June 1, 2015 Update How to Start a Nonprofit Organization: A Practical User’s Guide
Aug 18, 2015
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Table of Contents ABOUT THIS GUIDE ....................................................................................................................................... 2
Who is it for? ............................................................................................................................................. 2
IDEA PEOPLE.......................................................................................................................................... 2
BEGINNING NONPROFITS ..................................................................................................................... 2
SECTION I ...................................................................................................................................................... 3
So You Want to Start a Nonprofit? ........................................................................................................... 3
INTRODUCTION ..................................................................................................................................... 3
Self-Assessment ........................................................................................................................................ 4
20 QUESTIONS TO ASK YOURSELF ........................................................................................................ 4
SECTION II ..................................................................................................................................................... 5
Basic Steps to Starting a Nonprofit ........................................................................................................... 5
GETTING STARTED ................................................................................................................................. 5
OTHER CONSIDERATIONS ................................................................................................................... 15
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ABOUT THIS GUIDE
Who is it for?
IDEA PEOPLE You are a highly motivated person thinking about starting a
nonprofit but not sure what is required and need the tools to do so.
BEGINNING NONPROFITS You formed a nonprofit but have a nagging feeling that you may be overlooking certain legal
requirements. You feel responsible for the health of your organization and want to make sure
that you are on the right track. Simply review the Basic Steps to Starting a Nonprofit.
Congratulations for your proactive concerns!
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SECTION I
So You Want to Start a Nonprofit?
INTRODUCTION You have passion and ideas; you’re a visionary, but do you really want to start
a nonprofit? Starting a nonprofit is like starting a new business, and like
startup businesses, a large proportion of new nonprofits last only a short time.
Starting a nonprofit involves more than passion alone. Are you READY to start a nonprofit?
You’ll need to establish a board of directors, register the name your organization, create and file
Articles of Incorporation and By-laws, file federal, state, and city tax returns, and more. You’ll
need funding for government filings, professional fees (i.e. legal review) and operations (i.e.
marketing, website.) Starting and operating a nonprofit is a full-time job. You must financially
sustain the organization and comply with a number of legal requirements.
This user’s guide is a practical tool that will help you determine your readiness to start a
charitable organization. It takes you through the basic steps to form a publicly supported
nonprofit in the U.S.
Congratulations for your vision and dedication.
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Self-Assessment
Great ideas and commitment are the main starting points to forming a nonprofit. Before starting your quest, ask yourself the following 20 questions.
[Note: The following assessment addresses public charities. If you want to start a private foundation, supporting organization, or a charitable trust, other questions need to be made.]
20 QUESTIONS TO ASK YOURSELF
Business Checklist
1. Why do l want to start a nonprofit versus a for-profit business (cooperative, sole proprietorship, partnership, or corporation)?
2. Who is my target population?
3. What will be the legal structure of my nonprofit, as a separate legal organization?
4. What services will my nonprofit deliver (human services, education, art/humanities, recreation, etc.)?
5. How much money do I need to get started?
6. Am I prepared to spend the time needed to manage its operation?
7. Where will my nonprofit business be located?
8. Will my nonprofit duplicate services in the market? If so, what differentiates my nonprofit?
9. Who is my competition; what are their services; what segment(s) are they targeting?
10. What kind of staffing will I need and what skills and experience will be required?
11. What kind of suppliers do I need?
12. Will I need to pay taxes?
13. Do I need insurance? If so, what kind?
14. How will I manage operations?
15. How will I market my business?
Legal checklist – will your nonprofit be able to:
16. Form and maintain a board of directors?
17. Submit IRS Form 990, 990EZ, or 990N (for less than $50,000 gross receipts) annually?
18. File an annual report with the Secretary of State?
19. Regularly acknowledge donations in writing and in compliance with IRS requirements?
20. Prepare and maintain regular financial statements?
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Considering all that is involved, do you still REALLY want to start a nonprofit?
If so, then proceed to Section II and follow the Basic Steps to Starting a Nonprofit. If not, then review the 20-question assessment until you are confident you are ready to proceed.
SECTION II Basic Steps to Starting a Nonprofit
GETTING STARTED Starting a nonprofit corporation involves financial investment,
planning, operations, defining a mission, and completing a series
of legal activities.
See the following steps to take as you move forward.
1. Define your mission, vision and values
2. Define your nonprofit structure
3. Write a business plan
4. Form a board of trustees
5. Draft governing documents
6. Name and incorporate your organization
7. Apply for business licenses
8. Apply to IRS for an Employer Identification Number (EIN)
9. Apply to IRS for federal tax exemption status
10. Prepare for quarterly and annual filings and reports
11. Engage human resources when needed and viable
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Step 1 – Define your mission, vision and values
A nonprofit corporation has a mission to serve people. A well-crafted mission will provide
direction and purpose for the organization and appeal to donors and other supporters. The
mission should be written with input from board members, volunteers and other interested
parties. Ideally it should be brief and concise and embody the organization’s basic commission
to make something happen in the world. The statement answers the following questions:
Why do we exist?
What is the purpose or essence of this organization?
Who is the target population that will benefit from our services?
What do we desire to achieve in the long run?
What makes us unique from other similar organizations?
What human needs are compelling our organization?
Step 2 – Define your nonprofit structure
The steps you must take to form a nonprofit corporation are similar to those for starting a for-
profit business, but a bit more involved. You must apply to the same agencies and follow a
similar process, but satisfy a few extra requirements depending on the legal structure of your
nonprofit.
The following represent your basic options for legal structure:
Informal nonprofits: As the name implies, these organizations are loose-knit groups of
like-minded people who get together for activities or to be of service to the community.
Examples include local book clubs, self-help support groups, or graffiti cleanup patrols.
Informal nonprofits have no legal structure and typically raise and manage only small sums
of money. They aren’t big enough to fall under the watchful eye of the IRS.
Nonprofit corporations: By incorporating a nonprofit organization can protect its directors
and staff from certain types of liability, similar to the protection offered to for-profit
corporations. Incorporation also ensures that the organization can continue its activities
even when the founding members are gone. To get the details on incorporation in your
state, check with the office of your Secretary of State, Division of Corporations, or
Attorney General.
Nonprofits can receive favorable tax treatment when they are created to serve the public
interest. Nonprofit corporations with charitable, educational, scientific, religious, or cultural
purposes can apply to the Internal Revenue Service (IRS) under Section 501 of the Internal
Revenue Service Code for favorable tax status. Some sections of the code including 501(c)(4)
and 501(c)(6) offer exemptions from income taxes to nonprofits, but do not allow donors to
deduct their contributions to the nonprofit.
The major types of tax-exempt organizations included under section 501 are:
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Charitable organizations (ex. religious, educational, scientific, and literary
organizations)
Social welfare organizations (civic leagues and community groups)
Labor and agricultural organizations (labor unions and farm bureaus)
Business leagues (trade associations and chambers of commerce)
Social clubs (country clubs, fraternities, and sororities)
Fraternal organizations (lodges and other clubs)
Veterans’ organizations (armed forces groups)
Employees’ associations (employee-benefit groups)
Political organizations including campaign committees, political parties, and Political
Action Committees (PACs)
Donations to qualified nonprofits may be tax deductible – a distinction that can matter a great
deal to your contributors. Section 501(c)(3) of the IRS tax code not only exempts certain
nonprofits from having to pay federal income taxes, but also allows their donors to deduct their
contributions to the 501(c)(3) nonprofit from their federal income taxes.
Qualified organizations who can apply to the IRS for 501(c)(3) tax status include: religious,
educational, scientific, and literary groups, as well as child and animal welfare organizations,
certain veterans’ organizations, fraternal societies, and more.
Note: For information on whether your organization qualifies for tax-exempt status check out IRS Publication 557, revised February, 2015 at: http://www.irs.gov/pub/irs-pdf/p557.pdf.
Step 3 – Write a business plan
A business plan is essential for an organization’s success. Nonprofits have a lot in common with
for-profit businesses. Both must understand and follow common business practices. While most
for-profit companies start with a business plan, a nonprofit also needs the foundation of a
business plan as a roadmap for success. The nonprofit business plan outlines the route the
organization should take in order to deliver relevant, viable services to the public.
Start with an Executive Summary. This is a snapshot of your organization. A good Executive
Summary should include:
The Mission Statement – The purpose and reason your organization exists.
Organization Overview and History – This statement describes the organization, when it
was formed, how it was founded, population served and the geographic area where you
deliver services.
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Services – Briefly describe the services you deliver, what differentiates your organization
from others and the population you serve.
Goals and Objectives – Explain what you want to do in your community and how you will
measure your efforts.
Growth Highlights – If applicable, include examples of growth, such as the number of
people being served currently compared to the number served at or before inception of the
organization. Graphs and charts are helpful in providing a visual comparison of the data in
this section.
Financial Information – Summarize information about potential contributions and
revenues.
The main content of the Business Plan should include the Target Population, Program and
Services, Marketing Plan, and Financial and Fund Development Plan as described below:
Target Population
Be thoroughly familiar with the people you plan to serve - their needs, barriers, other providers
in the market, and how you will serve the target population more effectively.
Assess the following:
Statement of needs
Size and locations of the population
Duplicate services available to the population
What is your window of opportunity to serve this population?
Program and Services
Clearly describe your program, the resources and services you will deliver. They should align
with the mission, goals and objectives of the organization. Follow this checklist as you plan
program and services in your business plan:
Program structure with goals, objectives and outcomes
Draft a description for each service
Uniqueness of the program
List community partners/collaborators
How will you evaluate program efficacy, outputs, success indicators, outcomes, how
the program is changing the marketplace
Marketing Plan
A basic market plan should include analysis of your population, its needs and outlook and size.
Your marketing plan should include marketing analysis and your:
Target market – description, character and size
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Market forecast – market potential, i.e. calculation of people who will use your services
and how you plan to capture that market
List competitors – their services, target market, locations
Laws and regulations to follow – federal, state, city
SWOT analysis – strengths, weaknesses, opportunities, and threats of your nonprofit
Barriers that hinder you (e.g., technology, initial investment, lack of quality personnel)
Based on your market analysis, you should then describe your strategies to gain awareness of
your target market and serve those people.
Financial and Fund Development Plan
Because most charitable nonprofits rely on contributions for some or all of their operating
revenue, fund development is of major importance for success.
You first must know how much money you will need for start-up. What will it take to deliver
quality services? Where will you get the money? Will you need to use a combination of your
own money and contributions? Make a fund raising plan to determine how much money you
will need to raise and to plan revenue sources.
Start by preparing an annual budget listing sources of revenue and expenses. Consider
preparing a three-year budget for projection purposes.
Typical revenue sources for a public charity include:
Grants
Individual Gifts
Special Events
Corporate Sponsorships
Earned Income
A simple example of a mix of revenue sources for a fund raiser is:
Goal: raise a total of $100,000 with approximately:
- $25,000 in grants
- $25,000 in individual donors
- $50,000 in special events
Step 4 – Form a board of trustees
Most new nonprofits recruit and name their first board members as part of the process of
incorporating.
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The nonprofit's board manages the business affairs of the nonprofit corporation. It shoulders the
legal duty to keep the organization true to its mission to serve the public and remain compliant
with laws and contractual obligations. This "public trust" role explains why nonprofit directors are
sometimes called trustees.
Usually a board of trustees sets policy; determines overall goals, objectives, and related
strategies; set priorities; sees that resources are used wisely; oversees the budget, and ensures
that plans and programs are implemented.
Great boards have traits and qualities that enable them to lead creatively and effectively.
Whether board members are comfortable with legal, financial, marketing, and/or human
resources aspects of business, there should be a way for all board members to get involved. A
Trustee is not expected to be experts in every matter of the board considers. They are expected
to use common sense, practical judgement, their particular expertise, and rely on information
presented to them from competent and reliable sources.
Ideal board members:
share a passion for the organization's mission
have strong ties to their communities
are diverse in age, gender, race, religion, occupation, skills and background
act as an ambassador on behalf of the organization to its clients and contributors
contribute to the organization’s fundraising strategies and campaigns
One way to tell prospective board members what you expect is to create a "Board Candidate
FAQ" that communicates important facts in a simple one-page format. Here are some samples
questions that might be included in a board candidate FAQ.
Board candidate FAQ
What is the organization's mission?
What is the organization's history?
What are board members' responsibilities?
How long does a board member serve?
Are there legal issues that board members should know about?
Step 5 – Prepare your governing documents
Once deciding to form a non-profit corporation your organization will need to create and the
organization and governing documents, the Articles of Incorporation and Bylaws, with state
government.
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Articles of Incorporation bring an organization into initial existence; when filed and approved
they create the nonprofit corporation under state law.
The Articles of Incorporation contain structural information such as the name of the
organization, its address and other information. Nonprofit corporations also include tax-
exemption information in their articles, such as their tax-exempt purpose and related operating
information.
Bylaws are the rules and methods that your organization follows to insure legality and
productivity. Bylaws basically serve as an operating manual. Bylaws contain rules and
procedures for holding meetings, electing directors, appointing officers and taking care of other
essential business formalities.
Good news! There are a number of templates available to you to simply fill in and then file the document with the appropriate authority. Start with the Office of the Secretary of State in the state you will be incorporating in, SCORE, or your local nonprofit association.
The Bylaws and the Articles of Incorporation should be kept in your non-profit record book.
After your Articles of Incorporation are approved by the state government, your non-profit must
hold an organizational meeting where the Articles of Incorporation and Bylaws are adopted by
the board of trustees. Then the incorporation process is completed.
Step 6 – Name and incorporate your organization
Choosing a name for the organization is an important step in the business planning process.
Not only should you pick a name that reflects brand identity, but you also need to ensure it is
properly registered and protected for the long term. Legally, the name must not be "deceptively
similar" to any existing corporation in your state of incorporation or must be "distinguishable on
the record" of your state.
Here are some points to consider as you choose a name:
What connotations does your name evoke? – Does it reflect your mission? Will it
appeal to your donors?
How will your name look? – On the web, as part of a logo, or on social media.
Will you have a website? – Is there an available domain name for your nonprofit?
Register the name of your nonprofit with your state government.
CAUTION: DO NOT order letterhead, business cards or any printed materials with your
nonprofit name on it until is it approved by the state in which you are incorporating.
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Having your organization’s name approved, and your Articles of Incorporation and Bylaws ready
to go, you can now apply for incorporation as a nonprofit with the Secretary of State in the state
your nonprofit will be incorporated in. You may want to have an attorney review everything
before submitting the application to ensure that you have not missed any legal implications and
everything is complete.
Also apply for charities registration, if required by the Sectary of State in which your nonprofit is
incorporated in.
Step 7 – Apply for business licenses To operate as a nonprofit business, apply to the state Department of Revenue (DOR) or Business Licensing Service (BLS) for a state business license. Also if required by the city you will be operating in, apply for a business license to that city as well.
Step 8 – Apply to IRS for an Employer Identification Number (EIN) Every organization must have an employer identification number (EIN), even if it will not have
employees. The EIN is a unique number that identifies the organization to the Internal Revenue
Service (IRS). Do not apply for an EIN until your organization is legally formed.
The simplest way to apply for an employer identification number, is online. It takes less than
fifteen minutes. To apply for your EIN online go to:
https://sa.www4.irs.gov/modiein/individual/index.jsp
You can also apply by submitting IRS Form SS-4 by mail or fax. Make sure that you select the
correct type of entity, such as other nonprofit organization, church or church-controlled
organization.
The EIN is not your tax-exempt number. That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes. Contact your state Department of Revenue for additional information about tax-exempt numbers.
Step 9 – Apply to IRS for federal tax-exemption
Tax-exempt status is not automatically granted to nonprofits. You must apply for approval and
recognition of tax exemption. To apply you must complete and file Form 1023 or Form 1023-EZ
(for revenues up to $50,000) with the IRS. To determine whether or not you can use the easier
Form 1023-EZ, you must complete Form 1023-EZ Eligibility Worksheet.
For detailed, step by step information about Form 1023-EZ and Form 1023 search for the
following on http://www.irs.gov/Forms-&-Pubs
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Inst 1023-EZ – for instruction about completing Form-EZ and a link to the Form 1023-
EZ Eligibility Worksheet
Form 1023-EZ – for Form 1023-EZ to complete
Form 1023 – for Form 1023 to complete
Inst 1023 – for instructions about completing Form 1023
When the IRS receives your application it will perform an initial review and place your
application in one of two groups:
1. Those that can be processed based on the information submitted
2. Those that require additional information to be processed.
If your application falls in the second group, you’ll be contacted by a specialist in approximately
180 days for the additional information needed.
You may want to have an attorney review your application and attachments before you submit it
to the IRS to ensure you have not missed any information or misinterpreted the instructions.
After the IRS approves your nonprofit organization for 501(c)(3) tax exempt status you will be
notified by mail by the IRS. Only then should you communicate that status to contributors and
others.
Step 10 – Prepare for quarterly and annual filings and reports
You must comply with mandatory reporting requirements, beginning the year you incorporate:
Annual Report to the state Secretary of State
IRS Form 990-N, Form 990-EZ, or Form 990
IRS Forms 990-N, 990-EZ, and 990 serve two essential purposes:
First, it provides information that helps government agencies (the IRS and state charity
regulators) enforce the laws that govern nonprofits. For example, it helps government
regulators learn whether groups have been spending funds in a way that might cause
them to lose their charitable and tax-exempt status.
Second, the Form 990 provides a great deal of financial information about the filing
organization’s financial condition, its financial strengths or weaknesses and the sources
of its income.
Step 11 – Engage human resources when needed and viable
Serious thought should be given to the mix of human resources for your nonprofit organization
from start-up to full operations and continued long-term growth. There are several ways to
engage people in your nonprofit organization:
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Volunteers – are typically are inspired by the mission of your nonprofit and are not paid
monetarily for their services.
o There are many reasons why people serve as volunteers and it is important to
understand why people will view your nonprofit to advance in areas of their life
such as giving back to their community, sharing skills or gaining new ones,
enhancing their resume and make important networking contacts, feeling needed
and making a difference, and many more.
o What are the intangible benefits you will provide your volunteers?
o What range of time commitments do you expect from your volunteers?
o How will the work to be done be assigned to volunteers?
Contractors (independent, firms) – work to complete a defined scope of work within a
defined time period for an agreed upon monetary payment(s). With contractors:
o Be sure that you and the contractor have a mutually agreed upon and signed
Statement of Work (SOW) including the monetary payment amount for the
services and deliverables to be completed. This will help ensure the work
remains within your limited budget.
o You must prepare and file Form 1099 for these people who provided services to
your organization for the calendar year, even if your organization has a 501(c)(3)
tax status.
Employees (part-time and/or full time) - are legally hired to work for your organization
for monetary payment and benefits, until legally separated. With employees you must:
o Determine whether pay will be by hour based on a minimum number of hours per
week, or by salary. Your minimum wage must be at the least minimum wage
established by the federal, state, and city governments
o Adhere to all federal, state, county, city employment laws and regulations
including:
Job Descriptions and Compensation Levels
Unemployment Insurance
Benefits
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OTHER CONSIDERATIONS
Legal
You may be asking yourself, “Do I need an attorney?” An attorney is not a legal requirement to
form a nonprofit, but working with one may help clarify questions and concerns you have along
the way.
Gift Acknowledgement
You must establish a system for receipting gifts over $250 to comply with IRS substantiation
requirements.
Resources: Following are some sites for additional information related to starting a nonprofit organization are: http://www.sba.gov – Small Business Administration
http://www.score - SCORE
http://www.irs.gov - IRS
http://topnonprofits.com/examples/nonprofit-mission-statements/ - 50 examples of mission statements
http://www.councilofnonprofits.org National Council of Nonprofits