complicated process, and indeed, some of the steps involved in starting and running a nonprofit organization can at times be more complex than those involved in setting up and maintaining a regular for-profit business. Despite this, forming your nonprofit and putting together an IRS nonprofit application is still something that you can do yourself.
So what's involved when you want to start a nonprofit business and apply for nonprofit status? While there are certain things you will be doing differently than the owner of a for-profit business, when you're forming a nonprofit you are still starting a business and, aside from the 501(c)(3) application, many of the steps required are similar to the steps any general business owner will need to go through in order to set up a new business.
How To Start A Nonprofit
1. Determine your niche. As with any business, selecting the right niche is important for a nonprofit business. Do your market research beforehand: is your niche unique and original? Is there a need for your niche?
2. Prepare your business plan. Just like a for-profit business, having a well-prepared business plan is essential to the nonprofit business. A nonprofit's business plan will be key to obtaining funding from donors and also from various government agencies. Because of this, it's important to take your time when drafting and finalizing your business plan.
3. Incorporate your nonprofit. If you intend to apply for tax-exempt status, you will need to incorporate your nonprofit business. Incorporation isn't usually a difficult process, and generally consists of the following:
- Choose your business name. In choosing your business name, you should check that your proposed name is not already being used by an existing company. As a corporation, you may need to include certain words which signify an incorporated status, such as "Corp.", "Inc. or "Limited"; check with your state for specific business name requirements, and also to be sure you're not using any restricted words in your name. As a final precaution, you should also search for your proposed name on the United States Patent and Trademark Office's Trademark Electronic Search System (TESS) to make sure your proposed name is not too similar to a registered trademark or to a trademark for which registration has already been applied.
- File your nonprofit articles of incorporation. Once you've selected a business name, you'll have to file your nonprofit's articles of incorporation with your state; this is usually done with your state's Secretary of State, although some states may require you to file in another state office. Articles of incorporation are generally easy-to-fill-out forms requiring some basic details, like your nonprofit organization's name and location. Some states may require more information, such as the names of your nonprofits directors. And you will most likely also need to designate a registered agent, who is authorized to accept service of process on your nonprofit's behalf.
While basic articles of incorporation are simple to prepare, if you intend to apply for tax exempt status, the IRS has suggested wording which should be included in a nonprofit's articles of incorporation.
4. Apply for an EIN. Once you've properly registered your nonprofit corporation with your state, you will need to apply for an Employer Identification Number (EIN). You will need an EIN even if you don't intend to employ anyone, as it will be required on the form you'll be submitting to the IRS when you apply for tax-exempt status.
5. Apply for tax-exempt status.
- In order to be eligible to apply for exempt status under section 501(c)(3), your nonprofit business will need to have an appropriate legal form—that is, it must be a trust, a corporation or an association. If you've properly completed the incorporation step outlined above, your nonprofit organization should meet this requirement. Your nonprofit should also have an exempt purpose. For more information, the IRS has set out the full exemption requirements for 501(c)(3) status here.
- You will need to submit a completed, signed and dated application, along with the appropriate user fee. Nonprofits applying for 501(c)(3) status will be required to complete a Form 1023-series application while those applying under 501(a) should complete and file a Form 1024. Smaller nonprofits applying for 501(c)(3) status may be eligible to file Form 1023-EZ, which is a simpler, more streamlined version of Form 1023. Note that you will need to provide your EIN on the first page of your application.
- If your nonprofit organization is new you will need to provide financial statements for the current year and proposed budgets for the next two years. For section 501(c)(3) organizations this information should be provided in Part IX of Form 1023.
- If a third party will be representing you, you will need to complete Form 2848, Power of Attorney and Declaration of Representative. By completing this form you will be authorizing the third party to represent you.
- If you are submitting a Form 1024 (a section 501(a) application), you will also need to fill out Form 8718, User Fee for Exempt Organization Determination Letter Request, along with the required user fee.
- You will need exact copies of your nonprofit's organizing documents—that is, your articles of incorporation.
- Once you've completed the forms required, submit your application by mailing in the completed, signed, and dated forms, along with the required fees.
6. Apply for state tax exemption, if required. Most states will automatically grant tax exemption status if you've received federal tax exempt status; however, some states require you to apply separately for state tax exemption. If your nonprofit is located in such a state, you will need to submit a separate application for state tax exempt status.
7. Draft corporate bylaws for your nonprofit corporation. As with any for-profit corporation, your nonprofit organization will need a set of corporate bylaws.
8. Appoint your initial directors. Note that if you live in a state which requires the names of directors to be listed in the articles of incorporation, you will have to complete this step prior to filing your articles of incorporation. Once you've appointed your initial directors you can hold your first Board meeting.
9. Obtain any necessary licenses and permits. Just like a for-profit corporation, your nonprofit will have to obtain any required licenses and permits before it begins operations; the licenses and permits required will vary depending on your state and local government. The Small Business Administration maintains a list of links to state business license offices.
10. Open a bank account for your nonprofit. Your nonprofit business will need its own bank accounts. Check with your bank to see what documentation is required in order to open a bank account with them.
Starting a nonproft has more steps than starting a corporation or LLC, especially if you’re applying for tax exemption. With hard work, and attention to detail, you can get your application completed by yourself.
Starting a nonprofit can be time-consuming and complicated, but LegalZoom simplifies the process. Get started with your nonprofit application by answering a few questions online. LegalZoom can also connect you with a company that can help you obtain the business licenses and permits required for your nonprofit.