Starting a nonprofit is similar to starting a for-profit business in that you need to file specific documents, hire staff, and secure funding. However, many people believe that nonprofits are even more difficult to get off the ground than LLCs.
In this article, we’ll cover all the basics you need to know to start a nonprofit, as well as some tips you can use to help maintain and grow your organization.
What is a nonprofit organization?
A nonprofit organization is a not-for-profit entity that is formed and operated to benefit a collective need.
For-profit businesses make profits to benefit themselves, while the main goal of a nonprofit organization is to help others. Another distinction between the two is that a for-profit business has to pay taxes, while most nonprofits qualify for a tax-exempt status.
Nonprofits include public hospitals and clinics, research centers, museums, volunteer services, civic organizations, public charities, public schools, humanitarian aid organizations, and more.
Some examples of the better-known nonprofits include World Vision, Doctors Without Borders, the American Cancer Society, Habitat for Humanity, Children’s Miracle Network, and many others. But there are numerous smaller nonprofits serving their communities every day. In fact, according to Statista, there are 1.54 million nonprofit organizations operating in the U.S. with revenues totaling $2.62 trillion.
Can nonprofits make money?
Nonprofits fundraise to generate the revenue needed to accomplish their goals. In a for-profit company, excess revenue is distributed as profits to the company owners. In a nonprofit, all revenue is split between operations and programs. Operations can include things like salaries, marketing, and fundraising costs. Programs include what most people think of as the “work” of nonprofits—handing out meals for the homeless, teaching ESL classes to immigrants, or offering cancer treatments to children.
3 types of nonprofits to consider
There are many options when forming a nonprofit organization. Here are three of the most common types.
A 501(c)(3) organization is the most common type of nonprofit. Most educational, scientific, and religious organizations fit into this category.
Some examples of 501(c)(3) nonprofits are the Boys and Girls Clubs, public elderly care homes, and churches.
You’ll need to file Form 1023 with the IRS to apply for tax-exempt recognition federally. Once approved, you can apply for tax exemption at the state and local levels. Finally, there are continuing requirements that must be met to keep your tax-exempt status.
Best for: Charity organizations
501(c)(4) nonprofits include community, social welfare, and political and lobbying organizations.
Examples of 501(c)(4) organizations include but are not limited to civic organizations, like the Kiwanis or Rotary clubs, and volunteer fire departments.
501(c)(4) organizations aren’t eligible for a charitable income tax deduction, but a 501(c)(3) is. Another difference is that a 501(c)(3) organization must receive public support from many donors, whereas a 501(c)(4) only has to receive funding from one entity or individual.
The biggest difference is lobbying limitations placed on each type of nonprofit. A 501(c)(3) is only allowed less than 5% of its activities to involve lobbying, while a 501(c)(4) can devote all of its time toward lobbying.
Best for: Social welfare and political/lobbying groups
501(c)(7) nonprofit organizations include social and recreational clubs such as college fraternities, country clubs, hobby clubs, and alumni associations. The primary distinction of a 501(c)(7) nonprofit is that it must derive its income from its members to receive a tax-exemption status. Income received outside of the membership doesn’t qualify for tax exemption.
Best for: Recreational clubs
How long does it take to start a nonprofit?
The amount of time it takes to start your nonprofit organization can depend on many variables. Technically, you can start your nonprofit in one to three days. But qualifying for tax-exempt status is another matter.
There are various forms, attachments, and schedules that often go into IRS tax-exempt applications. In the end, you might need to submit 100 pages and if there’s one mistake in your application, it can cause a delay or the IRS can deny your application altogether.
The anticipated annual revenue of your organization can also impact how long it takes to start your nonprofit. Organizations that expect less than $50,000 in annual revenue can be fast-tracked through the IRS system, while those with higher revenues may take longer.
When all is said and done, the average time it takes to start a nonprofit is about three to four months.
How to start a nonprofit
Here are the steps you can follow to form your nonprofit organization.
1. Research the need for your nonprofit
Research and ensure your nonprofit idea is feasible and can be successful. To determine this, ask these questions and answer them honestly.
- What problem are you solving?
- Are there other organizations that do something similar?
- How will you gauge impact?
- Is nonprofit the right fit for your organization?
- How will you fund your organization?
- Do you have people ready to join your board of directors?
- Are you ready to hire your first employee(s)?
- What are the costs to start your nonprofit?
- Incorporation costs
- 501(c)(3) status
- Staffing needs
- Remote work tools/office space lease
2. Define your nonprofit
Every nonprofit begins with identifying its purpose and values. Build a strong foundation by using some of your answers to the questions in Step 1.
● Assign a name for your nonprofit
● Craft a solid mission statement
● Create an ideal supporter profile (think of like-minded people who will want to help launch your nonprofit)
● Elect a volunteer board of directors who are committed to your mission
● Create a brand identity
● Outline a business plan to grow your nonprofit and secure funding. Include the following:
○ An executive summary: Talk about your nonprofit’s purpose and mission, goals, community impacts, and the services you’ll provide.
○ Competitive analysis: Show how your nonprofit can fill any gaps that are unmet by your competitors.
○ Organizational structure and plan: Outline how you’ll operate your nonprofit and who it’ll help.
○ Financial plan: Lay out how you’ll fund your nonprofit to keep it operational in the short and long term, whether through donors, grants, or other means.
3. File your incorporation paperwork
Required documentation for starting your nonprofit varies by state and by the type of nonprofit. Contact your state business filing office or a CPA to determine which forms and documentation are needed to qualify for incorporation.
There may also be licensing requirements and associated fees with each filing. Some states my require you to publish the articles of incorporation in your local newspaper.
If you haven’t already done so, file for tax-exempt status and an EIN. Note that you won’t be able to file for local or state exemption until after the IRS has acknowledged your tax-exempt status with a Determination Letter.
4. Hire initial staff
Once your nonprofit is designated as a not-for-profit organization, it’s time to hire workers to help run it. Select staff members who are as passionate as you are about your nonprofit’s purpose and try to match key members with roles that complement their skill sets. Be sure to prioritize roles that will help get your organization off the ground. It’s also important to consider compensation and budget when hiring so not to overextend your finances before you get going.
Some critical roles might include:
- Communications and PR
- Finance and accounting
- Event coordinator
5. Secure funding
You’ll need startup funding for your nonprofit, as well as continuous funding to keep your nonprofit going. There are many ways to get funding for your nonprofit, including:
● Individual or corporate donations
● Fundraising events
● Membership fees (for membership-based nonprofits)
6. Maintain tax-exempt status
It’s essential to stay up to date with bi-annual or annual state and federal tax filings to remain in good standing as a nonprofit and maintain your tax-exempt status.
Keep detailed records of all organizational activities, including revenue and expenses, donation allocations, and funding you receive. These will provide the necessary documentation for all your filings. Make sure your tax filings are accurate and on time so you don’t lose your tax-exempt status.
Since tax laws are constantly evolving, it can be a good idea to seek the advice of a tax professional.
7. Prepare for growth
The last step of starting a nonprofit is planning ahead for the next step. Like any business, your nonprofit organization can grow and scale—sometimes faster than you expect. With the right plan in place, you’ll be able to take advantage of growth opportunities that come your way and handle everything in stride.