How To Form a Nonprofit
When you think of starting a nonprofit organization, you're probably driven by a powerful passion to make a difference. It's crucial to remember that a nonprofit is still a small business. Before you dive into creating a nonprofit corporation, you need to get serious about the business side of things.
Meticulous planning and thorough preparation are a must. The following step-by-step guide will help you create a solid foundation for your new nonprofit endeavor.
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Name Your Nonprofit Startup
If you plan to create a nonprofit corporation, you should choose your name first. If you are incorporating, you will probably be required to register a name.
When naming your new nonprofit, you should try to think of one that will be memorable to your members and donors. You should also check social media and domain name availability.
There are a few legal considerations to keep in mind too:
- If you incorporate, your nonprofit's name cannot be the same as any other corporation in your state. Your state's corporation's office can help you find out whether your name is already taken. Some states' websites have searchable name databases that help speed up this process.
- Another business cannot trademark your nonprofit's name. Check the United States Patent and Trademark Office's (USPTO's) searchable database.
Get an Employer Identification Number (EIN)
An Employer Identification Number (EIN) is a unique number that helps the federal government identify businesses. It issues EINs for both nonprofit and for-profit organizations.
Your nonprofit needs an EIN to open a bank account, hire employees, and pay any taxes it owes. You can secure an EIN by mail or phone. The Internal Revenue Service (IRS) also offers an online application for faster processing.
Establish Financial and Operational Systems
Set up accounting and financial systems to track income, expenses, and donations. Develop policies and procedures for governance, financial management, record-keeping, and corporate structure. Obtain any necessary business licenses or permits required to operate. You will need accounting systems to know where your money is coming from and where it's going. You should also consider creating policies and procedures addressing how to handle money to ensure there are clear expectations.
How Do I Get Paid if I Run a Nonprofit Corporation?
Running a nonprofit corporation doesn't mean you work for free. In fact, many nonprofits pay salaries to key personnel. This helps ensure they attract and retain the right talent to manage the organization effectively. Your compensation should be reasonable and in line with what similar organizations pay for equivalent roles.
It's essential to have a clear, documented salary structure approved by the board of directors to ensure transparency and avoid potential conflicts of interest. Always remember that the primary goal of a nonprofit is to serve its mission, but fair compensation is vital to sustain dedicated leadership and staff.
Write a Business Plan
All businesses, whether nonprofit or for-profit, can benefit from a strong business plan. As a not-for-profit business, your plan should focus on your mission statement. It should include strategies for how you plan to fund and achieve your mission. You should also check to see if existing organizations already do the same type of work.
If you plan to do marketing or fundraising, you should include that in your business plan. A realistic assessment of your fundraising needs can be very helpful. It will help you create a financial plan and budget for long-term outreach in your community.
Create a Fundraising Plan
Fundraising is the lifeblood of a nonprofit organization, fueling its mission and programs. To ensure consistent financial support, every nonprofit should develop a robust fundraising strategy. This strategy outlines clear goals, identifies potential donor sources, and decides on methods to approach them.
Whether it's organizing events, seeking grants, or launching online campaigns, choosing the right mix is crucial. Furthermore, understanding the interests and motivations of donors can help tailor pitches to resonate more deeply.
Regularly reviewing and adjusting the strategy is essential. This accounts for changing circumstances and new opportunities. Ultimately, a well-crafted fundraising strategy not only secures necessary funds but also strengthens the bond between the nonprofit and its supporters.
Decide Whether To Incorporate Your Nonprofit Organization
If you do not take steps to incorporate your nonprofit, it will be unincorporated by default. It will be legally known as an unincorporated association. Although incorporating requires some extra paperwork, it is probably worthwhile.
Benefits of Incorporating
When you incorporate, your nonprofit has its own legal existence. In other words, incorporating makes the nonprofit its own legal entity separate from the people who run it. This also means the nonprofit corporation can buy and sell property.
Incorporating also comes with tax benefits and helps to shield your personal property from liability for the nonprofit's actions. For these reasons, most nonprofits incorporate.
If you decide not to incorporate, your nonprofit will be an unincorporated association. This means that your nonprofit does not have a legal status separate from its members.
Unless your state has laws that specify otherwise, your nonprofit will not be able to buy or sell property. It also will not be able to sue or be sued. Check your state law to be certain.
How To Incorporate
If you choose to incorporate your nonprofit, there are a few steps you will need to follow.
- Find the local government department where you must file your paperwork. This is usually a department of the secretary of state or department of state.
- Submit your articles of incorporation. This is a legal document that provides some general information about your organization. Many states offer fill-in-the-blank templates that make this easier. You will need to provide information such as the organization's purpose, name, address, and list of directors.
- Pay your state's filing fee and submit.
Bylaws are a set of internal rules that your nonprofit's members agree to. The rules will include:
- Identifying information for your nonprofit, including its name, address, and place of business
- Procedure for electing the board of directors
- Term limits for board members
- Frequency of board meetings
- Procedure for changing the bylaws
The IRS does not have specific requirements for nonprofit bylaws. State rules may vary.
Appoint a Board of Directors
Every great nonprofit corporation starts with a great team. You will need to form a board of directors for your nonprofit corporation. Find people who not only believe in your cause but also bring expertise to the table. This group will help guide your nonprofit and make important decisions. They ensure your organization stays on track and follows all legal requirements.
Apply for Tax Exemptions
Tax exemptions for nonprofits are not automatic. You will need to file some paperwork to secure your nonprofit's tax-exempt status.
The most common type of federal tax-exempt status in the nonprofit sector is covered by 501(c)(3) of the Internal Revenue Code (IRC).
If it is tax-exempt, an organization does not have to pay taxes on the revenue it earns through activities related to its tax-exempt mission. If it generates substantial revenue through unrelated business activities, it might be taxed on that income.
Who Qualifies for a 501(c)(3) Tax Exemption?
Most nonprofits are charitable organizations. They qualify for tax exemption under 501(c)(3). Private foundations may also get this type of tax exemption.
The nonprofit must have one of the following purposes to qualify for this type of exemption:
- Charitable work
- Religious outreach
- Prevention of cruelty to children or animals
- Scientific inquiry
- Educational or literary missions
Your nonprofit organization also must not have a political purpose to qualify for this exemption. The IRS has a rigorous process for examining these applications. They will check whether your nonprofit has any conflicts of interest and will also investigate whether it might inappropriately benefit its members.
What Are the Benefits of a 501(c)(3) Tax Exemption?
Donors get tax deductions on their donations, so having this income tax exemption can help you attract more donations. There are also federal tax exemptions and possible state tax exemptions.
How Do I File for a 501(c)(3) Tax Exemption?
You should fill out the appropriate paperwork. These will be either an IRS Form 1023 or Form 1023-EZ. Form 1023-EZ is for smaller nonprofits. You could qualify for the EZ form if your gross receipts and assets fall below certain thresholds.
How Do I Get a State Tax Exemption?
In some states, you will automatically be a tax-exempt organization if the IRS grants you a 501(c)(3) tax exemption. Other states will require you to apply for state-level tax exemption separately.
Check with your state's Department of Revenue or Attorney General's office to learn more about the state law.
Do I Need a Charitable Solicitation Registration?
Most states require this before you can ask for donations. Talk to your state's attorney general's office for more information.
Other Types of Tax-Exemptions
Most nonprofits fall under 501(c)(3), but there are also many other types of nonprofits. If your nonprofit does not qualify for a 501(c)(3) exemption, it may qualify under a different subsection. Some examples include:
- Social clubs
- Civic leagues
- Social advocacy groups
- Trade associations
Launch and Promote Your Nonprofit Corporation
Launching a nonprofit corporation is an exhilarating step toward realizing a vision for positive change. As you embark on this journey, promotion becomes essential to create awareness and garner attention. Utilizing a mix of traditional media, social platforms, and community outreach can amplify your nonprofit's voice and message. Hosting launch events or open houses can introduce the organization to potential supporters, volunteers, and beneficiaries.
Engaging storytelling and highlighting your mission and objectives can captivate and resonate with your target audience. Partnerships with like-minded entities with similar missions can also extend your reach. As you consistently communicate your impact and successes, you'll not only attract supporters but also foster a community deeply invested in your nonprofit's goals.
How an Attorney Can Help
If you are starting a new nonprofit, you might want legal advice. You may have questions about tax exemptions, bylaws, incorporation, and other issues. Call a local attorney today to ask your nonprofit organization formation questions. They are well-versed in helping business owners realize their goals.
When you are ready to form your nonprofit, we offer a reputable DIY nonprofit formation service that will ensure you take the right steps in your state.
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