How to Start a Nonprofit Organization: Everything You Need to Know
A Nonprofit organization (also known as non-business entity or NPO) is an organization classified by federal law that does not earn profits for its owners. 3 min read
How to Start a Nonprofit Organization
Ascertain how to start a nonprofit organization by first understanding what it is exactly. Nonprofit organizations invest profits back into the organization rather than distributing profits to the business owner. There are four main types of nonprofit organizations:
- Trade associations. These are organized to serve the interests of a specific trade or profession.
- Charitable organizations. Charitable organizations serve a public purpose. These include organizations dedicated to remedying a social problem or promoting some social good. Museums, libraries, educational institutions, environmental groups, and outreach groups are examples of charitable organizations. Charitable organizations also include religious groups.
- Social clubs. Fraternal organizations and country clubs can often classify as nonprofit organizations.
- Political Groups. These are nonprofits that exist to promote and are organized to endorse certain politicians or government policies.
Should I Start a Nonprofit Organization?
If an organization is intended to serve a specific interest or the public at large, rather than to accrue profit for the owners, organizing as a nonprofit may be a good decision for tax purposes. However, another element of being a nonprofit that needs to be considered is that nonprofits must have an autonomous Board of Directors that dictates the organization’s policy. Therefore, when a person chooses to organize as a nonprofit, they will not be able to have full control of the direction and agenda of the organization.
Do Your Homework
Before making a decision, do research and really analyze your options. Understand that there are very particular rules governing how nonprofit organizations must be organized under state laws and under the IRS regulations. The IRS classifies nonprofits in Section 501(c)(3) of the IRS Code.
Build a Solid Foundation
A nonprofit should be guided by a mission statement. A compelling statement will convey the organization’s goals and purposes, and how the organization intends to fulfill those goals and purposes. A nonprofit should also have a business plan that sets forth the financial costs and revenues that are expected.
Every nonprofit is required to have a Board of Directors. This governing Board sets out the agenda of the organization and outlines the managerial strategies that will apply. Board members should be carefully chosen, have an interest in the work of the nonprofit, be knowledgeable about that work, and be regularly engaged in what the nonprofit is doing.
Incorporate Your Nonprofit
It is generally best for nonprofits to be incorporated. An incorporated nonprofit is generally seen as more credible, and incorporation limits the liability of the nonprofit’s Board of Directors. Incorporation occurs at the state level.
File For 501(c)(3) Tax Exempt Status
Nonprofits should apply for tax exempt status under IRS Code 501(c)(3). The fee to apply for this tax-exempt status is several hundred dollars and can take several months to be processed.
All nonprofits have certain annual reporting requirements. Form 990 must be filed with the IRS. These forms are made public and show an organization’s finances and management structure. State governments may also have annual reporting requirements.
Where Will I Get Funding?
The most difficult challenge that nonprofits face is financial sustainability. Like any other organization, nonprofits must have a good business plan and a good stream of revenue. For-profit organizations can attract funding from investors that want to turn a profit. Nonprofits cannot do that. Instead, funding must come from people that believe in the nonprofit’s mission.
Can My Nonprofit Demonstrate Its Impact?
It is important for a nonprofit to develop some way of measuring the benefit it is causing.
Is This the Right Solution for My Community?
A nonprofit should be accountable to its community and include a mission statement that is in line with the community.
Table of Reminders for Registering Your New Nonprofit in the United States
- A bank manager that understands nonprofits can help with funding.
- Consult with an accountant and a business attorney.
- Have ongoing service from an accountant that understands how nonprofits operate.
- A nonprofit may need liability insurance plans in place.
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