Starting a nonprofit is no different from starting any other business. You need to do research, write a business plan, and file business-formation documents with your state. But nonprofits face an additional hurdle—they must get approval from the Internal Revenue Service (IRS) to be exempt from taxes.
Following the steps below will help you create a nonprofit business plan and start your new venture on a solid legal and financial footing.
Conduct a Needs Assessment
A successful nonprofit fills a unique need. A needs assessment helps you identify that need, find out what other organizations are already doing, and research the best way to meet the need.
To conduct a needs assessment:
- Visit the U.S. Census Bureau website for basic demographic information for your area.
- Talk to people at other nonprofits or businesses that have related missions. If another entity is already providing the service you want to offer, consider revising your mission or collaborating with that organization.
- Interview people who might need your nonprofit's services. Find out what they want and the obstacles they face.
- Research logistics and practicalities, including federal, state, and local laws.
- Learn about similar programs in other communities.
Use this research to write a needs assessment that describes your nonprofit's mission, the need it will fill, your organization's strengths and weaknesses, and any obstacles to overcome.
Complete a Market Analysis
Organizations, including nonprofits, must bring in money to survive. That's why a market analysis—a plan for getting financial and volunteer support for your nonprofit—is a must.
Start by listing the kinds of supporters you want, such as donors or volunteers. For each type, envision an "ideal supporter" and write down some characteristics, such as age, income, occupation, lifestyle, and reasons for supporting you. Next, use surveys and interviews to reach out to potential donors. Find out about their motivations for giving and the types of communications to which they respond best.
Use your research to fine-tune your ideal supporter descriptions. These descriptions will help you target your fundraising and outreach to the people most likely to be enthusiastic donors and volunteers for your cause.
Form Your Nonprofit
You'll need to set up a board of directors and file documents with your state to start a nonprofit business entity. Most states have a special business classification for nonprofit corporations.
For more information and to learn how much it costs to start a nonprofit in your state, visit the agency's website that handles business filings in your state. And if you're trying to start a nonprofit organization with no money, government grants and loans may be available to help with startup costs.
Apply for Tax-Exempt Status
Each of the many types of nonprofit organizations has rules for tax-exempt eligibility, tax-deductibility of contributions, and whether the organization can lobby legislators or support candidates.
Most nonprofits are 501(c)(3) charitable organizations. Of those, most are public charities—a category that includes animal welfare organizations, food banks, and museums. Private foundations are also 501(c)(3) organizations. Donations to 501(c)(3) organizations are tax-deductible, and income that fulfills their mission is exempt from taxes.
After you file your application, the IRS may have questions or need more information. If everything is in order, it can still take several months to receive a determination letter granting tax-exempt status. Once you receive the letter, you can file for tax-exempt status in your state.
Setting up a nonprofit can be complicated and time-consuming. The process is likely to go more smoothly if you consult a lawyer who has experience with nonprofits. A lawyer can answer questions, prepare articles of incorporation, and review your application to the IRS. A lawyer can also explain your ongoing obligations to have board meetings, file reports with your state, and submit tax returns.