Nonprofit organizations, also known as NPOs, are institutions that have been created to provide a service or social benefit for the public rather than generating profits for their founders. Nonprofits are intended to improve the quality of life in the community and the natural environment. Nonprofit organizations must make profits that benefit their mission, not enrich stakeholders, as is the case with for-profit businesses.
Successful nonprofit organizations can apply for tax-exempt status. This allows them to be exempt from federal income tax and allows charitable donations to be tax deducted. Examples of nonprofit organizations include churches, social clubs, schools, humanitarian programs, public charities, and churches.
Although it may seem difficult and complicated to start a nonprofit, it is possible with a systematic step-by-step approach to ensure your success. It’s also one of the most rewarding ways people can spend their time. However, it takes dedication and careful planning.
This step-by-step guide will help you start a non-profit organization.
1. Choose a name to represent your organization
After you have decided on the purpose of the nonprofit and identified a way to meet the unmet needs in your community, you can start to think about a name.
The first step in establishing a nonprofit’s brand and the image is critical. Names must comply with state naming requirements. They should also be easily found by potential donors and members. If you are considering creating a website for your nonprofit, check if the business name is available on the internet.
2. Nominate a registered representative
Every non-profit organization must nominate a registered representative. Also known as resident, statutory, or service-of-process agents, registered agents can also be called:
Nominated individuals will accept important documents on behalf of the nonprofit organization. The registered agent will be your point of contact with state officials.
Anyone can be nominated to serve as your nonprofit’s registered agents, provided they are over 18 years old and live in the state. The appointment must be consented to by the individual.
3. Recruit your board members
Next, the selection of board members or a board is crucial in the process of incorporating a nonprofit organization with the state. The organization’s operations are governed by the board of directors.
Each state will have its own requirements. In most cases, three directors must be appointed. Three additional members are needed to fill the positions of secretary, president, and treasurer. The initial term of the directors is for one year, then a successor will be elected.
4. Consent to Conflict of Interest Policy and bylaws
The next step in creating, approving, and ratifying essential governing policies is to start a non-profit organization. The Bylaws and Conflict of interest policies are two of the most important documents that you will need.
- The Bylaws describe how an organization should run.
- The Conflict-of-interest policy is a set of rules and regulations designed to ensure that decisions made by the board or members of the board of directors are in the nonprofit’s best interests and not in any member’s personal agendas.
When the organization appoints directors and officers, these governing documents must be adopted and ratified. They do not have to be filed with the state but should be kept safe for future reference.
5. Choose a non-profit startup corporation structure
There are many types of organizational structures. This step is crucial because you will need to decide on the legal structure for your organization.
Charities are usually nonprofit public benefit companies. Other nonprofits can be established as trusts and associations. You should consult a lawyer to determine the best legal form for your nonprofit. To incorporate your nonprofit, you will need to use the forms your Secretary of State Corporations Division provided.
There are also other types of corporations and types of non-profits, such as mutual benefit and religious corporations. Mutual benefit corporations are often formed to benefit their members. This includes social clubs and business leagues. These include churches and other places for worship.
6. File and prepare nonprofit Articles of Incorporation
To register your non-profit organization, you will need to file the Articles of Incorporation in your state. This is required to be eligible for tax exemption and to apply to tax-exempt status.
The Articles of Incorporation should also contain the following information.
Your nonprofit’s purpose must be clearly stated in your articles
It is your organization’s mission statement. To qualify for tax exemption, your nonprofit corporation must be limited to one or more of the following categories: Charitable, Religious, Scientific, Educational, Literary, Preventing cruelty to animals/children, Fostering international/national, non-professional sports competition, and Testing for public safety.
The dissolution clause clearly outlines the purposes of your nonprofit’s assets and the consequences for the assets if it is dissolved. To be tax-exempt, your nonprofit must use its assets only for purposes authorized by section 501c3.
This IRS example document explains how to meet IRS requirements for tax exemption.
Your articles should include information pertinent to your non-profit, such as:
- Name of your organization
- The initial registered office for your organization
- Your Board of Directors’ names and addresses
- Name and address of the registered agent
7. Send an initial report
After you have registered your non-profit organization, you may be required to submit your first reports to your Secretary. Although the due dates for initial reporting will vary from one state to another, they are usually within a 90-day range.
8. Get an EIN (Employer Identification number)
An Employer Identification Number (EIN) is a number that identifies an employer. It is also known as the Federal Tax Identification Number. It is used by the government to identify businesses within each state. You can use a social security number to identify your nonprofit.
EINs are useful for many purposes, including opening a bank account, filing 990 tax returns, or hiring staff members for your nonprofit. You will need to apply to the Internal Revenue Service to obtain an EIN.
The EIN can be obtained completely for free. You can apply online.
9. For federal tax exemption, apply
To be eligible for federal income tax exemption, you must apply for tax-exempt status 501c3 under the Internal Revenue Code. Although it can seem tedious and difficult, tax exemption has many benefits.
You are exempt from income taxes and can apply for government and private foundations funding. Before submitting your tax exemption application, review the criteria and meet all eligibility requirements.
To begin the process, you will need to fill the IRS Form 1023 and the template. You must complete the IRS Form 1023-EZ if your business is small. This application is short and easy, but it is also much quicker.
Before submitting your application, ensure your organization has elected its board of directors, filed Articles of Incorporation and adopted governing policies.
After the application is received, the Internal Revenue Service will examine it. There are only two outcomes.
- Your application will be accepted immediately. A determination letter will be sent to you confirming that your organization is exempted from the list.
- You may also be denied. In that case, you will receive a letter explaining why.
10. Request state tax exemption
You may need to apply for income tax exemption depending on where you’re incorporating your nonprofit. You may also need to file for sales tax exemption in your particular state.
11. Additional licenses and permits may also be required
You will need the appropriate permits and licenses to legally operate your non-profit organization in your state. This can vary on a local and state level. You should refer to the Small Business Administration Business License Look-up Tool. Make sure you enter your business type and locality when using the tool.
Additional reporting and state registration requirements
You may need to register with the state before you can participate in fundraising or charitable solicitation activities, depending on where your nonprofit is located.
If you intend to engage in fundraising activities that are not conducted in the state where your nonprofit is incorporated, you may be required by law to register it in another state.
12. Send an annual report
The nonprofit organization’s accomplishments for the past year are documented in an annual report. It also provides a glimpse into the future. Although not every nonprofit organization in every state will require an annual report to be credible with the federal and state governments, it is recommended.
The costs of starting a nonprofit
A wide range of costs will be involved in starting a non-profit organization. The cost of starting a nonprofit organization can range from $275 to more than $900, depending on whether you pay federal or state filing fees.
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: email@example.com