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How to Start a Nonprofit

nonprofitHow to Start a Non Profit Organization

Do you aspire to save the world, or at least a small piece of it?  If your passion is to inspire, make a difference and give back to the world, then starting a non-profit is bound to be an exciting entrepreneurial proposition for you.  Maybe you have always wanted to leave the world to a better place than you found it? By learning how to start a non profit, you can take your idea and contribute something positive to your community, your state, your country and even to the world. Starting a non-profit organization is similar to starting any kind of business – along with your personal commitment you need a clear objective, a very original idea and an excellent well thought out business plan to present to your donors.

What exactly is a non profit?

It is likely that you have heard the term a hundred times before, but do you really know what a non-profit organization is? There are legal definitions, including 26 types of non-profits recognized by the IRS, and there are common perceptions of what people mean when they refer to an organization as non-profit.

By definition, it is an organization in which no owner, stockholder, or trustee shares in profits and losses, and which exists not to earn revenue but to promote a mission that enhances the public welfare.  This type of organization is often eligible for tax-exempt status and some, but not all, can receive tax deductible contributions. It really is a tax-exempt organization that serves the public interest. In general, the purpose of this type of organization must be charitable, educational, scientific, religious or literary. The public will expect to be able to make donations (monetary or other) to this type of organization and deduct these donations from their federal taxes.

Legally, a non-profit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated. An unincorporated non-profit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a non-profit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders and of course, no profits.

Where Do I Start?

Most people simply don’t know how to start a non profit organization, but also don’t realize that is relatively similar to how to start a for profit one. Many non-profits start out the same way as any business, with an idea.  You may have a great idea that will make the city, state, or world a better place with something that you have to offer.

However, like for profit businesses, there is a very high failure rate.  You have to ask yourself a few questions.  The key question to ask yourself is, “Who will benefit from the activity?”  If the answer is that you or your family will benefit, then it’s a good idea to start a for-profit company rather than a non-profit organization. If your answer is that the community or the public at large will benefit, then a non profit organization may be the best choice for you. The second question to ask is, “Will I allow the board of directors to set policy, and key items like my salary, benefits, and even my employment by the organization?” If your answer is no, and you want to maintain control of the organization then you want to make your corporation for-profit. If, however, you want the board to be autonomous, then a non-profit organization can be a good fit. Remember, you can sit on the board and you can have a vote when it comes to determining policy. However, on issues that affect your employment, salary, and benefits, you must excuse yourself from voting.

Make sure you are not duplicating someone else’s idea.  Before forming a non-profit, your first step is to find out if any other local organizations (non-profit, for-profit, or government) are already doing the same or similar work in your community. It will be harder to get support if you are just duplicating existing services, versus improving or adding to them. Before starting a non-profit, it is critical to examine the need for another non-profit. This is particularly true in light of

Develop your mission and an excellent business plan.  You will need to clearly define your organization’s purpose and develop and write a mission statement. Your mission statement should explain why people would want to invest in your organization (as donors, volunteers, or recipients of service).  Just like any other business, a successful non profit will require a comprehensive business plan, and a great leader.  Your business plan is what is going to get you much of your non-profit funding from donors and the government, and can also help you recruit volunteers and board members. There are currently over one million charitable non-profits in the United States, but many constantly struggle to attract increasingly limited funding, and many organizations have overlapping missions.

Find the right name for your organizationJust like someone else having the same idea and/or providing the service as you, you will need to ensure that no one else (at least in your state to begin with) has chosen the same business name as you have.  Each state has different and varied laws that apply to naming a non-profit.  Make sure you are familiar with what your state requires.

Incorporate Your Non-Profit.  Now that you have a mission and name, it’s time to start the real legal and financial paperwork.  Hope you didn’t think that learning how to start a non profit wouldn’t include filling out a few forms!   Becoming a non-profit corporation requires some paperwork, but for many organizations the benefits of non-profit status – such as 501(c)(3) tax-exempt status  will outweigh the complications. If you don’t incorporate, board members and other individuals in your organization may be held personally liable in case of a lawsuit.  Articles of Incorporation should be filed with your Secretary of State.  Incorporation for non-profits is very similar to creating a regular corporation except that you have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division.

Unfortunately, there is more than one step for incorporation; a single form just won’t cut it.  First of all, you will need to file your incorporation paperwork.  This formal paper work called your “articles of incorporation” along with a filing fee is filled out and filed with your state.  Your articles of incorporation will include information including the name of your non profit, its registered agent and office address and your organizations membership structure if you have one.

Once you have sent off your incorporation paperwork, you’ll need to wait, and wait and wait.  But, once you receive your paperwork back, you are ready to apply for non-profit status and federal and state exemptions.  Once you’ve received a copy of your article of incorporation from your state you are ready to submit an application to the IRS for your federal non-profit status as a 501(c)(3) organization. Why file for these exemptions?  Your group will not only be free from paying taxes on all income from activities related to its non profit purpose, but people and organizations that donate to a non profit can take a tax deduction for their contributions (the burden of proof for tax deductibility is on them should they be audited). Many seasoned and large donors are hesitant to donate large sums to any groups that don’t have their 501(c)(3) status.

It’s best to file quickly, within 27 months of the date of your incorporation.  Why 27 months?  Well, order to receive a tax-exemption dating from the date of your incorporation, you need to file within 27 months of your incorporation or your exemption will only be effective from the application’s postmark date.

And, don’t forget about your state.  After you have received your letter of determination from the IRS, apply to your state department of revenue and your state department in charge of regulations (often called the Department of Regulation and Licensing).

Ok, now that you have sent in and received back a lot of paperwork, you will have to create some of your own.  You will need to create corporate bylaws for your organization.  These are the operating rules for your non-profit corporation, they are the rules that you and anyone that works for you will adhere to.  You will also need to appoint directors and hold your first board meeting.  And don’t forget to obtain any necessary licenses and/or permits.  Depending on the specific nature or services of your business you may need additional licenses or permits, you can check with your state or on the Business.gov website.

When you are finally done with all the meetings, paperwork and permits, it’s time to start your business!  First step to a successful non-profit is to have adequate funding!

Start Fundraising – Now that your non-profit organization is officially established you will need to give you full attention to its bread and butter – fundraising. You may know how to start a non-profit, but do you know how to raise funds?  You will need to identify who your largest contributors will be, and go after them!  While individual donors amount to the largest contributors to non-profit organizations, federal and state and local governments also offer grants, loans and programs to help fund non-profit projects.

Small non-profits, including many schools, churches, community organizations and social service agencies, may face many unique fundraising challenges.  Without an established, large and influential board of directors, a substantial fundraising staff, or widespread name recognition, these types of non-profits can struggle with development, in many cases operating “donation to donation.”  This is not a situation that you want to find your own non-profit in.

For a startup non-profit, it’s best to leverage the resources you already have for fundraising.  Using your network is the absolute best fundraising strategy for smaller non-profits.  You may not have hundreds of volunteers, thousands of clients served, or dozens of large donors, but what you likely do have is a passionate core of supporters (friends, family, and business acquaintances) who may be able to do more for you.

Make sure that your fundraising strategy is scalable.  You won’t always be small, or go after small donors, you need to be able to turn around fundraise with everyone big or small.  Businesses love scalability – so should you!  Scalability means that your fundraising tactic can be planned and organized once, then utilized over and over again.  Making your fundraising opportunities scalable allows you to use your time and organizational resources once and reap the rewards quickly and over and over again.

And just don’t go after the small fish.  You may find it to be easier and more successful to fund raise with small donors.  Every cent truly does count, so you can’t discount any donations, but ensure that you are going after the small and large donors with the same frequency and voracity.  The best fundraising strategy is to always go after both: the small time donations will provide your base level of operating support, and the few larger gifts you receive from larger donors will help you grow, expand, and prosper.  Didn’t your mother always tell you that if you don’t ask for something, you will never get it.  But, if you do ask for it, you just might get it!

Now that you know how to start a non profit, take your idea, passion, and heart and go for it!