How to Start a Nonprofit

How to Start a Nonprofit

by Roberta Codemo, July 2015

Starting a nonprofit can be a rewarding experience. There is a lot involved in starting a nonprofit so make sure this is the right decision before you begin. Not every nonprofit succeeds. Less than half of new nonprofits survive five years. Establishing a nonprofit takes a lot of work and dedication on your part.

How To Start A Nonprofit

There are more than one million nonprofit organizations in the United States, according to the National Council of Nonprofits. Before starting a nonprofit, you need to have a solid nonprofit business plan in place, much like a regular business plan. As you work through the steps in the process, there are specific state procedures on how to start a nonprofit organization.

Conducting A Needs Assessment And Market Analysis

Make sure there is a need for the services that your nonprofit will provide. The U.S. Census Bureau website contains basic demographic data for your geographic area, including income level, population size and racial makeup. This information provides insight into the needs of the community.

  • Conduct a thorough search to make sure there isn’t already a nonprofit in place. Funding dollars are scarce. If there is an existing organization, offer to collaborate with it.
  • The first step in forming a nonprofit is creating the mission statement. The mission statement outlines the nonprofit’s purpose, the groups it serves and how it serves these groups. Everything the organization does must support and further its mission.

Selecting A Business Entity

There are three types of nonprofit organizations: charitable trusts, corporations and unincorporated associations. All three have advantages and disadvantages. The 501(c)(3) nonprofit corporation is the one most groups select because of the federal tax-exempt advantages it offers. 

Completing Articles Of Incorporation

The Articles of Incorporation form the foundation of the nonprofit corporation. Generally, this document contains the corporation’s name, purpose, membership, directors and registered agent. After you complete this document, file it with the state of incorporation and pay the filing fee to register your organization. 

Articles of Incorporation requirements vary by state, but most include:

  • Corporation Name. Don’t name your corporation after another one already on file with the state. If you aren’t sure the name is available, complete a name search with the state’s business registry (usually part of the secretary of state’s website). The name must end with “corporation,” “incorporated” or “limited.” 
  • Purpose. The purpose statement describes the corporation goals in broad generalities to allow the corporation space to grow and change. This statement is broader in scope than the mission statement. 
  • Membership. You have to decide whether the corporation will be a member or non-member nonprofit based on why you created it. In a member organization, the members support the organization; in a non-membership organization, the focus is on achieving the organization’s mission rather than on the needs of its members.
  • Directors. The document must contain a provision delineating whether the directors of the board will be elected or appointed.
  • Registered Agent. Include the complete address where the corporation is registered and the name of the registered agent who is authorized to act on behalf of the corporation in the event of legal proceedings. 

Applying For IRS 501(c)(3) Tax-Exempt Status

A 501(c)(3) nonprofit corporation is exempt from federal taxes. However, not all revenues are exempt. As long as the monies fulfill the mission statement, you don’t pay tax on it.

You must complete a 501(c)(3) application to receive tax-exempt status from the federal government. There are two types of applications. Both can be downloaded from the IRS website. IRS Form 1023 must be completed by large nonprofit corporations; if your corporation has less than $50,000 in gross receipts, and assets less than $250,000, complete IRS Form 1023-EZ. IRS Publication 557 provides instructions for completing the paperwork.

It can take six weeks to three months or longer before you receive a determination letter from the IRS granting tax-exempt status to the organization, provided the paperwork is in order. If you are required to file state income taxes, you can file for state tax-exempt status once you receive the determination letter.

Preparing Annual Reporting Documentation

All federal tax-exempt organizations must file annual reports that are open to public inspection. IRS Form 990 shows the activities, directors, finances, governance processes and key staff of the corporation. Each state has its own reporting and renewal requirements.

The directors can dissolve the corporation at any time. It will continue to operate until it winds up its operations and liquidates its business. Follow your state’s procedural requirements when dissolving the corporation.

Starting a nonprofit is time-consuming. The process is complex; while it is possible for an individual to set up a nonprofit on their own, it is best to consult an attorney in your state who has experience working with nonprofits to answer any questions you might have. There are specific procedures in place governing drafting Articles of Incorporation, applying for 501(c)(3) federal tax-exempt status and preparing annual reporting documents. In addition, each state has its own separate requirements that must be met. Without the proper guidance on how to become a nonprofit, you run the risk of missing important steps and jeopardizing the federal tax-exempt status.

LegalZoom can help you start a nonprofit. We can help you complete the application and other paperwork, checking your answers for completeness and consistency. You can also consult with an independent attorney about starting your nonprofit at an affordable price.