Prospective nonprofit founders are often classic entrepreneurs with a large vision in which they have enormous faith. Get a group of such people together and you have an incipient nonprofit. But not necessarily. There is always a plethora of very small nonprofits, not doing much, operating out of people’s living rooms with no real backers or traction. Don’t add to those ranks.
Step 1: Are we really ready for this?
Before we tell you HOW to start a nonprofit organization, we really must ask you WHY you want to do so. Separately incorporating as a nonprofit is not a prerequisite to starting an initiative, which can be done under someone else’s aegis or—these days—can work in a looser fashion unencumbered by that type of formal structure.
If you develop the structure, you must feed it, in terms of filing reports and meeting nonprofit accountability guidelines set out at the state and federal levels for the type of nonprofit you have chosen to be. You must develop an understanding of nonprofit financing (try making sense, for instance, of the various notions around overhead), nonprofit fundraising strategies, and nonprofit ethics in an increasingly more complex environment. Never mind establishing a board and understanding the requirements for effective and ethical nonprofit governance, which includes special requirements for transparency.
If you already have experience in these kinds of things, maybe the learning curve is not so intense and you can manage and prioritize such stuff easily, but if you are new to running a nonprofit, it could very well be better for your project to consider not incorporating as a 501(c) anything—progressing instead without a corporate umbrella or with the shared umbrella of a fiscal sponsor. And even then, you have not yet begun to consider the challenges of nonprofit fundraising, the challenges of donor retention disciplines, the frustrations of grant research and grant getting, and how to establish a culture of philanthropy in your own organization.
In other words, a good portion of the important work required to start a nonprofit begins before the nonprofit is even born.
Articles to read in considering whether starting a nonprofit is appropriate:
- To 501(c)(3) or Not to 501(c)(3): Is That the Question?
- The Nascent Nonprofit Organization—What Happens Before a Nonprofit Is Born?
- The Challenges of New Nonprofits
- Fiscal Sponsorship: A Balanced Overview
- What Makes a Charity Tax-Exempt? Issues for Government Oversight and Due Diligence
Step 2. Who is in this with you? To whom will you be accountable?
Nonprofits are not intended to be about an individual vision. By nature, they are supposed to be collectively held and guided, and the most tangible expression of this in most organizations is the governing board. That board should never be treated as a necessary but irrelevant but a source of energy, ideas, guidance and connection
Step 3: Incorporation and Filing for 501(c)(3) Status
A corporate structure limits the liability of the organization’s officers and directors. The IRS requires organizing documents and governance policies and procedures that are usually associated with corporations. Filings and fees will vary by state.
Also note, incorporation registers your nonprofit, but it does not make it 501(c)(3) exempt. For that, apply for exempt status with the Internal Revenue Service (IRS). Be aware, the user fee could be steep, depending on whether you expect your average annual gross receipts to exceed $10,000 annually over a four-year period. It also can take up to twelve months for the IRS to return its decision, depending on how many questions the IRS has about your application.
Register with your state’s agency that regulates charitable organizations and charitable solicitations (usually the Attorney General). If you plan to solicit contributions in other states, you will need to register there, too. Again, registration requirements will vary with each state.
All tax-exempt organizations must file some version of Form 990 with the IRS. (Which version you’ll file depends on your total gross receipts for the year.) Form 990 shows your finances, activities, governance processes, directors, and key staff which are open to public inspection. (You can see a collection of 990s on such sites as GuideStar.org) Each state has its own reporting and renewal requirements, too, so consider tracking your org’s finances and activities such that these annual reporting requirements will flow smoothly.
Step 4. Basic Systems Development:
Besides establishing the board and its by-laws and processes, every new organization needs to understand the rudiments of financial management and human resources management. If you choose not to use a fiscal sponsor, it is often the safest option to outsource these. Often, you can locate someone or an entity with the right reputation and skills by asking other organizations you trust.
But even when you do contract out, someone on your board and someone on your staff should have a healthy understanding of the basics of nonprofit financial management. Many regions have local training sessions for these and other basic skills.