How to start a nonprofit organization

How to Start a Nonprofit Organization

You have an idea to make the world a better place and want to take the plunge! Congrats. You are one of the few who make an effort to bring positive societal change.

Do you need a legal structure to execute your idea and wondering how to start a nonprofit organization? Let us help you. 

Starting, growing, and making your nonprofit a success is not easy. It takes dedication and relentless hard work. 

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Read through this guide till the very end or jump to a section as you need.

Nonprofit Organizations in Numbers

Nonprofit organizations in the US - Statistics & Facts
US Nonprofit Organizations in Numbers

How to Start a Nonprofit in 10 Steps

Use this detailed 10-step guide on how to start a nonprofit organization. We have discussed & explained all the steps, from validating your idea to ongoing legal compliance.

Step 1: Why do you need a Nonprofit?

There are about 1.5 million nonprofits in the U.S. The sad fact is that most nonprofits fail or never take off.  

Why? Because most nonprofit ideas are not scrutinized very well. 

Before starting a nonprofit, see if you are solving a problem in an area where no one is solving the same problem. 

You will need to look into the demographics, population, and relevant data to determine if your idea is valid. 

Even if a for-profit business is solving the same problem you are solving; you have competition. 

See who else is doing the same work in your target area. For example, you are planning to offer three square meals to the poor people in an area. You will need to see if there is a sizeable population of your target group and if there is still considerable scope for work.  

If you see don’t considerable demand for your services, see if you can work for an existing nonprofit organization.

If only a few people need your help, consider helping without a nonprofit. You can collect funding from family, friends, and relatives and help the deserving community. 

It is better to start a nonprofit with an idea where you see a pressing need for a solution to a problem. You will probably successfully run and scale your nonprofit organization where you have low or no competition. 

Step 2: Establish a solid foundation

Build a solid foundation for your nonprofit organization. A solid foundation will help you face the hardships at the start and scale successfully in the long run. 

A solid foundation starts with correctly naming your nonprofit organization.

Name your Nonprofit Organization 

A good nonprofit organization name is the one that describes what you do and it connects to the people you will serve. 

Some states require a corporate designator with a nonprofit name, like a corporation, company, etc. Check state laws for nonprofit organization name policies and name accordingly. 

Confirm the name availability with the Secretary of State’s office. Also, check for patents and trademarks for your desired name with U.S. Patents and Trademarks

You may be able to reserve a name for a few weeks in some states. California gives 60 days. Check your state’s nonprofit name reserve policy with the Secretary of State’s office. 

We also advise that you check for the exact domain name. A domain name with a nonprofit’s registered name will help you market and gain support for your cause online. 

Write Mission Statement 

Want to know how to write a mission statement for your nonprofit? Follow this easy 4-step process.

  • Narrow down and say exactly what your nonprofit organization will do.
  • Make the mission statement descriptive and relatable to the community you wish to serve
  • Keep it short and sweet. Only 2,3 short sentences are enough
  • Avoid jargon, buzz words, generalities, and any word that can make it ‘not easy’.

Write a Business Plan for your Nonprofit

Writing a business plan for your nonprofit will help you see the future and determine the right direction.

You know a thing or two about the market for your nonprofit. You will need to do more research about your target population for writing a business plan. Here, you will prove to potential donors that actual demand for your services exists. 

Use our Business plan template for nonprofit organizations and make a perfect nonprofit business plan in a short time.

In a hurry, hire our business plan writer for creating a nonprofit business plan. 

Step 3: Why incorporate a Nonprofit Organization

You need to incorporate your nonprofit to do good. 

Incorporating your nonprofit organization will:

  • Create formal structure and credibility for your organization 
  • Limits liability for directors and officers 
  • Enable you to make documents as a corporation needed for IRS 

The requirements, processes, and fees will vary from state to state. Check with the Secretary of State’s office for details.

It is worth noting that incorporating a nonprofit does not make it 501(c)3 exempt. You will need to apply for a 501c3 exemption separately.

Step 4: Appoint a board of directors

Let’s briefly discuss how to find members and appoint a board of directors.

Look for people who support your cause and who can contribute to it in any way. Can you spot some sincere advisors for your nonprofit? If yes, start selecting board members from them.  

We suggest the following when you are looking for members for your nonprofit board of directors.

  • Socially active people with a wide network
  • Multi-skilled and people with expertise in management, finance, or legal 
  • People who can make donations or raise funds for your nonprofit.

The board members are typically unpaid. We suggest noting this down in the job description for the board members. 

Tell the board members your expectations from them both in terms of time and donations.

Step 5: Take the initial board actions

Once you have established a board of directors for your nonprofit organization, the board will need to take some initial actions. These actions include:

  • Set nonprofit bylaws 
  • Adopt a conflict of interest policy 
  • Set the exact number of authorized members for the board of directors 
  • Adopt fiscal year for accounting 
  • Approve opening a bank account
  • Pass applying for tax-exempt status 
  • Determine and fix salary for officers and staff members

If you have already taken some of the above steps, proceed with completing the remaining.

Step 6: Establish bylaws and conflict of Interest Policy

The bylaws are governing principles for your nonprofit. 

The bylaws will govern your nonprofit organization. A nonprofit organization is accountable to its bylaws as well as the state laws and IRS laws. 

Bylaws serve as a guide for the board of directors to make decisions. Nonprofit organization bylaws are required to apply for a 501c3 exemption. 

Next, create a policy for the conflict of interest. Check if your state has any requirements for the conflict of interest policy and add those to the policy. 

A conflict of interest policy protects your leadership and aids nonprofit organization governance. 

Call the first meeting of the board of directors of your nonprofit. Here,  elect officers for your nonprofit organization, and review and approve bylaws and conflict of interest policy. 

Step 7: Secure startup funding

You are almost done with your nonprofit organization formation. It is time to start working.

You need resources and funds to do good. Start with making charitable solicitations. 

Charitable solicitations are nonprofit organizations’ appeals for funds. The nonprofit organizations solicit fund requests in newspapers, the internet, social media, etc.

They introduce the cause, the way they will work for it, introduce their team, and request funding. Charitable solicitations or fundraising have become mostly online and you need a small budget for a fundraising campaign.

Establish a system for keeping records of all the funds you receive and the donors. It is necessary for accounting purposes and securing recurring funding from donors.

We recommend that you invest in nonprofit software or donor management software. A donor management software will help you organize donor data, see donor tendencies and patterns, and increase the chances of recurring donations.

Digital Marketing Expenditure comparison for Nonprofits in UK AND US
Digital Marketing Expenditure comparison for Nonprofits in UK AND US

Step 8: Get Employer Identification Number (EIN)

Get an Employer Identification Number (EIN) for your nonprofit organization. You need the EIN to open bank accounts, register with the local government, hire employees, participate in fundraising events, etc. 

You will need to provide the IRS with your nonprofit organization’s physical address, legal name, and the chairman’s SSN. Usually, an EIN is issued in only a few weeks.

Step 9: File for Tax-Exempt It is time to file for tax-exempt status with the IRS.

You may need to wait for some time for tax-exempt status.  The wait time can be three months to 12 months. So, start as early as possible.

The fee for application lies between $250 to $600, depending on the IRS form you choose. Form 1023 costs $600, while form 1023-EZ for smaller organizations will cost $250.

There are some requirements and restrictions for applying for the 1023-EZ form. The IRS will confirm if you qualify.

Step 10: Prepare for ongoing compliance

Each state has an agency for nonprofit organizations’ oversight, usually the attorney general. Registering with the nonprofit and charitable oversight agency is necessary for raising funds. 

You will need to register in all the states where you wish to solicit charitable contributions. 

The gross receipts for a nonprofit organization determine its annual reporting requirements. 

A nonprofit organization with over $50,000 in gross receipts will file form 990 with IRS.

A nonprofit organization with less than $50,000 in gross receipts will file form 990-N or an e-Postcard with IRS.

We suggest you start a nonprofit organization with a system that tracks finances, activities, governance, policies, etc. You may need to include more details than the finances in your nonprofit organization’s annual report.

FAQs

There are many cost factors to starting a nonprofit, including:

  • Name reservation fee (if you want to reserve the name for a few weeks)
  • Incorporation fees
  • 501(c)(3) fees
  • Office space
  • Website and branding
  • Employees
  • Insurance

 The nonprofit organization name reservation service is available in some states. The fee is $50 on average. The Secretary of State's office will reserve the name for you. 

The setup fees are low for most states. For example, the incorporation fees for a nonprofit vary between $8 to $125. Check with the Secretary of State's office to know the incorporation fee in your state. 

 The typical 501(c)3 fee can vary between $250 to $600. 

 All other expenses are in your control. You can start small and control your expenses at the start. 

 The legal structure will cost you less than $1000. However, we have not included the attorney fees in this estimate. Our estimate for pro bono help is $250, but the regular attorney fee can be few thousand dollars.

Your organization will make money by fundraising, collecting donations, grants, and in-kind donations. You can pay yourself a salary from your nonprofit organization's income. 

Some other possible incomes sources for a nonprofit organization are:

  • Selling donations
  • Selling merchandise
  • Renting property 
  • Making investment
  • Interest income from bank accounts

Setting up a nonprofit can take anywhere from 3-12 months. 

The most time-consuming process is IRS scrutiny for nonprofits. IRS looks closely at each application. 

Filing with Form 1023 takes longer than filing with Form 1023-EZ. The 1023-EZ form was introduced for the smaller organizations. The IRS determination time for smaller nonprofit organizations is mostly between 3-6 months. 

An LLC can be a nonprofit organization. 

Forming a nonprofit LLC is a complex process. Most people choose a nonprofit corporation. The legal structure of a corporation is rigid, but an LLC offers flexibility and greater liability protection. 

If you are interested in starting a nonprofit LLC, consult with a qualified attorney on the process. (Link to our services)

The difference between a nonprofit and a foundation is how they get funding. 

A foundation gets money and resources from a family or a corporation; however, a nonprofit raises funds through donations, grants, selling merchandise, and generating income from any other resources. 

We have evaluated some banks and the following are our picks for the best banks for nonprofit organizations. 

  • U.S. Bank: Best bank for nonprofit organizations of all shapes and sizes. Also suitable for large fundraising events. 
  • Axos Bank: Best for online-only banking for nonprofit organizations
  • PNC Bank: Best for helping nonprofit organizations take care of their employees. 
  • TIAA Bank: Offers best interest rates for account holders thus helping nonprofits earn more from their idle money

Wells Fargo: Excellent choice for small nonprofit organizations

  • The best accounting software for a nonprofit depends on your unique needs. We have compiled a short list of the top 10 options for accounting software for a nonprofit. Have a look:

    • Most Features: QuickBooks Enterprise Nonprofit 
    • Best Overall: FastFund Online Nonprofit Fund Accounting
    • Best for Small Nonprofit Organizations: ACCOUNTS from Software4Nonprofits
    • Best Desktop-based accounting Solution: Intuit QuickBooks Desktop for Nonprofit
    • Best for Churches and Religious Nonprofits: Breeze
    • Best for Enterprise-Level Nonprofits Organizations: NonProfit Plus
    • Best for Donation Tracking for the Nonprofits: Sumac by Silent Partner
    •  Best Cloud-Based Nonprofit Accounting Solution: Araize FastFund Accounting
    •  Best for Volunteer-Led Nonprofit Organizations: MoneyMinder

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