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How to Start a Nonprofit Organization

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"How do I start a nonprofit?" Because that is one of the most frequent questions we get asked, we thought we would share this five-step outline from a graduate-level class on how to create a charitable nonprofit organization. As you will see, starting a nonprofit requires much more than just filing out a set of simple forms. 

Step 1: Learn the True Facts & Consider Easier Options

Even before Dr. Paul Light predicted in November 2008 that within the next 6-24 months the brutal economy would wipe out more than 100,000 nonprofits, we offered a warning that people needed to think things through very carefully before starting a nonprofit. Now, we want to reiterate that warning. Harsh times hurt nonprofits, too, and history tells us that the nonprofit sector normally is the last to emerge from bad economic times.

So the first thing to do is to learn the true facts. Get past the myths and weigh all of the legal, regulatory, administrative and financial burdens that can be very difficult to manage. There are already more than one million charitable nonprofit organizations working on arts, culture, education, the environment, animals, health care, human services, international and foreign affairs, social justice and advocacy, religious causes and much, much more.

The second thing to do is ask yourself whether there are easier options to accomplish your goals. For instance, consider partnering with an organization on a special project you develop, volunteering with a group or joining their board of directors or staff. You also can consider starting a chapter of an existing national organization, convening an unincorporated club or association or, if you want to finance scholarships or emergency funds, setting up a fund at a local community foundation. All these are great alternatives to starting your own nonprofit.

Most experienced people teaching others how to create a new nonprofit devote a substantial amount of time trying to persuade people that creating a nonprofit may sound like a good idea, but it is an idea that needs deeper exploration. The following questions may help you wrestle with the idea of whether creating yet another entity is the correct path for you:

"Are we looking past the myths to the realities?"

Many people have misperceptions about nonprofits, as evidenced by reasons some have given for attending a class on how to start a new nonprofit, including:

  • "Running a nonprofit is cushy because people just give you money" (fact: even the most sympathetic nonprofits have to work hard to earn contributions)
  • "Once I get nonprofit status, I can stop paying taxes" (fact: while the nonprofit doesn't pay taxes on income it receives, its employees still pay taxes on the income they earn, just like employees in the business sector)
  • "Running a nonprofit is easy and not like a real job because everybody is happy and wants to help" (fact: operating a successful nonprofit requires substantial work; while it can be very fulfilling, it is challenging to do so much work with so few resources)
  • "No one else is doing what we want to do" (fact: although it may feel that way, the odds are that multiple nonprofits are doing the same or very similar programs - especially when those making the statement are interested in programs for children, seniors, or animals).

"Where will we get not only start-up funding, but also operational funding to continue thereafter?"

Realtors stress "location, location, location." Creators of nonprofits need to get used to another mantra: "funding, funding, funding." Given the ever-growing competition for limited funding, make sure you have realistic plans for not only start-up funding, but also how you will secure funding thereafter. Avoid the common mistake of believing that your idea is so unique and wonderful that funders will throw money at you. That just doesn't happen. Really. Pragmatically explore where you will get funding, because it makes little sense to go through the time and expense of creating a new nonprofit if it won't be sustainable.

"Who wants to help fine-tune our business plan some more?"

To be successful, a nonprofit needs more than just people passionate about programs. It also needs an infrastructure strong enough to support those programs over time. Accordingly, invest quality time up front to develop a detailed business plan. Such a plan will provide the structured discipline to think through the critically important operational issues. Moreover, once the business plan exists, excerpts can be pulled from it to insert into the federal Form 1023 application for tax-exempt status.

"Do we really know what we are getting ourselves into?"

Even before creating a nonprofit ask this question, because once you incorporate at the state level and secure tax-exempt status from the federal level, then the real heavy-lifting begins: both internal (such as recruiting and orienting a great board, hiring talented staff, finding and equipping an office, setting up financial structures, etc.) and external (such as registering with the state before you can fundraise, launching your fundraising program, securing any required licenses or permits, making withholding tax deposits, and so much more). Plus, given the heightened scrutiny of nonprofits, you will need to have an ethics accountability program in place (including policies regarding conflicts of interests, compensation, travel, whistle-blower protection, and more).

Of course, there is no better teacher than experience. To get help - give help. By volunteering for other nonprofits, you will do three things: help develop your expertise, help make new contacts that may enable you to release your passion through an existing nonprofit, and help you make a difference today.

Step 2: Think, then Think Harder - Be Disciplined with the All-Important Preliminary Work

If you really have thought things through and determined that you truly need to create yet another nonprofit, then think like a reporter and ask these six basic questions:

WHO? Who will be involved?

Just as it takes "takes a village to raise a child," it takes much more than a solo founder to keep a nonprofit alive. If the only people excited about this idea are the founder and his/her family members, then perhaps this is a good idea for a for-profit rather than a nonprofit. Having lots of people willing to help launch a nonprofit - as board members, volunteers, etc. - can signal broad community support. So look around to see who supports creating a new nonprofit.

WHAT? What do you need to do?

  • Determine feasibility - Consider the economic climate and real facts
  • Think ahead to normal evolution of a nonprofit
  • Develop a detailed strategic plan with multiple parts including amission, organizational structure, 3-year budget, fundraising plan, marketing plan, business plan, governance, and staffing.

WHEN? When should you file paperwork?

Generally speaking, you can think of the paperwork process as involved five phases:

  • Phase I: Incorporating at the state level
  • Phase II: Securing your tax exempt status from the federal government
  • Phase III: Filling out your operational paperwork at the state and local levels
  • Phase IV: Completing your internal paperwork
  • Phase V: Ongoing and never-ending reporting

WHERE? Where can you get QUALITY assistance?

For help filling out and filing the mountain of papers at the state and federal levels, make sure you turn to true experts, not just friends who are free. Your next door neighbor just won an award for her skills as a lawyer, yet being "Drug Prosecutor of the Year" doesn't mean she knows anything about nonprofit law. Traditionally, law schools have not offered courses on nonprofit law, meaning most lawyers don't have training unless they have chosen to specialize to some degree in this area of practice. Seek help from an attorney or accountant who actually has direct experience working with nonprofits.

WHY NOT other options? Why shouldn't you create a nonprofit?

Keep your mind open to the larger question of whether you should create a new nonprofit or 
consider other options besides creating a nonprofit: share your idea with existing nonprofit; volunteer to create your idea as a new program; become an employee to launch your program

HOW? How do you create and sustain a nonprofit organization?

This may be the most important question and the answer depends on your business plan.

Step 3: State Forms (Start-Up Filings)

Welcome to the Land of the Forms:

Laws and regulations on starting a nonprofit organization vary from state to state. Below, we have provided a very short general primer to help get you started, although you will need to review the specific requirements in your state.

  • Reserve/register intended name (normally not a requirement, just an option)
  • File Articles of Incorporation
    • cover sheet
    • articles
    • certificate of disclosure
    • proof of corporate name
    • filing fees
  • Extra steps, depending on state
    • For example, in many states you must publish your of articles of incorporation a certain number of times in a local newspaper and then file proof of publication with a state agency
  • Governance Package

Step 4: Federal Filings

  1. Form SS-4 [PDF]: Federal Employer Identification Number ("EIN") (needed for IRS, bank, other)
  2. IRS Form 1023 [PDF]: Application for Recognition 
    1. Get Instructions Package 1023
    2. Get Publication 557
  3. IRS Form 2848 [PDF]: Power of Attorney
  4. IRS Form 5768 [PDF]: 501(h) Election to Make Expenditures to Influence Legislation

Step 5: Heavy Lifting - Initial Start-Up Operations

State and Local Government Filings

  1. Before starting operations, review state and local laws to ensure compliance on topics including, but not limited to:
    • register (if necessary) before starting any fundraising 
    • register (if necessary) before engaging in any lobbying
    • secure (if necessary) permits and licenses required because of:
      • goods or services provided (e.g., health care);
      • types of clients served (e.g., fingerprinting of employees dealing with children); 
      • types of employees hired (e.g., educators or health care providers); and 
      • location (e.g., zoning in certain areas)
  2. Complete state tax exemption requirements (usually must wait until IRS acts)
  3. Register (if necessary) for unemployment insurance and reporting to officials
  4. Register (if necessary) to secure any additional tax exemptions (e.g., property tax, sales tax collections, exemptions from paying sales tax)

Heavy Lifting

  1. Initial internal issues
    • structural - staff, space, services
    • set up systems and policies - 
      • accounting
      • fundraising (e.g., that required legal disclosures are made)
      • human relations - for volunteers and paid employees (e.g., rebuttable presumption & intermediate sanctions rule)
    • insurance
  2. Regular activities
    • tax withholdings
    • board meetings
  3. Quarterly - e.g., reporting taxes withheld (federal/state/potentially local)
  4. Annually
    • file annual report with state government
    • File Form 990 information return with IRS (and any similar form required by the state)
    • re-register any required items (e.g., charitable solicitation)

If, after careful consideration, you believe you should start your own organization, contact your local state association of nonprofit organizations for guidance on state laws and regulations.

Once you've formed your new nonprofit, join your local state association of nonprofits and tap into the resources, training, networking and information they can provide.

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Where to Get Help

  • Professionals (who actually have expertise regarding nonprofit organizations)
    • Attorneys
    • Accountants
    • Other consultants
  • State
    • Appropriate state agencies
  • Federal
  • Other
    • State nonprofit association
    • Written resources ( published and on-line)
    • Live training 
    • State university's nonprofit program (if it exists, sometimes training)
    • Local libraries (sometimes on-line guidance)

 

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