How to Start a Nonprofit

So you are thinking of starting a nonprofit? THAT IS EXCITING!

One of the things I am asked for advice on most often is starting a nonprofit. When I started a nonprofit for the first time I made some mistakes. It was expensive, inefficient, and I did not understand what I was doing. After assisting in the formation of over 450, I now know the ins and outs of starting up. I hope I can help make your launch a lot smoother than mine. Here are the vital first steps (assuming you know what your organization is all about and how you want to serve the greater good). 

1. Name and Mission Statement

A name must be chosen for the nonprofit and a mission statement drafted. The name should be searched through the state name registry to make sure no other organization has that name or a name that is too similar. It is best practice to search the US Patent and Trademark Office for trademarks as well. Finally, you should also do a google search to see what's out there and secure a URL as well.

Your mission should never change so keep it as broad as you can while still being specific about what you are working to accomplish. The advice I give most often is to change the focus to your "why" rather than your "how." In some cases, you will need to adapt it over time, but it's not easy so make sure it encompasses everything you want to do and might do in the future without being too vague. 

2. Select Board of Directors

It is now time to elect a board of directors. A board should consist of at least 3 unrelated members (President, Secretary, Treasurer) but may include as many as needed (such as... VP, Chairperson, CEO, CFO, COO, etc.). 
 

3. Incorporate with the Secretary of State

Once the name is cleared, a mission statement has been written, and the board has been elected, the nonprofit corporation must be registered with the Secretary of State. This process is called "incorporating." You will have to pay a state-filing fee, which usually range from $20 to $125 depending on your state. Some states allow you to file online, while others are still doing it by paper. 

4. Employer Identification Number/ Tax ID Number

Simultaneously, step four should occur. This step is acquiring what is known as an Employer Identification Number (EIN) also known as a "Tax ID Number." This is basically equivalent to the organization's Social Security Number. All information about your organization will be traced to this number and it is required to complete the process of forming your 501(c)(3) regardless of whether or not you have any employees. You obtain your EIN online through the IRS, but beware - this website has office hours. Yes, that's right. It only works during the daytime on weekdays! Beware, there are several scams out there - websites imitating the IRS. Obtaining an EIN is instant and free, so if you are paying, you are not on the IRS website. You may choose to pay for someone to obtain your EIN number for you which is fine, but just be aware of what route you are taking. 

When you receive a confirmation letter back from the Secretary of State you are completely incorporated, these incorporation documents along with your EIN - you need to have a document called a “Unanimous Consent” - the summary of your first board meeting with some specific resolutions which will allow you to officially start business. You can open a bank account and issue tax receipts, but the donations are not officially tax deductible until you complete step 5. Technically you can wait to complete step 5 if you are not taking donations, but it is VERY important not to delay long since you want your donors to receive the benefit of their donations being tax deductible. 

5.  IRS Form 1023 "Recognition of Exemption"

This process takes your nonprofit from its local/state recognition to national recognition by the IRS. All nonprofits are based out of the state in which they are doing business (where they are incorporated) and the work of the nonprofit should be restricted to that state unless otherwise specified and worked out in writing (known as "qualifying"). The IRS requires the submission of Form 1023 in order to be officially recognized as a nonprofit corporation. The IRS includes hefty filing fees for this form. There is 1023-EX for nonprofits whose income will average less than $50,000 per year - this has a filing fee of $275 as of this writing. The full form 1023 has a filing fee of $600. It could take as long as six to nine weeks to hear back from the IRS regarding your acceptance/denial of 501(c)(3) status. The response will either ask for more information (to which you will have to respond), approve your organization, or decline your applications. Upon approval, your organization will receive a letter on IRS letterhead stating that you are a tax-exempt 501(c)(3) corporation. For full 1023 filers, this letter will be stated retroactively to the date of your incorporation. Keep this letter, make a digital copy, and make several paper copies. It is this letter that large donors and foundations will want to see before donating. 

6. (Optional) State and Sales Tax Exemption:

In some states the sales tax exemption is separate from incorporation and in other states it is automatically granted upon incorporation. Your organization may need to apply for state tax exemption and sales tax exemption separately. 

Bylaws and Conflict of Interest Policies

Every organization must have bylaws (governing documents) and a conflict of interest policy. 

Ongoing Work

At the very least you must meet all financial reporting requirements and have at least one annual board meeting - plus whatever you outline in your bylaws. 

A Note on Financial Reporting

Depending on the nature of your organization, you may need to file quarterly or annual reports. For example, if your organization is selling items that are taxable, you will have to file a report for sales tax each quarter. All nonprofits regardless of their business must file an annual Form 990 with the IRS. This form shows how much money your organization has brought in and how much is spent. This form is like a tax return but for a nonprofit. Note: some religious-based organizations (Catholic, Christian, or other denominational) can apply to become exempt from this requirement. 

Hire Someone or DIY

Those of you who already spent some time searching the Internet for nonprofit start-up, will find that the prices range anywhere from $200 to $4,000+. The truth is that you can start your nonprofit for $20 plus filing fees by buying a book on Amazon. If you are in no rush, this might be a good option for you but more than 70% of my clients have tried this before coming to me for services because this process can be long and drawn out if you do not get it right the first time. Form 1023 is a 30+ page application and one wrong checkbox could mean a delayed application. Waiting up to six months for a response to only be asked more questions with a one to three month response time can be frustrating so I do not recommend taking this approach if you intend to get started in the next year. But if there is no rush, that’s a great option.

Attorneys often take advantage of those who do not know what they are doing by insisting that it is better for an attorney to do the paperwork, but that is simply not true… especially for a small nonprofit making less than $1million per year in the first few years. Some CPAs will also offer the same service, with the idea that it’s better for to have a professional sign your application. Don’t buy into that. It makes no difference. I have assisted with starting more than 450 nonprofits - so I know that it doesn't make a difference. In fact, many attorneys and law firms have hired me to do all the work for them since I am more experienced anyway. There is a good chance if you go to a law firm you will have a non-attorney doing the paperwork anyway. My best advice is to shop for INCLUSIVE services and then analyze PRICE for what you get vs. what you want to do on your own. Here is what you need to have done – you can decide if you have the adventurous spirit and want to try to do it yourself or hire a professional. If you decide to engage a professional use these as talking points to make sure they will give you all these things - you need them all to be compliant and stay in business long term.

• State Incorporation – be sure they include the proper tax exempt language
• Obtain an Employer Identification Number
• IRS Application for Exemption – Form 1023 (plus Attachments – make sure these are included)
• Professionally Written Mission Statement (this is what determines if you are tax exempt so there are some things you need to include to make sure you organization remains tax exempt).
• Customized Bylaws (do not settle for generic ones because you are required to follow them once they are accepted and you need to understand them and have them customized for how you want to operate.
• Customized/Complete Unanimous Consent
• Board of Directors - help to form and elect people in positions and to coach them through what they need to do
• Coaching – whether it’s a paid consultant or a volunteer who has extensive nonprofit experience there will be a plethora of questions that come up. Once you start there are so many different things you will need to learn that (believe it or not) you can't get a good answer from Google - or you will get several answers. (What is required on our website as a disclaimer, do our tax receipts need to say anything specific, are donated items tax-deductible, if so - who determines the price, how do volunteers deduct mileage, etc.). If you do not know someone who has at least 5-10 years being heavily involved on a nonprofit board or as a director of a nonprofit, I recommend paying someone.

I am happy to have a quick consult with you to talk through your questions about start-up and I would be happy to make a referral for a service provider if you want one. Book a time on my calendar to start chatting today.