Congratulations! If you are reading this article it means that you have decided to jump in headfirst into the nonprofit world. You have big dreams of changing the world for the better, creating lasting connections, and giving back to those in need.
Now that you have dreamed your dream, it is time to get down to brass tacks and begin the process to officially form your nonprofit organization.
In this article we will break down the four major steps that you need to follow:
- Step 1: Doing Your Research
- Step 2: Creating a Business Plan
- Step 3: Recruiting a Board of Directors
- Step 4: Filing on the State & Federal Level
Here we go!
Step 1: Doing Your Research
Doing proper research is arguably the most important step you can take before starting your nonprofit. There is a lot to do before preparing to file and that includes making sure that your idea is not only unique, but that it truly adds value to your community and to the nonprofit sector.
Preparing a Needs Assessment
A needs assessment is a common business tool used to determine if there is an actual, measurable need to the problem your nonprofit wishes to solve.
Completing a needs assessment is also a great starting point to your business plan, creating your first programs and building goals.
To keep it simple, there are two essential steps you need to follow.
The first is to determine the context. Your goal here is to analyze the community to be able to deeply describe the need, quantify the need, know who addresses the need and identify the people you will serve. By the time you get to the end of this section you should be able to know exactly who is working on the same problem, in what capacity, and know where the disparities in service are. The mission of your nonprofit should fill one of those disparities.
For example, you are a nonprofit that seeks to provide safe and affordable lodging to the homeless. After you determine the context in your community, you should know that there are three other nonprofits working toward the same goal, but there is not one among them that also provides a proof of address. Additionally, you have been able to interview those who might benefit from your service and know that a proof of address is needed to be hired in your state.
The second step is to collect and analyze data. This section is about supporting your theories with hard, quantifiable data. You can do this by sending out surveys, compiling census data, foundation reports or reviewing existing data.
Pro Tip: Remember that the internet is full of data and more does not always mean better. Always opt for quality over quantity and don’t consider any sources that are more than a few years old.
Great job! You have found your place within your nonprofit community. That begs the question, what format should you register under?
The Different Types of Nonprofits
Did you know that there are 25 different types of nonprofit organizations? Even though 75% of nonprofits file as a 501(c)(3), you need to double check what category your new nonprofit falls under as the filing and organizational requirements differ.
A 501(c)(3) is a general category that the IRS breaks down into organizations that have a purpose regarding religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition or prevention of cruelty to children or animals. This encompasses many different types of nonprofits like public charities, private foundations, childcare facilities, alumni associations, fraternity and sorority organizations, human services structures and more.
There are many benefits to a 501(c)(3) status like the fact that you are considered a tax-exempt organization by the federal government. Some other benefits include:
Exemption from Federal income tax
Possible exemption from state, employment, and sales tax
Exemption from Federal unemployment tax
Now that you know exactly what kind of nonprofit to register as, it is time to move on to everyone’s favorite subject: money.
Every year, nearly 5,000 people search "how much does it cost to start a nonprofit" in Google. It is one of the most common questions asked before beginning the registration process, as many organizations are self-funded from the beginning. While the fees will vary by your nonprofit type, size, and mission, there are a few fixed costs you can plan for in advance.
The main expenses associated are the filing, incorporation, and legal fees.
The filing fees are attached to your application for tax-exemption, also known as the 1023 or 1023-EZ form (more on this later). The EZ, or streamlined form costs $275, while the longform is $600. In order to use the less expensive version, your nonprofit must meet certain standards, which the IRS calls eligibility criteria.
Incorporation is a step that needs to be taken before filing for tax exemption as it is a necessary document that you use to fill out both versions of the 1023. Even though the process of incorporation varies from state to state, it is generally the secretary of state that oversees the process. Costs can vary from $40-$400, so make sure to check your state’s websites for more information.
Legal council for this process is not required by the State or Federal government, but it is highly recommended. The process of creating your nonprofit, particularly when it comes to filing the official documents, can be a challenging process. Having a lawyer that specializes in tax-exempt organizations look over your documents will save you a lot of time and avoid an organizational headache.
The fees for the entire process of filing can range from $2,000-$5,000 but there are many more affordable options. For a lower fee you can consult online services (ranging from $200-$600) but we recommend using a legal aid center or law school clinic for support. These centers are usually run by probno lawyers or law students who are supervised by a higher party and offer their services for a reduced fee.
Pro Tip: Don’t forget to determine the cost of your time. Even if at this stage you are working pro bono, your time and skills have a cost that could be used elsewhere, or in a more efficient manner. Be sure to track your time, and optimize when possible. For example, if you are going to spend seven full workdays preparing your 1023, it may be in your financial interest to hire a professional to do it in one day.
Nonprofits are deeply committed to their cause, that is what drives them to reach their goals and defy all odds. A mission statement is a short paragraph that sums all of that passion up into a few sentences.
Having a strong mission statement helps you to explain your goals, values and positioning to the public. It is also a foundational tool that helps you define your nonprofit and how you are different from others in the same sector.
In your statement you should address the why, who, and how.
Why: Why were you founded?
Who: Who are you serving?
How: How are you pursuing your mission?
Trying to fit all of this into two or three sentences can be a healthy exercise for you and your team members. Thankfully we have some tips to make it a bit easier:
Keep it concise. Your mission statement should be limited to 2 sentences maximum.
Make it outcome-oriented. Use powerful verbs to put your words into actions.
Use simple wording. Direct language to avoid confusion.
Avoid generalizations or clichés. Avoid broad statements.
Avoid trends. Avoid trendy language and opt for timeless vocabulary.
Be inclusive. Don’t alienate a part of your potential supporters, include everyone.
Don’t do it alone. Get help from your team or board members.
Your mission statement can be produced directly after completing your needs assessment, while you have a clear understanding of what your community needs.
Pro Tip: Remember that your statement is not just for the general public but also something that is looked at when applying for funding, grants, even loans. It should have a dedicated place on your website as well as be present on all formal documents.
Now that you have done all of the background research, you are ready to tackle step two: the business plan.
Step 2: Creating a Business Plan
Starting a nonprofit is a lot of work. It is normal to get lost in the process, the paperwork, and administrative tasks on your to do list. One of the best ways to stay organized is to have a precise business plan that keeps you and your nonprofit on track.
Outside of it’s organizational perks, your nonprofit needs a business plan to break down some of the more difficult tasks when filing for tax-exemption or even your articles of incorporation.
It may seem arbitrary for a non-traditional business to spend time on such a task, but trust us, it’s worth it. As stated above, your business plan acts as a roadmap for your first few months of operation. It provides you a space to put all of your ideas onto paper, organize them and gives you an idea of what your future might look like.
In addition to helping you stay on track, a business plan is necessary if you want to gain any sort of public or private funding. Investors, funders, foundations, even banks want to know that their investment is safe and that they will see the results they expect from their donation.
After a video called "Start With Why" by Simon Sinek at a Ted conference in 2009 went viral, the concept of finding your "Why" and "How" have become household concepts. Sadly, very few nonprofits incorporate this strategy into their every business, communications, and operations when they are actually the most legitimate structures to use this technique.
The theory breaks down into the "What," "How," and "Why."
What = What you do
How = How you do it
Why = Why you do it
His theory argues that many traditional businesses don’t know the "Why" of what they do and it is the reason they see average results. Instead, they lead with the "What" which is uninspiring and produces mediocre outcomes.
The theory of "Why" is all about inversing the flow and having everything you do be led by your "Why." What is your purpose? Why do you get out of bed in the morning? Why does the public care? As you can see, nonprofits are the best form of business to use this technique because your whole structure is based on your "Why."
I know what you’re thinking, how does this relate back to my business plan? Good question. Your "Why" should be at the core of all of your actions, but your business plan in particular. It should be present in every part of your plan, including the major sections on your product/service and future strategy. You can even state your "Why" in the executive summary, which acts as a brief overview of your business plan. If you do, you will find that your plan embodies your mission, values and goals on a profound level. This will show and communicate to those reading it, giving you better chances at reaching your goals.
It can take some time to master this technique and way of thinking, but keep trying! Your "Why" is the reason you created your nonprofit in the first place and has a legitimate place in your business.
Step 3: Board Members
As an essential step of your nonprofits governance, recruiting, and maintaining your board is serious business. Your board is the backbone of your organization and acts as its governing body.
You must have your board recruited before filing for tax-exemption but we strongly recommend that you follow steps one and two beforehand.
Why? Your business plan and needs assessment can act as a considerable recruitment tool for your new members and shows that you have done the necessary work to become a legitimate organization.
Before jumping into recruitment, you need to decide on what kind of board you want:
Working board: A working board is a group of (essentially) unpaid staff members. They are very hands-on and handle a lot of the arduous tasks like fundraising, project management, or HR. When hiring for this board you are looking for hard skills that you and your current team might not have (i.e. accounting). For this reason, and because they are working on a volunteer basis, you are looking for someone who is committed to getting the job done, not just voting on external decisions.
Governing board: This is a more traditional form of governance where the board acts as overseers to the work being done internally. Their main roles are to vote and give their professional opinion on large strategic decisions. This structure is more common for large nonprofit organizations and the members generally have separate careers outside of the nonprofit sector.
While recruitment and engagement are key for a great board, you want to make sure that they are aligned with your organization’s values.
Values are core beliefs of your organization. They support your vision, mission and culture and reflect on your purpose. While these go hand-in-hand with your "Why," your values should also enable growth, transformation, and reactivation.
Many structures believe that values should come from the top and then be applied to the people employed by them and then lastly, those they serve. For nonprofit organizations, this traditional thinking isn’t ideal. Your purpose and "Why" is driven by a real need on the ground, therefore your values should reflect this. You can find out what your community and those you serve value, by gathering groups and leading a brainstorming session, or simply have everyone write down their top five values and see if any patterns arise.
Most traditional businesses have five to ten core values, but it is important to find what works for you! At AssoConnect, our three values are simplicity, excellence and benevolence.
Once you have your values decided, you need to put them into place. You can do this in many ways but here are our best practices:
Print them out in large format and put them in visible places in your offices
Post them on dedicated place on your website (i.e. your “About Us” page)
Use your values to express policy and procedure
Use your values to determine your yearly objectives
Reward those who embody your values
Evaluate the impact of putting your values into place
When people feel the values at the core of the organization, they are more motivated and connected to their work. Additionally, making complex strategic decisions should always begin with: "Does this opportunity align with our values?" If the answer is no, then your organization may be entering into a juncture that carries risk.
Pro Tip: Your board of directors should be the people that exemplify your organization’s values. They should promote them as much as possible and lead by example for others. If even one of your board members doesn’t align, it can create tension within your nonprofit and skew important decisions that may have a negative impact later.
Now that your board of directors is ready, you can pass to the final step: filing! May the odds be ever in your favor.
Step 4: Filing On The State and Federal Level
Take a deep breath, make some tea and strap in for the ride! This is where things can get a bit complicated. Don’t worry, we have every resource available to make this step as easy as possible.
Filing your nonprofit with the state and the federal government is getting their stamp of approval on all official documents in order to formally launch your operations.
Believe it or not, you have done a lot of the hard work already to get here. By determining the need, your purpose, and established a board of directors you have laid a great foundation to begin the filing process which happens in several sub-steps:
Establishing your Name
Applying for an Employer Identification Number
Writing your Bylaws
Filing your Articles of Incorporation
Filing your 1023 or 1023-EZ
Filing your 501c3 Application
Establishing Your Name
Your name is a huge part of your nonprofit’s identity and also necessary to be able to file on the state and federal level. Your nonprofit's name should be inspired by your previous work on your "Why" and values, therefore don’t hesitate to solicit your notes from those brainstorming sessions to get valuable insight!
Pro Tip: Don’t forget that your name must be the same on all official documents. This is very important, so keep the spelling simple and without accents if possible. Just one wrong letter or misplaced accent can cause the IRS to declare your application null and void and force you to apply again.
As for the name itself, you might have to try a few until you find the one that not only fits you, your organization, and your values but also one that evokes a positive image in the public sphere. Oftentimes, because you are an expert in your mission and sector your name might be very clear for you, but holds a completely different meaning for those outside of your circle.
Remember that those who will be donating to your organization are most likely passionate about your purpose but are likely not scholars on the different subjects you may be addressing. You want your name to be a clear and simple representation of your community. To avoid this confusion, don’t hesitate to harness the power of social media and your community to test out several different names and let them choose!
Once you have your winner, we strongly encourage you to proceed with a trademark. While it brings legitimacy to your brand, it also protects your idea against infringement. That basically means that if someone tries to use your name for their brand, you can proceed with legal action.
Applying For An Employer Identification Number (EIN)
Even if you are not planning on hiring employees right now or even in the immediate future, you must have an EIN in order to register your nonprofit. Your EIN is a unique number that identifies the organization within the IRS.
In order to apply, you must fill out the SS-4 form, read the instructions and apply for your EIN by phone, fax, postal service or online.
Be aware that your EIN is not your tax-exempt number. Your tax-exempt identification number comes after you have sent in your 1023.
If you have any questions about this process, we highly recommend that you consult a lawyer to verify your application.
Writing Your Bylaws
The IRS considers your bylaws as the "Internal Operating Rules" of your organization. In layman's terms, they are the guidelines for your nonprofit organization and generally need to be agreed upon before beginning the filing process.
Be careful when constructing your bylaws as the regulations vary by state, so double check your requirements before beginning the process.
There are many different aspects to include in your bylaws that you have previously determined like your name, board roles, and board responsibilities. While there are an unlimited number of sections you can add, there are a few that are required.
Committees: This section needs to detail any committees you may already have and any that would like to create in the future. Your bylaws should detail when they will meet, who can be involved and any rules regarding committee rights.
Bookkeeping & Misc: This section tells the government if you will be working on a calendar or fiscal year and is a blank space for any other sections you would like to add (i.e. founder’s clause). While not obligatory, we suggest that you also think about adding a section on conflicts of interest.
Transparency: As a nonprofit, some of your documents like your financial statements and board meeting minutes are considered to be public information. In this section you must include a confirmation that they are available for public use and where they can be found (i.e. on a dedicated website page).
While this may seem like a lot of information to have early on, especially if you are in the very beginning stages of your nonprofit career, know that you can always amend your bylaws. They can be changed at any time but all significant changes must be declared in the Schedule O of the 990 form. For that reason, we recommend updating only once a year to avoid confusion and federal complications.
Filing Your Articles of Incorporation
Your Articles of Incorporation are the next step in the filing process and require you to have your address, board of directors, bylaws, and name prepared beforehand.
When you file your articles of incorporation you turn your organization into a legally formed entity. This structure is required for most 501(c)(3)’s, so be sure to double-check with your local state offices if you are registering under a different status.
A little word of warning: Your articles of incorporation need a certain type of language required by the IRS. Some states do not require it, but it will become necessary when you file for tax-exemption (the next step). If you do not use this particular language now, your application for tax-exemption will most likely be denied and you will be required to amend your articles of incorporation. For all the details regarding your articles of incorporation and IRS language, read this article.
Please note that it is not recommended to incorporate outside of the state you operate because the filing fees may be cheaper. You will still be required to incorporate and file for tax-exemption in the state you operate in so avoid the headache (and double fees) by incorporating in the main state you are operating in.
Filing Your 1023 or 1023-EZ
The 1023 form is the Everest of nonprofit administration. Many nonprofits struggle with this form as it is long, extensive, and requires IRS language that is fairly elusive to the regular user.
The major takeaway is that there are two different types of the 1023 form: the 1023 (longform) and the 1023-EZ (streamlined). While they both have the same goal of getting your organization a tax-exempt status, the applications are quite different.
The 1023 longform is 40 pages long and costs $600 to file. The questions are extensive but the IRS provides a series of detailed instructions with examples that you can use for inspiration. Just like your articles of incorporation, be sure to be strict with the use of the sample language provided in the instructions.
A few years ago the IRS created the 1023-EZ to help small nonprofits that fit certain criteria gain their tax exemption faster for a lower financial burden. The 1023-EZ is only three pages long and costs $275 to file. The form mainly consists of checking boxes and drop-down lists. While this is an excellent option, be sure to read the fine print and use the IRS eligibility worksheet to see if you qualify for this service.
One of the pitfalls with this service is that, much like TurboTax, it is a one size fits all solution. Because of the rapidity of filing, you can expect an audit down the line to verify that you are compliant with federal and state restrictions.
Pro Tip: We highly recommend having a professional attorney that is specialized in tax-exempt organizations look over your application before submitting. As this is a key step in registering your nonprofit, tackling the major issues beforehand will avoid unnecessary back-and-forth with the government.
Filing Your 501(c)(3) Application
You made it! The hardest part is over. The 501(c)(3) application consists mainly of gathering the documents you have prepared thus far and sending them to the appropriate party.
What you need to include:
1023 or 1023-EZ
Organizing documents, (i.e. articles of incorporation) that have been approved by the your operating state
Financial information (i.e. business plan)
New organizations must provide financial statements for the current year and budgets for the next two years
Organizations with three or more years of existence must include financial statements for the current year and the previous two years
Bylaws if have been adopted and approved
We will keep repeating it for good measure, but make sure you have a professional look over all of your documents to make sure everything is within state and federal regulation.
Congratulations! You now know how to start a nonprofit in 4 steps. Your passion led you here and we are excited to see how much you accomplish. Let us know more about the nonprofit you are starting in the comments below!
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