Starting a successful nonprofit requires a clear mission, doing your research, and preparing a solid business plan.
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updated November 21, 2023 · 10min read
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 one additional hurdle—they must get approval from the Internal Revenue Service (IRS) to be exempt from taxes.
This guide will help you learn how to start a nonprofit organization and will include tips for creating a nonprofit business plan so you can start on solid legal and financial footing.
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 solutions.
To conduct a needs assessment:
Use this research to write a needs assessment that describes your nonprofit's mission, strengths, and weaknesses, and the need it will fill.
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:
Next, use surveys and interviews to reach out to potential donors to uncover 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.
Choosing the right type of nonprofit structure is an important part of forming your nonprofit. The most common types of business structures include corporations, associations, and LLCs. For all of these structures to be recognized as tax-exempt by the IRS, they must qualify for 501(3)(c) status.
A nonprofit business plan is similar to a for-profit business plan, but the fundraising section makes it different. The key elements you'll want to include in your nonprofit business plan are:
When starting your nonprofit organization, you may need a hefty amount of funding upfront to cover startup costs, as well as continuous funding to bring in revenue and help you sustain your organization.
When looking for funding options, grants, donations, and membership programs are some of the most popular ways nonprofits generate operational funds.
There are many different types of government grants available to nonprofits to help with startup funding—available at local, state, and federal levels. The application process is often extensive.
Below are the steps you can take to secure a grant for your nonprofit:
Donations can come in a variety of ways, including corporate sponsorships, through individual donations, and events.
Part of keeping your nonprofit running is by having a membership program in which members can contribute money to your organization. This usually includes a membership fee—whether a one-time, yearly, or monthly fee—that can help with running costs.
These fees usually result in membership benefits, like free entry to fundraising events, access to a member newsletter, and discounts to local businesses.
Once you've built a solid foundation and have secured funding, it's time to form your nonprofit business. When forming a nonprofit corporation, you'll have to:
Keep in mind that most states have a special business classification for nonprofit corporations. If you plan on receiving donations from another state, you'll also have to register there too. The National Association of State Charity Officials (NASCO) is a great resource for finding contact information for the state you'd like to register in.
Part of forming your nonprofit is choosing your legal structure. In most cases, nonprofits are formed as corporations, but an LLC can also be a nonprofit. A nonprofit incorporation and a nonprofit LLC will both have the same purpose—to serve a community.
Those forming a new nonprofit may be interested in an LLC structure because it can be more flexible with its organizational structure. A nonprofit corporation, on the other hand, has more restrictions when it comes to shareholders, directors, and managers.
The biggest difference between forming a nonprofit incorporation and a nonprofit LLC is the requirements involved in the process.
Forming a nonprofit corporation includes all of the steps mentioned above. However, there are a few additional and more complicated steps when forming a nonprofit LLC, one of which is obtaining 501(c)(3) status so you can qualify for tax exemption.
For a nonprofit LLC to be recognized as tax-exempt, it must:
Once you've incorporated your nonprofit, you'll want to apply for tax exemption with the IRS.
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.
To get tax-exempt status, you'll need to download, complete, and submit the appropriate IRS application.
After you file your nonprofit 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.
The final step in starting a nonprofit organization is maintaining your tax-exempt status. Here are the things you need to do to keep your tax-exempt status year-round:
If you're trying to start a nonprofit organization with no money, government grants and loans may be available to help with startup costs. Fiscal sponsorships are also another great way to get your nonprofit up and running.
Fiscal sponsorships can be formed when community organizations or other nonprofits partner with new nonprofit organizations. Through this partnership, you can receive help attracting donors and securing funding before your nonprofit is recognized as a 501(c)(3) by the IRS. Aside from funding, a fiscal sponsor can help guide you through the process of starting your nonprofit and help tackle administrative tasks.
Nonprofits receive their revenue through things like grants, donations, and membership programs. They then use their revenue to pay for expenses needed to operate their business—including employee salaries and compensation.
Nonprofit owners pay themselves (and their employees) a fair salary from the revenue they receive, as it is an operating business expense.
The short answer is yes—you can start a nonprofit organization alone. However, a lot of time and effort is involved in the startup process, and having support from a partner or team can help make sure things run more smoothly. You'll also need to form your board of directors that will be involved in important decision-making, so you'll eventually need a team by your side.
Nonprofit organizations and for-profit businesses are two different wheelhouses. Simply put, a for-profit business's main purpose is to make a profit, while the purpose of a nonprofit is to use its profits to give back to a community and further its mission. Because of this, nonprofits are exempt from paying taxes, and for-profit businesses must pay taxes by law.
Choosing between the two all comes down to your business goals.
If your main goal is to sell products or services to make money, a for-profit business may be for you.
If your main goal is to have a charitable business that gives back to the community, a nonprofit business may be for you.
Setting up a nonprofit can be complicated and time-consuming, but consulting a lawyer who has experience with nonprofits can help the process go smoothly. A lawyer can answer questions, prepare articles of incorporation, and review your application to the IRS. They can also explain your ongoing obligations so you can maintain your tax-exempt status and continue to run a successful nonprofit organization.
by Siege Media, contributor to LegalZoom
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