Nonprofit Organizations: What Are They?

If you're wondering how to start a nonprofit organization, you probably already have a good idea what a nonprofit organization is. If not, here’s a brief description. A Nonprofit organization (also known as non-business entity or NPO) is an organization that does not earn profits for its owners. Instead, the profits earned, or donations taken in, by the NPO are used to fund the programs and objectives of the NPO. Most nonprofit organizations are charitable, religious or scientific in nature. NPOs are usually tax exempt, that is, they are not required to pay taxes on moneys earned or otherwise taken in.

This federal government website lists the categories of organizations that the government recognizes as nonprofit, including some groups you may not expect, including: charitable and religious organizations; veterans organizations; social welfare organizations; labor and agricultural organizations; and business leagues.

Steps for How to Start a Nonprofit Organization

There are several steps involved in creating a nonprofit organization, more than are required for creating a for-profit company. Making even one mistake in creating your nonprofit can damage your chances for success, so it is important to follow these steps as thoroughly and completely as possible:

1. Perform Research

Doing your homework is the most important part of starting a nonprofit. You need to determine the issues that your organization will address and decide if there's actually a need to address those issues in your community. If there's not, or another organization is already providing help, your nonprofit may find it difficult to survive. You also need to be sure that your organization will qualify as a nonprofit, meaning that its earnings and the donations it collects will be tax-exempt under section 501(c)(3) of the Internal Revenue Code.

You may also want to consider an NPO alternative, such as setting up an unincorporated nonprofit association, or becoming an affiliate or local chapter of an existing NPO. Such alternatives may allow you to avoid the time and effort required to create an NPO while still meeting your goals.

2. Build Organization Structure

Before incorporating your nonprofit, you need to build the structure of your organization in a way that will ensure its effectiveness and sustainability. The first step will be to come up with an appropriate name. The best names are those that are creative and unique, and that communicate to the public your organization’s identity and purpose. In most states, the name must not have been previously taken by another corporation, and may not contain state designations (i.e., United States, Reserve, etc). You may also be required to include a designation, such as Inc., Corp., etc.

The next step in the building process is to draft a mission statement for your organization. Your mission statement will include a clearly-stated purpose for the NPO’s existence, as well as a general description of what the organization will do to help people and carry out its purpose.

Next, you will need to create a business plan that explains, in some detail, how you intend for your organization to operate to successfully meet its goals.

Finally, you will need to appoint your organization’s board of directors. An NPO’s board of directors typically consists of at least three officers (President, Secretary and Treasurer) but may include others. Your board of directors will assist you in drafting your NPO’s bylaws, the rules under which the board will function.

3. Incorporation

Incorporating a business requires that you follow the procedures of, and file the proper paperwork with, the state in which you choose to incorporate. Specifically, you will file formal incorporation papers, or articles of incorporation, as well as pay a small fee, with the Secretary of State’s office in the state where your NPO will operate. By filing for incorporation, you gain legal protection for your nonprofit status. Further, filing for incorporation is required for your NPO if you intend to obtain tax-exempt status.

The incorporation process is similar in most states. The IRS provides incorporation contact information for the officials in each state who can help with the incorporation process. The following are the incorporation steps common in every state:

  • Choose a legal structure: Since you already have your name and board of directors, you will next need to choose the right legal structure for your NPO. Nonprofits are usually either trusts, corporations or associations. Research each to see which structure provides the best fit for your organization.

  • File incorporation paperwork: The exact process for filing your paperwork varies from state to state. Check with the National Association of State Charity Officials for your state’s specific filing requirements. Your filing will include, among many other documents, a copy of your NPO’s articles of incorporation, as well as an application for an Employer Identification Number (EIN) .

4. Apply for Tax Exempt Status

After incorporating in your state, you can apply with the IRS to become a 501(c) tax-exempt nonprofit organization. Publication 557 will tell you whether you should fill out either Form 1023 (for charities) or Form 1024 (for non-charity organizations). You will also need to file a Form 2848 (power of attorney) if you have an attorney represent your NPO in the application process. Expect the decision by the IRS on your NPO’s tax-exempt status to take from three to twelve months.

5. Develop Fundraising Plan

Funding a nonprofit can be more difficult than with a traditional organization. Once you have received tax-exempt status, you may wish to begin your fundraising efforts by applying for federal grants or private foundation grants. Many states require NPOs to file for Charitable Solicitation and Fundraising registration before starting fundraising efforts.

6. Obtain Other Necessary Licenses and Permits

You may need to obtain additional licenses and permits from state or local government agencies in order to solicit funds or conduct other business within those jurisdictions. The Small Business Administration (SBA) maintains licensing information for every state.

7. Maintain Compliance

Every state government has an agency, typically the Attorney General’s office, that monitors the activities of nonprofit organizations within the state. You will need to make sure that your NPO continually maintains compliance with all rules, regulations and licensing requirements in every jurisdiction in which it conducts business or solicits donations. Also, make sure to always file all required tax forms with the appropriate federal, state and local agencies on a timely basis.

Reasons to Consider Starting a Nonprofit

  • Tax incentives.

  • Ability to help your community.

  • Limited liability under the law.

  • Ability to obtain grants from both public and private sources.

Reasons to Consider Not Starting a Nonprofit

  • Very little monetary incentive: If your plan is to bring in substantial revenue for yourself, a nonprofit may not be the route to take. Consider creating a for-profit business that can accomplish the same goals.

  • Little time to commit: Creating and running a nonprofit normally requires more time and effort than with a traditional company. If you cannot dedicate the time necessary for running your NPO properly, failure to successfully meet your goals is, unfortunately, the most likely outcome.

Common Mistakes

  • Choosing the wrong officers for your board of directors: You are going to need officers on your board who are talented, experienced, and have access to a broad network of resources helpful to your NPO. Stocking your board with friends and family members is almost always a mistake.

  • Not getting help: Starting your NPO will not be easy. Don’t hesitate to seek out help -- financial, legal, or otherwise -- whenever you feel you need it.

  • Not considering all funding options available: It's nice to think that you will be able to fully fund your NPO through individual private donations. Unfortunately, that’s rarely the case. Always consider funding through other sources, like government, public and private grants.

Frequently Asked Questions

  • Do I have to incorporate my nonprofit organization?

Not necessarily. But you will need to incorporate if you intend to obtain tax-exempt status.

  • Which corporate structure should I choose?

It depends on your NPO’s specific needs and goals. The SBA provides information on legal structures that can help you with your choice.

  • How much should my NPO’s CEO be paid?

There's no set amount that the public considers appropriate when it comes to NPO salaries. Just make sure that the salaries you pay your CEO and other executives are reasonable and appropriate to the your NPO’s goals.

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