If you’re considering starting a nonprofit, chances are you see a need in the world and want to participate in a tangible solution. This journey can be equal parts rewarding and intimidating, as you’re about to join over 1.5 million tax exempt organizations registered in the US according to the National Center for Charitable Statistics (NCCS).
We know you’re probably anxious to get to the part where you’re rallying people around your mission, so we’ve put together this comprehensive outline of the process of starting a nonprofit so you can step forward with confidence. And when you’re ready to begin the paperwork of creating a nonprofit, reach out to us. We’ve helped over 700 nonprofits get started nationwide. Our comprehensive startup packages start at $1550.
Menu:
What to Plan When Starting a Nonprofit
Documents to File When Creating a 501c3
I’ve Received My Determination Letter – What Next?
Creating a Nonprofit: Resources By State
Creating a Nonprofit: Resources By Type of Nonprofit
What to Plan When Starting a Nonprofit
Before you go about creating a nonprofit, you’ll need to plan out aspects like who will be involved with the organization and what your mission will be. So how do you know you’re ready to get started? Here are seven simple questions (with more substantial explanations here) that can help you assess if you are ready to turn your dream into a reality:
- Who will you serve? You need to make sure you serve a charitable class. Generally, a charitable class is a specific group of people or other defined group, such as the homeless, vulnerable animals, wildlife habitats, etc. The most common mistake with choosing who you’ll serve is leaving it too broad (like saying you’ll help all people in a country) or by making it hyperspecific (we will only serve one family). The IRS wants you to have a defined group that’s not so specific that it only serves one or two people, but is defined enough to be clear. Learn more here to ensure you’re serving a charitable class.
- How will you accomplish your mission? When starting a nonprofit, one of the most important things to know is what your charitable program(s) will be. The IRS will need to know details about the “who, what, when, where and how” you will practically carry out your mission. Code § 501(c)(3) with the IRS requires that tax-exempt charities be organized and operated exclusively for (1) religious, (2) charitable, (3) scientific, or (4) educational purposes, among others (collectively “charitable purposes”).
- Can you feed and care for an organization? Basically, do you have the time and resources needed to follow the IRS and your state’s rules for nonprofits. This includes your reporting and record-keeping obligations like filing your 990 with the IRS each year.
- Can you fund the startup? Unfortunately, there is no way to start a nonprofit with no money. If you’re wondering how much it costs to start a nonprofit, we’ve mapped out the basic startup costs here. If you cannot secure enough funding, then it might be better to work with an existing organization or charity to accomplish your charitable goals.
- Do you have an anticipated budget? Not only does budgeting help you understand what resources you will need to support your objectives, but this will also help you determine whether you are a private foundation or public charity, an important choice for when filing for tax-exempt status.
- Have you developed a funding plan? It is a common misconception that nonprofit means that you cannot make a profit. Many nonprofits rely on the funds they bring in from charging government entities or individuals for their services. A nonprofit can, and should, have revenue that exceeds its expenses, but nonprofits cannot distribute that excess to its “owners” or other “insiders.” The phrase “no margin, no mission” reflects this reality well – plan to make sure you’ll be sustainable!
- Do you have a board? Lastly, you need to have a board of directors for your nonprofit. These are a few people who will help you as you’re starting a nonprofit with various things like opening a bank account, fundraising, etc. We’ll go more in depth about developing your board later in this article.
If you answered “yes” to four or more of these questions, then you are headed in the right direction and might be ready to start your nonprofit. However, if you answered “no” to four or more, you will want to invest more time in planning before you are ready to change the world. For more in-depth information about each of the questions outlined above, learn more about the seven questions to know if you are ready to start a nonprofit.
Find Your First Board Members
When starting a nonprofit, selecting members for your board of directors is one of the first things you’ll need to do. Every nonprofit is required to have at least 3 board members by the IRS. Here are our most frequently asked questions about creating your initial board of directors:
What does the board of directors do?
Your nonprofit’s board will play an important role in how your organization is governed. Whether the board is making informed decisions about how the nonprofit operates or managing legal and financial risk, they act as the top of the chain of command. For many new nonprofits, these are the people who are helping you get the organization off the ground.
Often in nonprofit startups, board members will help by volunteering, donating and/or fundraising for the organization. The smaller the nonprofit, the more involved with the day-to-day the board usually is. If you have a big group of volunteers though, your board may be able to stick with the big picture decisions like how many fundraising events to have annually or what programs to offer.
Who can (or cannot) be on my board of directors? Can board members be relatives?
A typical board of directors has three or more members, the majority of whom are unrelated. “Unrelated” simply means that the members cannot be related to you or each other by blood, marriage, or business (for example, two people who own a business together). You can have some related board members, but you must have additional members that can out-vote the related members. This is because related board members may pose a conflict of interest for your organization. A conflict of interest, in this case, is a transaction or arrangement that allows a person to gain personal benefits from their official position.
The exception to this rule is for private foundations. However, just because it is permissible for the board majority to be related by blood or marriage does not always mean it is advisable. Consulting with a nonprofit formation professional may be in order to help you understand best board practices for your specific organization’s situation and state guidelines to make sure you don’t run into any issues with the IRS.
Can board members be paid for helping the nonprofit?
There certainly are some instances where board members are compensated, but it’s quite uncommon. Most board members are volunteering their time and effort. Typically, only the largest and most complex nonprofits, like hospitals, compensate their board members for their service to the organization.
What kind of people should I select to be on my board?
When you’re creating a nonprofit, you’ll need people in your corner to help. So first and foremost, choose people who are passionate about your cause who have the time and energy to dedicate. Your first board doesn’t need to be perfect and there aren’t requirements for having certain types of people on your board. But it’s often a great idea to recruit people who have different skillsets than you so you can delegate tasks that might not fit your strengths.
For example—you may have strengths in management, but if event planning is challenging for you, a board member who has experience with events could be a great asset when you need to plan a fundraiser. When your nonprofit is just starting out, or if the nonprofit is small (think under $50,000 in annual revenue), your board tends to be very involved in the day-to-day, hands-on aspects of your nonprofit. At this stage, one of the best things you can do is recruit board members who can help fill in gaps for you.
It’s also a great idea to have someone on your board who either can represent or knows a lot about the population you’ll be serving. For example, if your nonprofit will serve homeless veterans, having a veteran on your board will allow for veteran voices to be represented in the organization’s decision making processes.
Lastly, when choosing board members, ensure that you educate them properly about their roles and duties to the organization. Your board is obligated by law to attend to these three duties, and failing to educate them properly can result in disastrous consequences for your organization that could include expensive liability. You’ll want board members who are team players, committed to avoiding these common board mistakes.
So how do you find people for your first board?
First, think of the people you know who care about your cause. Whether it’s friends, coworkers, people you know from a social club, or people you know from church, odds are, you know other people who care about your mission. When you have initial people in mind, be sure to ask them if they know people who also may be interested in getting involved.
Don’t discount the power of networking. Most cities have networking groups you can attend to meet other people, so that can also be a great way to expand your options. Remember that you can have someone related to you on your board, but it cannot be the majority of people on your board.
When you’re recruiting, remember you’ll need some of your board members to be board officers. Officers hold a specific job like secretary or treasurer. You can read more about board officer roles, including the required roles here.
Documents to File When Starting a 501c3
Once you’ve completed your initial planning stages and you’ve begun recruiting board members, it’s time to start looking at the legal steps of creating a nonprofit. This could be a 501c3 organization or it could be another type of tax exempt organization like a social club.
Step One: Incorporate In Your State
The first step is to incorporate with your state. This step is what brings your nonprofit from an idea to an existing entity, so you’ll want to have your nonprofit’s name decided at this point. There are some pieces of information that all states require like the name of your organization and the registered agent’s name and address. Each state is a little different when it comes to processing this paperwork:
- Some states call this filing articles of incorporation, while others might call this a certificate of formation or something similar. Most states have a filing fee you’ll need to pay to accomplish this step that usually ranges from $10-$100.
- Some states process paperwork within a few days, while other states can take as long as a few months (so plan accordingly). We’ve included a map below that will show how long your states takes (on average) to review and approve the paperwork.
- Each state has slightly different requirements for articles of incorporation, and many provide templates that outline what they ought to contain.
It’s important to note that if you’re starting a 501c3, the IRS requires specific language in your corporate formation documents that may not be included in your state’s templates. If you’re unsure about these requirements and would like one of our nonprofit attorneys to handle the incorporation paperwork for you, let us know. We’ve helped start over 700 nonprofits successfully across the country.
Step Two: Draft Your Bylaws and other Corporate Documents
Step two is made up of several small steps. In this phase, you’ll file for an EIN, create bylaws, a conflict of interest policy, and organizational actions, and adopt an OFAC compliance policy if your nonprofit is going to engage in international work.
EIN
You’ll need to file for your Employee Identification Number (EIN) shortly after your articles of incorporation are approved, which is a nine-digit code the IRS uses to identify your organization. Similar to a social security number, your EIN will follow the nonprofit around for all its years of existence. The EIN is crucial. Without it, you won’t be able to do basic financial tasks like opening a bank account in the nonprofit’s name. Filing for an EIN is free with the IRS.
Bylaws
Next, create bylaws. If you’re starting a 501c3, you’ll want to be sure your bylaws meet the IRS requirements for tax exempt entities. Nonprofit bylaws outline any state and IRS requirements for the nonprofit, as well as how the organization (and by extension, the people who run it) will operate on a high level. Bylaws typically cover the high level information about your board, your fiscal year and members if your organization has them (most nonprofits don’t). Bylaws are adopted when the nonprofit is established.
They are essential because they determine how decisions are made, conflicts are resolved, and risks to the nonprofit are avoided. When it comes to many common concerns, it’s your bylaws that have the final word.
What Should My Bylaws Include?
Bylaws should eliminate guesswork, and effective nonprofit leaders refer to them often so they can be followed closely and consistently. The best nonprofit bylaws are clear enough to be followed without being so hyper-specific that they’re impractical to implement. For example, many nonprofits required their board to meet in-person in order to conduct any official votes. This was a huge problem that left many organizations scrambling in 2020.
On the most basic level, your bylaws should be able to answer practical questions such as:
- How will the board of directors be structured and run?
- If applicable, how do members fit into the organization?
- What will happen when the organization needs to dissolve?
- What if the nonprofit’s bylaws need to be amended in the future?
Read our Nonprofit Bylaws Basics resource for a more detailed breakdown of why each of these questions matter and items to consider when creating your bylaws, as well as a list of common mistakes.
Conflict of Interest Policy
Your conflict of interest policy will also be drafted at this stage. A conflict of interest is when an individual’s duty to serve the nonprofit’s charitable mission is in conflict with their own interests. In short, this policy will “help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation,” according to the IRS. In layman’s terms, if there’s a potential conflict of interest, this policy will show you how to navigate it. It also outlines a procedure for how individuals who have a conflict of interest will be excused from voting if a conflict arises.
Organizational Actions
A commonly missed step when creating a nonprofit is the organizational actions. Organizational actions are a written record of what gets approved at your first board meeting. They can act as a sort of roadmap, letting you know what will need to be voted upon in that 1st board meeting. Some of the tasks in organizational actions are appointing your initial board of directors and their officer roles, choosing who will open the bank account, and officially approving and adopting your bylaws.
OFAC Compliance Policy
For people starting a 501c3 that will provide services outside of the US, you’ll need an OFAC compliance policy. OFAC is the Office of Foreign Assets and Control. It’s a branch of the federal government that sets the rules for US activities in other countries, including sanctioned countries and regions. Nations or regions on the list might have limited activities that can be done there or they may completely be blocked. The OFAC compliance policy assures regulators that your international activities will follow US laws and any applicable sanctions
Step Four: Applying for Tax-Exempt Status
Once you exist on the state level, select your board of directors, and draft and file your corporate documents, the moment of truth has come: it’s time to get your federal tax exemption (501c3 status). When starting a nonprofit, this is often the step people are more familiar with.
Donations to 501c3 organizations are tax deductible, which is a great incentive for giving. Plus, 501c3 status reassures donors that your organization adheres to some level of transparency and accountability. This versatile designation is for charitable causes that are:
- Religious
- Educational
- Charitable
- Scientific
- Literary
- Testing for public safety
- Created to foster a national or international amateur sports competition, and/or
- Focused on the prevention of cruelty to children or animals
It’s worth noting that churches, synagogues, mosques, and other places of worship are automatically considered tax exempt by the IRS (as long as they meet certain requirements) without filing for recognition of 501c3 status officially. There are several factors to consider when starting a church. Check out our article about if your church should file for 501c3 status here for more detailed discussion.
501(c)(3) status covers most types of nonprofits, from veteran’s organizations and youth sports clubs to animal shelters and many places of worship. Most federally tax-exempt nonprofits fall into the “c3” category—however, you may find that the activities you’re looking to engage in are better suited for another type. While there are over 20 types of 501cs, you can learn more about the most common types in this free resource: What Type of Tax Exempt Status is Right for Your Organization?
A determination letter is a document issued by the IRS confirming your organization is tax-exempt. To obtain this letter, nonprofit leaders file the Form 1023 or Form 1023-EZ with the IRS. If you’re starting a nonprofit that is not a 501c3, you’ll file Form 1024. If you’d like assistance selecting which form is right for your nonprofit, let us know. We’re happy to help complete either IRS form. Because most nonprofits are 501c3s, we’ll use the language applicable to that type of organization below, but we are still happy to assist other types of tax exempt organizations.
IRS Form 1023
The full Form 1023 requires detailed, narrative answers and multiple attachments (many of which are the documents you completed in earlier steps). It can be up to eight schedules and the IRS estimates the form will take 15 ½ hours to complete – but keep in mind this does not include the time to learn the form’s requirements, answer each question accurately, gather records and other related tasks. As a result, the full Form 1023 may take up to 185 hours of working time to file (almost a month’s worth of effort!) and can end up being 100 pages total in some circumstances.
If you are starting a church, school, or hospital, you will need to file the full Form 1023 by default. You will also file this form if you have or anticipate having over $50,000 in annual revenue in the first three years or if you own over $250,000 in assets. The IRS charges $600 to file the full 1023. For organizations that don’t fit into the categories above, you might be eligible for a shorter, cheaper version of the form called the 1023 EZ.
IRS Form 1023-EZ
The Form 1023-EZ is 2 ½ pages long. As the considerably shorter form, this can be a great option for small organizations looking to get started faster. Typically, the IRS takes 1-3 months to approve the 1023 EZ, rather than the 6-9 months they take on the full 1023. This form has similar requirements for eligibility:
- Having less than $50,000 in annual gross receipts
- Owning less than $250,000 in assets
- Not belonging to one of several specialty categories of tax-exempt organizations like schools or churches
With either form, the IRS is looking to make sure your nonprofit is charitable according to their standards for charitable purposes and activities. They examine everything from your organization’s governance structure, organizing documents and any conflicts of interest that may raise a concern. The IRS charges $245 to file the form 1023-EZ.
The IRS can take several months to approve these forms, so many organizations use fiscal sponsors to receive tax-deductible donations and apply for grants in the meantime. You can learn more about fiscal sponsorship in general here, and learn about Fiscal Sponsorship Allies’ program here.
Due to the lengthiness of this process and the numerous areas that can be easily filed incorrectly, it’s discouraging to be denied tax-exempt status after sinking that many hours into either form. That’s why we’d be happy to help you start your nonprofit and structure it correctly from the very beginning. Let us know if you’d like to speak to a member of our team to discuss. We can complete the entire startup process from start to finish in any state in the US. Packages start at $1550.
I’ve Received My Determination Letter – What Next?
If you’ve completed all the steps in this article, congratulations on achieving tax-exempt status! Your journey of starting a 501c3 or other tax exempt organization has ended, but now you’re ready for the next chapter: actually running your nonprofit! Here are a few more steps to consider once you’ve gotten your determination letter from the IRS:
Charitable Solicitation Registration
In order to fundraise legally, you’ll now need to register to solicit donations in the relevant states (this includes asking for donations via email, newsletters, telethons, etc.)! There are currently 43 states that require this step. While the exact process for registration varies widely by state, the requirement as a whole is called Charitable Solicitation Registration (CSR). You can learn more about CSR and some practical considerations when registering here.
State Tax Exemptions
Unfortunately, even after achieving your federal tax exemption, this does not mean you are exempt from all state-level taxes. Some states, like Texas and California, do require additional steps for charity status in-state. These exemptions include sales and use taxes, income and franchise taxes, and property taxes. Don’t forget to double check to make sure your nonprofit stays compliant and isn’t missing out on additional exemptions.
Making Your Nonprofit Your Full-Time Job
Many nonprofits begin as volunteer-led endeavors, spearheaded by people who have other day jobs. But it is possible for your nonprofit to turn from your passion project into your career. Learn more here about when you may be ready to take the leap into making your organization your full-time gig.
Common Mistakes for New Nonprofits
Finally, check out our article Top 3 Mistakes Nonprofits Make for more tips and considerations for new nonprofits. We love to see new nonprofit leaders thrive and truly believe that knowledge is power. And if you need assistance with getting your nonprofit started legally, reach out to us for a consultation with a member of our legal team. We’ve helped over 700 nonprofits get started nationwide.
Need some help starting a 501c3?
Once you have a mission in mind and at least three board members (including yourself) ready to get involved, you’re ready to get started! Reach out to us to schedule a free initial consultation with a member of our team. We’re happy to complete some (or all) of the legal paperwork for you to ensure you get started on the right foot.
Creating a Nonprofit: Resources By State
Our team makes free resources to help you get the most relevant information when you’re starting a nonprofit. See which states we’ve developed a guide for below. Don’t see yours yet? We’re always making new content, so check back soon:
Creating a Nonprofit: Resources By Type of Nonprofit
If you’re starting a 501c3 or another type of organization, check out our resources by what type of nonprofit you’re starting. Don’t see what you need? Let us know! We’re always developing new free content for nonprofit founders:
