Suppose you are wondering how to start a nonprofit. People like you are inspired to create a nonprofit organization to assist those in need. Establishing or maintaining a charitable organization is not simple, but we applaud your desire to help others.
In that case, you must know that starting a nonprofit organization can be daunting, time-consuming, and complicated, but a systematic, organized, and stress-free approach can help ensure success.
Before we continue about how to start a nonprofit, you should be aware of all the phases involved. A foundation might require years of hard work and perseverance to survive.
We’ve provided a comprehensive guide listing the key steps you must take to start a nonprofit organization in a routine, organized, and hassle-free way.
- What is a Nonprofit Organization?
- Types of Nonprofit Organizations
- How long will it take to form a Nonprofit Organization?
- Can you earn money from a Nonprofit Organization?
- 9 Steps on How to Start a Nonprofit Organization in 2022
- 1. Conduct research
- 2. Build a strong foundation
- 3. Create a Business Plan
- 4. Incorporate your Nonprofit
- 5. Recruit board of directors
- 6. File for tax-exemptions
- 7. Secure funding for your Nonprofit
- 8. Invest in software
- 9. Ongoing Compliance
- Wrapping Up
What is a Nonprofit Organization?
Nonprofits are groups that promote social causes or assist a group of people. For example, they might be a club, association, trade union, social advocacy group, or charity.
Unlike a for-profit company, a nonprofit does not distribute its profit to its shareholders but recycles it into its business. Nonprofits maintain a consistent mission and are set up without a set expiration date.
If you want to know how to start a nonprofit for a temporary project that benefits a particular community, consider collaborating with an existing nonprofit organization.
Types of Nonprofit Organizations
To know how to start a nonprofit, you must know the most common types of nonprofit organizations. The Internal Revenue Service (IRS) outlines 25 tax-exempt nonprofit statuses in the United States. These are a few of the most common:
1. 501(c)(3): The 501(c)(3) designation is the most popular kind of nonprofit organization, which includes any institution serving charitable, religious, educational, scientific, or literary purposes. Private foundations, public charities, and private working foundations are the most frequently encountered 501(c)3 organizations.
Still, nonprofit corporations, trusts, and limited liability companies, or LLCs, may also be eligible for 501(c)3 status. Nonprofit organizations may not participate in political activities, including lobbying and campaigning.
2. 501(c)(4): 501(c)(4) organizations, including homeowners associations, veterans associations, and civics associations, are classified as social advocacy groups and social welfare organizations. 501(c)(4) organizations may engage in political activities, like lobbying and campaigning, as long as they are concerned with social welfare.
3. 501(c)(7): Nonprofit 501(c)(7) organizations are social clubs whose purpose is pleasure, recreation, or another nonfinancial endeavor. These groups charge membership fees to cover operating expenses and offer limited access based on geography, religion, or sports affiliation. According to the IRS, these organizations cannot discriminate based on race, color, or religion.
How long will it take to form a Nonprofit Organization?
Establishing a nonprofit can be pretty time-consuming, especially if you need to recruit a board of directors, incorporate your nonprofit, and prepare everything required for tax-exempt status in a short amount of time.
The process for most new nonprofits takes several months. You will file Form 1023 to apply for tax-exempt status, but remember that it might take the IRS up to a year to reply.
If your nonprofit makes less than $50,000 in annual income, you can file Form 1023-EZ, which will be processed in 2-4 weeks. If you want to know how to start a nonprofit and the time required to create one, there are several legal particulars you’ll have to deal with, and the time it takes depends on where you live.
Can you earn money from a Nonprofit Organization?
It is accurate that a nonprofit will make a profit, but you must use all of it to cover the costs associated with running the organization and accomplishing its mission. Rent, equipment, and software, as well as marketing expenses and employee wages, are just a few of the costs your organization may face.
Can you, as the founder, receive a remuneration? In addition to all other workers, you deserve to be compensated for your efforts. The Board of directors can establish a fair wage for you, which will be part of your enterprise’s expenses.
The image shows significant revenue streams for nonprofit organizations.
9 Steps on How to Start a Nonprofit Organization in 2022
Now, look at the 9 steps you’ll take and everything you’ll need to consider when you want to know how to start a nonprofit organization.
1. Conduct research
When considering how to start a nonprofit, research and planning is the first and most crucial step to take.
Even though nearly half of all nonprofits are doomed to failure because they do not put enough time into research and planning, you can increase your chances of success if you ask yourself the following questions:
Has the community demonstrated a need for the type of nonprofit we envision?
The first action to take when you are wondering how to start a nonprofit is to identify the problems in the community and quantify them. You must specify the “demand” and “market” for your nonprofit’s services, just as you would if starting a for-profit firm. The market for foundation grants and the demand for individual donations is highly competitive.
To gain funding, you must prove that your nonprofit’s services are needed and that they are best positioned to provide them. Working with existing institutions may be more efficient and effective than starting a new one.
Are There Any Existing Organizations That Already Address This Need?
When considering how to start a nonprofit, it is essential to know your competition. Are there any other organizations already doing what you want to do? Would your organization be able to provide extra value to your local community?
If two nonprofits have identical missions, they will compete with one another for funding and public backing. Neither would be able to generate sufficient income to have a significant impact.
What are the expenses of starting a nonprofit organization?
The Harbor Compliance chart delineates the cost of registering a nonprofit in every state and the time it will take. In addition to the upfront costs, you’ll need to invest time and money to establish your company.
What infrastructure expenses will your firm incur? Do you require office space? What supplies will you need? Some services, such as health and child care, require special licensure, permits, or certifications.
When considering how to start a nonprofit and the costs involved in its establishment, we suggest you seek guidance from your state’s nonprofit association or a local attorney experienced in the workings of nonprofits to understand all the statutory and operational demands.
Are you considering alternatives to starting your nonprofit?
The tricky thing about how to start a new nonprofit is establishing and maintaining consistent revenue streams. The majority of new nonprofits have difficulty establishing and maintaining reliable income streams.
You may still assist a cause you care about by taking the following actions, donating to other nonprofits, collecting donations from your family and friends, organizing an event and donating the proceeds, starting a chapter of an existing nonprofit, joining a nonprofit as a staff member.
You may also volunteer or serve on another organization’s board, offering consultant services or as a fiscal sponsor.
2. Build a strong foundation
After completing your research, it’s time to build a strong foundation.
Choose a name for your Nonprofit
If you are thinking about how to start a nonprofit, start by selecting a name for your nonprofit organization. There are many approaches you may use when naming your nonprofit organization.
Your nonprofit should have a unique name connected to its primary activities. It’s wise to give some thought to this choice, as it will establish the tone and impact your nonprofit’s brand over the years.
Some states demand that nonprofits have a corporate designator, like Incorporated, Company, Corporation, Limited, or their abbreviations (Inc., Co., Corp., and Ltd, respectively). Inspect your state’s incorporation web page to see if a corporate designator is required for your nonprofit.
You should also verify with your Secretary of State to see if your desired name is available and with the U.S. Department of Commerce to ensure it is not trademarked.
Come up with a great mission statement
An effective mission statement is crucial for any nonprofit. It can help you define your purpose and inspire your employees and volunteers. It conveys a strong message about your values; if it is written and disseminated, it directs your focus and attention and helps you make future decisions.
Here are a few tips for preparing the perfect mission statement:
- To craft the perfect mission statement, keep it unambiguous, simple, and easy to understand.
- It would help if you also strived to keep it brief and to the point. It should, above all, inform people about what you do and lead your team members and stakeholders.
- It should be open to input from everyone, frequently reviewed, and distributed to everyone.
- It should not be a marketing slogan, use expert phrases, or include buzzwords or generalities.
A strong mission statement is critical to establishing a solid foundation for your plan and attracting the right people to your cause when considering how to start a nonprofit.
Determine vision and organizational values
A vision statement should be a driving force behind your work, motivating you and your team to achieve your organization’s goals. Here are some examples of grand nonprofit vision statements:
- She’s the first: Invest in girls.
- Alzheimer’s Association: A world without Alzheimer’s disease.
Your organization’s values are principles followed by everyone, including you, your team, your volunteers, your board members, and your supporters. They will guide every decision and activity at every level and corner of your organization.
3. Create a Business Plan
A business plan is essential for planning purposes, but it is also valuable to anyone considering investing in your company. That is why a business plan holds an important position in the process of how to start a nonprofit. Anyone thinking about backing your organization might ask to see this document before committing.
Regardless of your size or financial standing, a well-crafted nonprofit business plan lays out a route for the coming three to five years of your labor.
Your nonprofit business plan establishes a blueprint for how you will manage your nonprofit, what duties will be assigned to whom, and how you will accomplish your goals.
Here are the fundamental components of a nonprofit business plan:
Your executive summary should be the first section of your business plan and the last one written.
You will describe your nonprofit’s mission, purpose, and mission in this section, along with a description of how your nonprofit will address the identified need. Before mentioning your programs or services, write about your organization’s mission, vision, and values.
You can read the best business plan executive summary examples to know how to write one perfectly.
Programs, Products, and Services
This section describes your nonprofit’s products, programs, and services. Who are your customers? What are your outcome-based objectives, and how will you achieve them? How do your programs and services contribute to a positive trend?
Your organization must establish a strong marketing strategy to increase awareness. Your marketing strategy should address the following issues: Who is your target audience (i.e., potential members, donors, and supporters)? Who will you locate these individuals? How will you encourage them to join?
Your nonprofit’s impact plan should answer the following questions: What are your objectives? What do you need to accomplish? How will you measure success? How will you share your impact with your community?
Here, impact refers to the positive change that your nonprofit will bring about.
Your operational plan will guide your nonprofit’s day-to-day operations. Your operational plan should answer the following questions: Where will your office be? What supplies and equipment will you require? How will you deliver your services? What staff and volunteer positions must you fill?
In addition to cash flow statements, balance sheets, and income statements (if appropriate), compose a budget. What income is guaranteed? Are there any potential revenue streams?
How much money do you require to start and maintain your business? What startup expenses are there? Are there any deficiencies?
If the process of creating a business plan seems tricky to you, read our article here about how to write a perfect nonprofit business plan. There are many business plan software available to assist you with this process.
4. Incorporate your Nonprofit
Incorporating is the most crucial step when considering how to start a nonprofit. A 501(c)(3) corporation is a not-for-profit organization formed as a corporation. Nonprofit organizations must reinvest their profits in the cause, while for-profit businesses may distribute them to their shareholders.
Register your organization: To apply for 501(c) status, you must register your organization as a corporation (or, less frequently, as an association or trust) with the US Secretary of State, known as “incorporating.”
You must include your organization’s bylaws (or regulations specifying how you will administer the firm) and its articles of incorporation (detailing its fundamental structure) in the application. Every state has a different cost for incorporation.
File for EIN: Every organization, for-profit or nonprofit, must obtain an employer identification number (EIN) from the US government; it’s essentially a social security number for your organization. An EIN permits you to open a bank account for your nonprofit venture. You can get an EIN for free online through the IRS website.
File for 501(c) status: After your organization has been appropriately registered with the government, you may apply for one of the several 501(c) statuses, which will make your organization tax-free.
If you qualify, you will utilize the IRS’s 1023 form (or the 1023-EZ form) to receive one of these statuses. It will require several documents, including your organization’s structure and activities, as well as a filing fee.
File with your state: Before you begin fundraising, check the attorney general’s office website to see if your state requires nonprofit corporations to file for charitable organization status.
The image shows the difference between a nonprofit and a for-profit organization.
5. Recruit board of directors
Hiring the perfect Board members is critical in establishing a new nonprofit. The Board will be responsible for ensuring regulatory compliance, making important decisions, supporting everyday operations, hiring employees, and other critical duties.
Consider which skills, knowledge, abilities, and other characteristics are essential for your nonprofit’s ideal executive director and which are most important to you? When you invite someone to serve on the Board, you must inform them immediately about their role. There should be a smooth onboarding process for your employees and board members.
It will help if you begin by deciding whether your Board will play an active role in managing your organization (a hands-on Board) or whether it will function as a consulting advisory body (a governing Board).
States in the United States require a list of board members before incorporation; you can find out more on your state’s website. The board of directors holds an important position in the process of how to start a nonprofit.
6. File for tax-exemptions
Your nonprofit will benefit from tax-free status in addition to federal corporate income tax deductions and bulk-rate postage discounts. Your nonprofit may also seek foundation funding if it is federally tax-exempt.
Donors will appreciate the benefit of being able to deduct charitable contributions as a result of their status as tax-deductible contributions to your nonprofit organization.
In addition to being tax-exempt, 29 distinct categories of corporate entities are listed in section 501(c) of the Internal Revenue Code. The 501(c)(3) is the most frequently recognized of section 501(c) exemptions.
The IRS restricts 501(c)(3) nonprofit organizations.
- 501(c)(3) organizations cannot benefit private interests, such as the founder, his family, or others connected to him directly or indirectly.
- The Internal Revenue Code’s Section 501(c)(3) specifies that 501(c)(3) organizations must be organized and operated primarily for limited, exempt purposes.
- Campaign work for and against political candidates is prohibited for 501(c)(3) organizations.
How to apply?
To know how to start a nonprofit and obtain tax-free status, you must register with the IRS as a 501(c) organization. According to the IRS, completing Form 1023 will take about 90 hours to satisfy record-keeping requirements. You can learn if you’re eligible to use Form 1023-EZ here.
The application process can take anywhere from three to twelve months to receive a decision, so begin early. It will help if you educate yourself with all IRS resources to help you with your application. These resources will help you in navigating the application process:
- The Compliance Guide for 501(C)(3) Public Charities
- Application for Recognition of Exemption
- Life Cycle of an Exempt Organization
- All Governance and Related Topics for the 501(C)(3)
Remember that there are fees to apply for tax exemption:
- $600 for Form 1023
- $275 for Form 1023-EZ (if you have less than $50,000 in gross receipts and less than $250,000 in assets, you may be eligible for this more straightforward form).
To finish the procedure, you must register your nonprofit with your state’s tax authority. Every state’s exemption procedures, filing locations, and annual reporting requirements are found on the IRS State Links for Exemption page.
If the above process seems daunting, reach the IRS tax-exempt hotline for assistance. Filing for tax exemptions is essential when thinking about how to start a nonprofit; you must not skip this step.
7. Secure funding for your Nonprofit
Finding and selecting a funding model for a nonprofit organization can be one of the most challenging tasks when considering how to start a nonprofit. A poorly funded nonprofit organization is unlikely to survive long enough to establish a strong fundraising program. You can get funding for your nonprofit in six ways:
Nonprofits can secure startup funding by applying for grants. Grants are given to a nonprofit organization for a particular purpose or program and often focus on a specific population or category of organizations.
A grantmaker typically grants to a nonprofit organization for a specific objective or project.
You can get started faster with grants than with many other funding resources, but they take a lot of time to apply. Composing a winning grant application takes time, and you might not see the money in your bank account for quite some time.
Corporate sponsorships typically take three forms:
- Philanthropic – unconditional donations similar to personal giving.
- Event sponsorship – short-term event-based support.
- Cause marketing – long-term thematic engagement.
Donor matching is also available, in which corporations match employee donations.
Nonprofit crowdfunding is attracting attention these days, as crowdfunding has become one of the critical ways to raise funds in 2022. You can utilize crowdfunding to fund specific initiatives or general initiatives.
For example, crowdfunding can be a game-changer if you have a time-sensitive initiative. Many crowdfunding sites are made explicitly for startups; refer to those sites for raising funds.
In-kind donations, such as food, clothing, and medicine, are an example of this type of donation. If your organization seeks to provide food, clothing, and water to people in areas affected by natural disasters, you may benefit from getting in-kind supplies.
Each funding source has its strengths and weaknesses, as well as benefits and pitfalls, which means they all require time and effort. Every nonprofit organization must know about its fundraising strategy.
Selling goods and services
Your organization can receive funding through selling branded items or charging for services (e.g., hospitals bill patients, museums request entrance fees, theaters sell tickets, civic organizations collect dues, universities require tuition, and so on).
Individuals contribute money or time to an organization in return for membership. They become affiliated with the organization for a predetermined period (usually one year) and receive certain benefits.
8. Invest in software
If you are thinking how to start a nonprofit, you must learn about all the systems and tools at your disposal, including fundraising platforms, CRMs, and task managers. However, don’t get too deep into the rabbit hole—you may lose track of all the tools at your disposal. You don’t need every tool in the world to do great work; investing in a few key ones may help you get started faster.
Here are some tools that we recommend for your nonprofit organization:
- Donation Software– to accept and manage all your donations.
- Email Software– to send out newsletters and other information.
- Finance Software– to handle all the funding and revenue of your nonprofit.
- Consumer Relationship Management Tools– to manage members and donors.
- Communication Tools– to manage communication between your staff members, volunteers, and managers.
- Task Management Tools– to automate and efficiently manage all tasks like events, campaigns, etc.
- Social Media Management Tools– to manage all social media handles of your nonprofit organization.
- Analytics Tools– to measure the performance of your nonprofit organization.
Your organization can benefit from using these tools as a legion of helpful robots to handle all the administrative work so you can concentrate on activities that will produce more member value and increase your growth.
9. Ongoing Compliance
Once you know how to start a nonprofit and successfully establish one, you must keep up with several things to maintain your tax-exempt status.
Register with your state’s agency
Each state has an office responsible for regulating charitable organizations and charitable fundraising (usually the Attorney General). In addition to registering in your state, you might need to register in other states if you plan to raise funds there.
Prepare for annual reporting requirements.
The 990 Form is mandatory for most nonprofit organizations. It collects data on revenue, spending, board members, achievements, and other operational information. The form you file depends on your gross receipts.
Each state has its reporting and renewal requirements, so consider how you can keep things running smoothly as you track your organization’s finances and activities.
If you manage personal health data, HIPAA compliance is critical. In addition, you must be PCI compliant if you handle payments with credit or debit cards. You will also have to keep in mind external regulations affecting your industry.
If your nonprofit works with children, you must conduct criminal background checks on employees who frequently interact with children and follow all standards for storing those records. You must also ensure that your content complies with copyright guidelines by collaborating with a copyright expert.
It is critical to consider concrete growth goals as soon as you’ve been operating for a while.
Setting up your nonprofit organization is just as important as maintaining it alive. Hopefully, this comprehensive guide on “how to start a nonprofit” has given you the understanding, tools, and resources you need to put your passion and vision into action and establish your organization.