9 Steps to Starting Your Own Nonprofit
If you are passionate about improving your community or desire to make a difference in the world, then forming a nonprofit corporation could be the right choice for you. A nonprofit is just that—not for profit, which means any extra profit and income may not be divided up and distributed amongst members at the end of the fiscal year. While your nonprofit organization can most certainly have employees, all leftover revenue is meant to support the cause for which the nonprofit was formed. So if the nonprofit corporation had a net income at the end of the year of $100,000, it would pay federal and possibly state corporate income tax rates for that $100,000 because it has no shareholders for that profit to be distributed among. This is why many nonprofit corporations that have a tax-exempt purpose utilize a 501c3 designation with the IRS, becoming exempt from paying taxes on that $100,000, so they can keep as much of the money they collect as possible and use it to further their organizational purpose.
When you decide to form a nonprofit, be aware that there are changing factors from state to state for nonprofit corporations. Each state is different and it is highly important that you contact the correct offices, obtain the right registrations, and make sure that you are operating in compliance with your state’s specific rules.
These steps will get those who are passionate about a cause either in their community or beyond on the right track to making a difference by way of a nonprofit corporation:
1. Name your nonprofit.
The name requirements vary, so research your state’s guidelines for what’s appropriate when it comes to naming your nonprofit. The differences in name requirements can be down to the word or letter, so pay close attention to detail. All states do require, however, that the name of the nonprofit is not deceptively similar to or the same as the name of another nonprofit or other business entity already registered to do business in that state. Many states give you the option to do an entity name search via their government website. As a new nonprofit without a lot of name recognition, you will find fundraising easier if the name of your nonprofit is relevant to the purpose of your organization.
2. Organize your team.
It is important to gather a team of like-minded individuals who will work together towards the same goal. Gather a group who is motivated and wants to achieve the same things, and is passionate about the purpose of the nonprofit. Figure out who is going to do what within the nonprofit: who is going to take care of legal paperwork and compliance reports, who is going to fundraise, who is going to manage employees, who is going to be the leader, who is the good communicator, who is going to be in charge of operations, etc. It is wise once you have assembled your initial team to outline what skills you are missing and search out possible candidates that have these skills and interests. Many business owners will be more than happy to be on a board and help with something they are good at if they share your concerns and vision. Your nonprofit will need incorporators (the person(s) or professional service who files the articles of incorporation with the state to legally form the corporation), directors, and other board members in order to legally operate.
3. Draft Bylaws
Create laws for your nonprofit. These are referred to as bylaws. They will not only help govern your nonprofit organization’s daily routine and actions, but they will also dictate how officials are elected within your nonprofit and will need to elaborate on how assets will be distributed should your nonprofit dissolve. It is wise to seek the legal counsel of an attorney who is well-versed in the law of the state in which you are forming your nonprofit, or use a comprehensive nonprofit corporation bylaws template to guide you. When it comes time to apply for federal tax exemptions, the bylaws will need to be attached to the application. An important note about nonprofit corporation bylaws versus for-profit bylaws is a for-profit corporation generally has the power to operate in whichever way they please unless the bylaws eliminate this power. The same goes for the board of directors and officers of a for-profit corporation. Because a nonprofit corporation will typically attempt to obtain tax-exempt status, the IRS will look for specific intentions and language concerning the purpose and goals of the nonprofit. The IRS will want to see a short set of very specific reasons the nonprofit is formed in order for it to obtain tax-exempt status The primary importance of nonprofit corporation bylaws is to specifically set forth a few powers that the nonprofit corporation and its directors can do and eliminate the rest to comply with the IRS standards for tax exemption.
4. Have a registered agent.
You must have a registered agent in order to operate a nonprofit, or any US business for that matter. The registered agent is the individual person or business entity that accepts official state documents on behalf of your nonprofit, such as service of process. Some states allow you to be your own registered agent, and some do not. For nonprofits that are made up of volunteer board members that have regular jobs, hiring registered agent services from a company is particularly important in order to avoid having board members personally be listed as the agent and having to list their personal residence address. Nonprofit boards can change frequently, and having to update registered agent addresses with each change of the board can be time-consuming and cause vital state notices to go to old addresses or board members that might not be involved in the nonprofit anymore. Many professional registered agents will also provide compliance tools to help remind the board of due dates. A registered agent service should have an online system to input all the emails and contact info of the board of directors to make the process seamless.
5. Incorporate your nonprofit.
You will need to file formation documents in the state in which you are incorporating. In most states these are called the articles of incorporation. Generally you will file with the secretary of state or attorney general, though that is subject to differ depending on state. Most states have official incorporation documents you can download or file online, though Nebraska and Iowa do not. Check out the secretary of state’s website in the state in which you are incorporating and you will find more detailed, specific information concerning incorporation in that state. You must make sure to include specific language stating the charitable purpose of your nonprofit on your articles and bylaws, so that you may file for and receive federal tax-exempt status. The IRS has specific laws dictating what language must be used.
6. Hold an official meeting.
At this meeting your team will officially adopt the bylaws for your nonprofit. At this meeting you will also officially elect the directors and the other officers (such as president, secretary, treasurer, etc.) needed to run your nonprofit. You will be specifying important things like the real purpose of the nonprofit and making any corporate resolutions needed to complete the process of starting a nonprofit.
7. Apply for tax exemption.
As a non profit, you can apply for 501c tax-exempt status at the federal level with the IRS. You will also need to obtain an Employer Identification Number (known as an EIN) from the IRS. The EIN will be used forever to identify your business and you will need one if you hire employees or open a bank account, and for the filing of tax returns. Often, applying for federal tax-exempt status will enable your nonprofit to be eligible for other state tax exemptions as well. Many states do not have processes anything like the IRS. Many states you will just fill out a simple application and include the status letter the IRS gave you showing tax exempt status.
8. Be aware of strange requirements.
Arizona, Georgia, Nebraska, Nevada, New York, and Pennsylvania all require that new businesses publish in a newspaper before operating in that state. Also, certain states require an initial report to be filed as opposed to just an annual report. There are also certain permits and licenses that must be obtained depending on the state and the city in which your nonprofit is operating.
9. Start raising money for your cause.
Many states require registration with either the secretary of state, attorney general, or another state office that deals with charities and charity registration. This generally must be done before your nonprofit organization holds its first fundraiser or starts accepting any donations. It is important to have this registration because not only will it help legitimize your nonprofit in the eyes of the donors, but having this certification will allow donors to deduct their donation.