How to Start a Nonprofit Organization

What is a Nonprofit Organization?

A nonprofit organization may be any of the following legal entities:

• Corporation

• Limited liability company (LLC)

• Unincorporated association

• Trust

The organization must operate for a specific, beneficial purpose. Unlike for-profit businesses, nonprofits do not distribute profits to owners or shareholders. Instead, they reinvest surplus revenue into the organization’s mission and programs. Some key features of nonprofits include:

• Tax-exempt status

• Public service mission

• Reliance on volunteer and donor support

Nonprofits typically exist to address societal needs and improve community well-being.

Section 501(c)(3) Organizations

Many nonprofits are tax-exempt under Internal Revenue Code (IRC) Section 501(c)(3), leading many to refer to nonprofits generally as 501(c)(3) organizations. To qualify for tax exemption, you must operate the organization exclusively for charitable purposes such as:

• Religion

• Public service

• Scientific study and advancement

• Public safety

• Literary endeavors

• Education

A nonprofit cannot use its earnings to benefit a private shareholder, and nonprofits may not participate in political campaigning or lobbying.

Other Nonprofit Types

The following organizations may also qualify for tax-exempt nonprofit status under other IRC Section 501(c) provisions:

Social welfare organizations

Civic leagues

Employee benefit organizations

Social clubs

Fraternal societies

Veterans’ organizations

Labor organizations

Business leagues

Additionally, political organizations qualify for tax exemption under IRC Section 527.

Benefits of Starting a Nonprofit Organization

Starting a nonprofit organization offers several benefits. Your nonprofit can address critical issues in your community and beyond, empowering you to make a real difference in people’s lives. Nonprofits can access funding sources, like government grants or charitable donations, unavailable to for-profit entities. Many are exempt from local, state, and federal taxes, allowing you to use more of the funds you receive to support your cause.

Steps to Starting a Nonprofit Organization

Starting a nonprofit involves several steps at different stages. You begin in the preliminary development phase, where you select an idea, learn about existing needs, and then develop the specifics of your organization. Next, you turn to the foundational stage, where you legally form your nonprofit, apply for tax-exempt status, and work on securing funding and getting the organization off the ground. Finally, you maintain and grow the organization.

Idea Development

To get started, identify a clear mission and purpose for your nonprofit. What issue will your organization address, and how will it make a difference?

Market Research

Next, assess the need for your nonprofit’s services, staying flexible and willing to adapt. Research similar organizations to understand the landscape and identify potential gaps in existing resources and opportunities for your organization to fill. Is your organization meeting a specific community need, or will it apply to broader groups?

Develop Specifics

Once you have an idea and know what needs you want to meet, you can turn to the specifics of your organization, like your: 

• Organization name—select a unique name for your nonprofit that complies with state and federal regulations and reflects your mission.

• Mission statement—develop a comprehensive but concise mission statement that defines your nonprofit’s purpose and guides its activities.

• Bylaws—draft bylaws that outline the governance structure, roles, and responsibilities within your organization.

The Internal Revenue Service (IRS) operates a database allowing you to search for existing companies. Searching early on can help avoid getting attached to a name someone else has already claimed.

Form Your Organization

Finally, you can officially form your organization. File Articles of Incorporation with your state’s business filing office to create a nonprofit corporation. You typically file online through your secretary of state’s office, which should provide the necessary forms. Once your entity is official, apply for an Employer Identification Number (EIN). Your EIN identifies your organization for tax purposes and authorizes you to pay employees.

File for Tax-Exempt Status

Next, file for tax-exempt status. To qualify for 501(c)(3) status, you must file Form 1023 or Form 1023-EZ with the IRS. Your filing details your organization’s structure, activities, and finances. You may need to file similar documents with your state. You can find details about state filing requirements from the National Association of State Charity Officials (NASCO).

Build a Board of Directors

Prioritize your nonprofit organization setup early. Building a strong board of directors—which is essential for effective governance and support of your organization—you must address:

• Roles and responsibilities—define board member roles and responsibilities related to governance, fundraising, and strategic planning.

• Recruitment—seek individuals with diverse skills and expertise who are passionate about your mission.

• Governance—implement policies and procedures for board meetings, decision- making, and accountability.

Your board will also be essential for establishing and monitoring a compensation policy to ensure your founders and nonprofit leadership receive reasonable salaries and avoid conflicts of interest.

Fund Your Nonprofit

Securing funding is crucial for your nonprofit’s sustainability. Consider the following funding sources:

• Grants—apply for grants from government agencies, foundations, and corporations.

• Donations—solicit donations from individuals, businesses, and community groups.

• Fundraising events—organize events such as galas, auctions, or community drives to raise funds and build awareness.

Your organization’s purpose may inform which sources are best to pursue at the earliest development stages.

Market and Promote Your Nonprofit

Now, you begin spreading the word about your nonprofit. Effective marketing and promotion are crucial for building awareness and attracting support. You may use social media, community events, and press releases, or connect at community centers like libraries. Social media can be especially effective in engaging with supporters, sharing stories about your work, and promoting events. Do not underestimate the importance of getting out into the community, even in our digital age. Build relationships with local businesses, community members, and other nonprofit organizations to enhance your reach and impact.

Maintain Compliance

Finally, ensure you meet your legal compliance obligations and maintain transparency, which is critical for maintaining trust and legitimacy as a nonprofit. To maintain tax-exempt status, ensure you:

• File your annual tax returns

• Regularly disclose details about charitable contributions, your tax filings, and where and how you use your funds

• Strictly adhere to your organization’s tax-exempt purposes

One of the best ways to ensure compliance is to implement ethical practices and standards in all aspects of your nonprofit’s operations, from fundraising to governance.

Frequently Asked Questions About Starting a Nonprofit Organization

How Do I Start a Nonprofit Organization by Myself?

Starting a nonprofit by yourself involves additional challenges but can be done with careful planning. Complete the legal steps, utilize online resources, and seek volunteer support to manage tasks and responsibilities.

How Do I Start a Nonprofit with Little Money?

Starting a nonprofit with limited funds requires creativity and resourcefulness but can be done effectively if you carefully monitor and minimize expenses. Use cost-effective strategies, leverage volunteer work, and seek in-kind donations to reduce costs.

What Is the Easiest Nonprofit to Start?

Some nonprofits have simpler requirements and structures, making them easier to start. Consider starting a small community-based nonprofit with a streamlined structure in popular sectors like education, health, and social services.

How Does a Founder of a Nonprofit Get Paid?

Founders can receive reasonable compensation for their work, adhering to IRS regulations and board-approved compensation policies.

Is a Nonprofit Automatically Tax-Exempt?

Filing the paperwork to establish a nonprofit does not necessarily mean that it is tax-exempt. Obtaining tax-exempt status from the Internal Revenue Service and pertinent state agencies is a critical step once the nonprofit is formed. Maintaining tax-exempt status is just as critical. Consulting a professional such as an attorney or CPA may be advisable to ensure compliance.

Common Misconceptions About S Corporations

Misconceptions about S corps may impact entrepreneurs’ business decisions. Below, we clarify some common myths.

S Corps Are Just for Small Businesses

Although many small businesses benefit from S corp status, it is not exclusive to them. Medium-sized companies can also enjoy the tax advantages and limited liability protection S corporations offer.

Setting Up an S Corp Is Overly Complicated

Setting up an S corporation requires fulfilling certain formalities, but this is a manageable obstacle. Several resources exist to guide you through the process, including the IRS, professional advisors like accountants and lawyers, and online tools and services that can simplify the formation process.

S Corps Always Face High Taxes

Strategic tax planning is vital for any business structure, and S corporations are no exception. With proper planning, S corps can optimize their tax situation by taking advantage of pass-through taxation, which avoids double taxation.

Start Your Organization

Starting a nonprofit organization empowers individuals to give back and make a meaningful impact on real issues in their community and beyond. You can establish a sustainable, successful nonprofit by following the steps outlined in this guide and leveraging available resources. Careful planning, dedication, and passion will drive your nonprofit toward its mission, whether starting alone or with a team.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.