Starting a nonprofit offers philanthropic-hearted individuals many benefits, including more credibility, donors and grants. However, it is not right for everyone. In this guide, learn if starting a nonprofit is right for you, the types of 501(c) designations that may best fit your nonprofit and the steps to forming your nonprofit. Follow along to learn how to start a nonprofit and take the guesswork out of the process.
Is a Nonprofit Right for You?
Starting a nonprofit offers several benefits. They include the ability to solicit funds from people who want their donations to be tax-exempt, apply for grants and keep from having to spend valuable donations on corporate taxes. However, there are some drawbacks. Nonprofits must maintain their tax-exempt status continually by undergoing IRS financial scrutiny, looping profits back into the organization, conducting board meetings and keeping detailed records.
Common Types of Nonprofits
While there are many 501(c) designations for nonprofits, three common types of nonprofits include 501(c)(3), 501(c)(4) and 501(c)(7) organizations. Each type has benefits and restrictions and, so, is best for specific types of organizations, including charitable, political or lobbying and social or recreational clubs, respectively. Here is a closer look at these types of 501(c) nonprofits.
501(c)(3): Best for Charitable Nonprofits
501(c)(3) organizations are the most common type of nonprofit. They raise money by soliciting donors and grants. Examples of 501(c)(3)s are those that address global concerns, such as the need for education, religious support and medical research. Private foundations are also 501(c)(3) organizations. Instead of running charitable programs, these foundations fund other 501(c)(3) organizations through grants.
501(c)(3)s have some restrictions surrounding the types of public services in which they can be involved. Namely, they cannot participate in political or lobbying activities. 501(c)(3) organizations can participate in some lobbying activities but they must limit the funding of such activities to 10% of their operational budget. Those that exceed this threshold run the risk of losing their 501(c)(3) tax-exempt status.
501(c)(4): Best for Political or Lobbying Nonprofits
Organizations with 501(c)(4) tax-exempt status are social welfare organizations. Their purpose should be to promote the public good. In contrast to 501(c)(3) organizations, 501(c)(4) nonprofits have free reign to participate in political and lobbying activities. They can, for example, endorse political candidates and promote legislation. For this reason, organizations that aim to take a political stand would do well to apply for their 501(c)(4) status.
Unlike in 501(c)(3) nonprofits, when donors donate to a 501(c)(4) organization, their donations are not tax-deductible. In most cases, these nonprofits must disclose to solicited donors that their contributions are not tax-deductible. However, these organizations are tax-exempt in that, like a 501(c)(3), they do not have to pay federal income tax.
501(c)(7): Best for Social or Recreational Clubs
501(c)(7) status is designated for nonprofit organizations that run social or recreational clubs. They are primarily membership organizations that are funded by members in the form of fees and dues. Examples of 501(c)(7) organizations include country, dinner, hobby, community association and amateur sports clubs.
501(c)(7) nonprofits must receive at least 50% of their funding from members. However, 35% of donations can come from nonmember donations and 15% of their funds can be raised through public use of the social club’s facilities or services. While membership contributions are not tax-deductible, most 501(c)(7)s do not have to pay federal income tax on membership contributions. However, they may be taxed on contributions that are not from members.
Other Nonprofit Designations
While most nonprofit organizations are 501(c)(3)s, there are 28 other 501(c) designations. As such, it is important to do your own research to find out which type of 501(c) designation would best help you meet your goals and make your desired impact. To begin this research, the IRS offers an updated list of 501(c) organizations and their definitions.
Steps to Start a Nonprofit
To start a nonprofit, begin by doing your research to ensure you will meet your goals when you start your nonprofit. Then, begin building a foundation that will help you attract donors and be prepared to file the necessary paperwork to earn your tax-exempt status. Next, file your articles of incorporation and the paperwork to be recognized as a tax-exempt organization. Lastly, take steps each year to keep your tax-exempt status.
Below is a closer look at the five steps you need to take to start a nonprofit.
Research Feasibility and Need
Before committing to starting a nonprofit, it is essential to research whether you can start a nonprofit and if your desired mission will serve an actual need in the community. Starting a nonprofit when it is not feasible or needed can mean the rapid failure of your mission.
To assess the feasibility of your nonprofit, answer the following questions:
Do I have the financial resources to start a nonprofit? Starting a nonprofit costs between $2,500 and $5,000. These costs go into legal, registration and business startup costs.
Do I have enough people to start a nonprofit? Starting a nonprofit necessitates selecting a board of directors and enough volunteers or staff to put together and run your programs. Make a list of the people you have in mind to help you start your nonprofit, including their skills. Make a note of any skill gaps to ensure you fill them through further brainstorming.
Are people excited to support my cause? If your community is not enthusiastic about your mission, it is unlikely they will donate to keep your programs running.
Will the economy support a nonprofit startup? If people in your community are struggling to feed their families, they are unlikely to be able to financially support your cause.
Do you have the ability to commit to your nonprofit? Nonprofit organizations, like any business, require time and effort to start and run. They are rarely a part-time effort for a founder. Look at your current responsibilities and decide whether you can take on a large initiative.
What strengths, weaknesses, threats and opportunities will my nonprofit face? Consider internal factors that could impact the success of your organization. In doing so, at minimum, think about skill gaps within your team, potential partnerships or large donors, the organization’s ability to handle dips in donations, your experience, your unique ability to meet beneficiary needs and how you compare to your competitors.
To assess the need for your nonprofit, answer the following questions:
Is my organization meeting a truly unmet need? There is a difference between needs and wants. Consider whether your mission fills a recognized need in your community. If it does not, donor dollars may go to an organization that is fulfilling a need before going to your cause.
What competitors are currently working on meeting the need? Use a nonprofit locator tool to assess what other organizations are fulfilling exact or similar needs in the community you will serve. If another organization is fulfilling your mission in your target service area, the redundancy of services will mean you will have to compete for donor and grant dollars.
How is my service offering different from the offerings of my competitors? If you discover that another organization is already fulfilling your target mission, consider adjusting your mission to fulfill a need they are not already meeting.
Now that you have assessed the feasibility and need of starting your nonprofit and fulfilling its mission, decide whether you want to move on to step two, which would require investing resources. If you find that your nonprofit initiative is not feasible or needed, it’s best to stop now and consider an alternative means of supporting your cause. Alternative options could include, for example, donating funds raised to another nonprofit.
Build a Strong Foundation
Some basic foundation-building steps to take include selecting your organization’s name, recruiting your board of directors and writing your values, mission and purpose statements. The following section offers some guidance on how to complete each of these foundation-building steps to start your nonprofit.
Write Your Values Statement
Your values statement focuses on the principles your organization will follow at all stages of organizational development and in every decision made by your staff, executives, board members and volunteers. As you write, first list the behaviors you consider most important to fulfill your mission successfully and ethically. Then, delineate how those behaviors will be implemented in the day-to-day operation performed by all members of your nonprofit.
Write Your Mission Statement
A mission statement motivates your internal team to stay focused and determined. It should tell what you do, how you do it and why you do it. To write your statement, in one sentence, answer what services you provide, then incorporate the values your organization holds dear and the desired result of your mission. Incorporate the point of passion that led you to begin your nonprofit. For best results, write concisely and at an eighth-grade reading level.
Write Your Purpose Statement
Your purpose statement tells why your nonprofit is necessary, despite any competitors’ already existing work. In doing so, it tells donors and partners why they should support you instead of or in addition to your competitors.
Describe what your nonprofit does in 50 words or less. First, state what category of service your organization provides (educational or humanitarian, for example). Then, elaborate on your service offerings. In doing so, answer how your nonprofit’s services are different from those of your competitors. Be specific enough to paint a compelling picture while also allowing room to grow your service offerings as your organization grows.
Choose Your Nonprofit’s Name
The name of your nonprofit should be chosen to align with the feelings evoked by your values, purpose and mission statements. To brainstorm your name, consider the category of services your organization provides―humanitarian, for example―and descriptive words that represent your purpose, mission and/or values. Be sure your chosen name is short enough to fit in domain names and social media handles and that it is easy to write, say and remember.
Once you have chosen a name, check to ensure it is not already taken. To do so, search to ensure your domain isn’t already in use using a tool like GoDaddy’s Domain search tool. Also, check with your state’s business filing agency to ensure your company name isn’t already in use in your state. Finally, to ensure your organization’s name isn’t trademarked, consider taking advantage of Legal Zoom’s trademark Check services.
Select Your Board of Directors
Make a list of the skills and expertise that you need to successfully fulfill your mission. Most nonprofits need financial, marketing, legal and industry-specific skills and expertise to fulfill a mission. Next, create a list of people with these qualifications and that share an interest in your cause. Finally, contact those people to discuss involvement with your nonprofit. To assess them for board positions, ask them to volunteer before committing to a board role.
File Articles of Incorporation
When you file articles of incorporation, you are requesting to be recognized as a business by your state. Once approved, your initiative is legally a business. However, your business is not yet tax-exempt. To file your articles of incorporation, you must first find out what office in your state is the state’s business filing office. The name of this office is different in each state as are the steps and documentation needed to complete this filing.
For example, in Florida, you must file your articles of incorporation with the Florida Department of State’s Division of Corporations. You must also register with the Florida Department of Revenue. To find out what forms you need to fill out and any additional required steps or documentation, you can visit the State of Florida website. Access the IRS’s webpage of State Links of Exempt Organizations to research the process in your state.
To legally conduct business in your state, you must also apply for a federal employer identification number (EIN). You can apply for your EIN easily online using EIN Assistant. Be sure to download Adobe Acrobat before filing so you can receive your confirmation letter online instead of waiting for it by mail.
File for Tax-exempt Status
The process for filing for tax-exempt status varies depending on the type of 501(c) organization that you seek to form. To file for 501(c)(4) tax-exempt status, for example, you must first register your 501(c)(4) by filing Form 8976 using the Form 8976 Electronic Notice Registration System. Then, you must file Form 1024-A to request tax-exempt status. In contrast, to apply for 501(c)(3) tax-exempt status, you must file Form 1023 or Form 1023-EZ.
The most common type of 501(c) tax-exempt nonprofit is the 501(c)(3). To learn more about forming this type of nonprofit, including the required steps for requesting federal and state tax-exempt status, read how to file a 501(c)(3) application online.
Maintain Your Tax-exempt Status
Maintaining your tax-exempt status is an ongoing process. Your bylaws, records and state and federal filing laws are the keys to doing so. Here is a short checklist you should consider when putting together your long-term tax-exempt status maintenance plan:
Adhere to your bylaws: Your bylaws offer a plan for running your nonprofit in a legal, ethical and impactful manner. They include details about when your board should meet, how to avoid conflicts of interest and how donor dollars should be spent. Follow your bylaws carefully and use them for all decision-making to keep your nonprofit healthy and, so, tax-exempt.
Keep detailed records: Records should be kept all year regarding your nonprofit’s activities. Specifically, to keep your tax-exempt status, it is imperative to keep careful financial records, including all organizational expenses, revenue, grants given and received, bank statements and canceled checks. Proving your organization is using funds solely for donors’ intended purpose is key to keeping your tax-exempt status.
File federal tax forms annually: On an annual basis, file at minimum a 990 Form (or 990-EZ form if your annual revenue is less than $50,000). This form shows how your nonprofit handles raised funds and avoids conflicts of interest. It is also made available to potential donors. Not only does it help you keep your tax-exempt status, but it helps you to attract new donors by proving your credibility and ethical use of funds.
File state tax forms annually: Many states require nonprofits to file a request on the state level to solicit donor funds from state residents. Others, such as Texas and California, require you to file for corporate tax exemption. File this paperwork annually with your 990 Form attached if required in your state. Doing so will allow you to keep your tax-exempt status on a state level and solicit the funds to keep your nonprofit running.
Forming a tax-exempt 501(c) nonprofit offers advantages that help 501(c) organizations use donor dollars more effectively and, so, make a more positive impact. These benefits include attracting more donors and grants and cutting down on owed taxes. However, the nonprofit formation process can be challenging, requiring time, effort and even legal expertise. For this reason, we recommend you contact an experienced nonprofit lawyer to help you succeed.
