What you need to know before starting a nonprofit
Entrepreneurs are often uniquely positioned to start nonprofit organizations. They can leverage their business knowledge and resources to make a positive impact. This helps them benefit their communities or contribute to a vital cause. In fact, there are many reasons an entrepreneur would want to start a nonprofit:
- To make a difference: Often, nonprofits serve a public good. They might do this by serving a community or advocating for global change.
- To support interest: Entrepreneurs may use nonprofits to invest in causes and build a legacy outside of business.
- To create a larger platform: Founding an organization creates awareness for a larger audience and amplifies the cause's message.
However, launching and maintaining a nonprofit organization isn’t exactly an easy task. A lot must happen before any nonprofit can open its doors and make a difference. In fact, there's a lot to simply consider before taking your first step.
Opening a nonprofit is typically a challenging but rewarding endeavor. It’s best to begin by determining the purpose of your organization. Once you’ve set the nonprofit’s core purpose, you can make a plan and leverage your resources to make an impact. It’s possible to stay engaged in your mission for years to come.
What is a nonprofit organization?
Each organization may have a different cause. Some back economic growth, education, and social causes. Others sponsor literary or art initiatives. Many work to provide resources and services to underserved communities.
However, all nonprofits have a common goal. They make a positive impact in the world or serve a public benefit. Basically, they must work to improve the lives of individuals and communities. Often, the purpose of a nonprofit can be categorized into one of a few categories:
Services and resources
Many nonprofits provide services or resources to local communities. These may be tangible supplies, like food, paper goods, and clothing to help underserved populations. Services can include offerings like job training or legal aid. Overall, nonprofits providing services or resources often contribute to broader causes. They may work to combat poverty or improve economic development.
Education is another popular focus among nonprofits. There are lots of organizations that work to improve the quality of education. They may do this by offering resources and after-school programs in local school systems. They could also sponsor scholarships or fund STEM programs for underfunded schools. Nonprofits can help increase existing education opportunities and support through fundraising.
Some nonprofits work to increase access to healthcare. They might provide free or low-cost medical services to those who cannot afford it. Some may bring medical services directly to remote communities. Others raise awareness and offer help for specific types of healthcare. Many nonprofits advocate for causes such as mental health, drug addiction, and chronic illnesses.
Other nonprofits seek to serve as catalysts in their communities. They start as volunteer and advocacy programs. At their core, they build community and promote positive change. By working toward a common goal, organizers and volunteers do more than benefit a cause. They help to build a sense of community.
What to consider before starting a nonprofit organization
Before founding a nonprofit, entrepreneurs have to ask themselves if they’re ready to undertake a big task. Primarily, you’ll need to be ready to address four major factors that will affect your future nonprofit. It’s not enough to have a passion for a cause or a desire to create a positive impact.
Don’t let this setback your dreams of contributing public good. Instead, take this time to hone your vision for your nonprofit. Understand the need you want to address. Then determine how your organization will function within that need. This can help you be more successful in your mission.
The purpose of a nonprofit
It may seem obvious, but it’s important to think about purpose. It’s vital to get as specific as you can here. Define your organization’s goal and how it will support that cause. This is the foundation for everything you’ll build in your nonprofit. It’s not a clear enough goal to say you want to “help the environment” or “provide fresh food.” Narrow your focus to a goal that can be translated into an actionable plan.
For example, you might say you will create a more efficient way to deliver fresh food to local food deserts. Knowing a specific what and where can help you create a clear plan to work with volunteers, vendors, and donors. It also can lay a foundation for your organization to eventually expand into other areas.
The planning and paperwork
It’s important to brace yourself for some planning and paperwork. The piles of forms will probably be stacked the highest at the beginning of your nonprofit’s journey. However, you’ll never completely escape having to file paperwork. You’ll probably still file regularly with the IRS or federal and state agencies. Don't forget these filings. It will be an important step to staying compliant and maintaining regulations.
Creating an initial business plan is a great way to give your nonprofit organization a solid start. Your planning won’t end there, though. As your organization adapts to the needs and community it serves, you’ll naturally have to pivot. Being flexible and ready to adjust your plan can help you better gain financing and advocates.
The financing and funding
Often, finances and funding are major considerations for nonprofit organizations. It’s common for nonprofits to have very limited resources, so budgets must be managed carefully. Consider the expenses for running your organization, like equipment, rent, salaries, and supplies.
Generating a source of income to supply those resources is also an ever-present concern. Donors, grants, loans, and other streams of revenue are essential. Fundraising at events or by working with local businesses can also become vital. It will be important to balance the organization’s time. It will need to generate revenue while still carrying out its mission.
The government’s requirements for nonprofits
Because nonprofit organizations often have tax-exempt status, they’re required to benefit the public. These benefits can range across many types of causes. Organizations might promote the arts or health awareness. Others may raise funds for charity. Many work to improve environmental, socio-economic, or educational conditions.
To be recognized by the IRS, nonprofits must meet certain criteria. They must be organized and operated exclusively for the public good. These might be charitable, educational, scientific, literary, or public safety purposes. After initially registering, a nonprofit must remain compliant and maintain regulations. For example, the IRS also requires nonprofits to file a Form 990. This is a federal tax filing that must be submitted every year to report financial activity.
An overview of how to start a nonprofit
Before you start a nonprofit, it’s good to take a quick look at what will be required when you take those first steps. Founding a nonprofit is a big task. Understanding its scope can help you decide on the right timing to begin the process. Here are five things to consider before getting started:
#1 - Assess your nonprofit’s cause and the need it addresses
This step requires some research and resources. You may even need to call in some experts. You might have vast knowledge and skills about the nonprofit you want to start. However, you may need additional insight. Local leaders might know more about the community you're serving. Experts might offer ways to acquire funding or operate in the nonprofit sector.
Gain an understanding of the social and political climate that surrounds your cause. No issue is simple. This insight into how the need you’re addressing affects different communities can make you a better advocate. Considering the impact on communities can improve your nonprofit's effectiveness.
Listen to your audience
As you gain context, be sure to speak directly to the source. Listen to your audience. Engage with the community that’s already working toward your intended goal. Don't leave out the people who are affected by the cause you want to positively impact. This can help you direct your efforts.
Seek expert advice
Talk to those who are already involved in similar causes. They can provide advice or insight into their existing initiatives. Networking and learning from their experiences is key to making an informed decision about a cause.
Consider if the cause will have a lasting impact or if it’s a temporary concern. Consider the competition. Yes, there is competition in the nonprofit world– for donations, volunteers, funding, etc. Would it be beneficial to focus on a lesser-known, but equally important cause? Think about how much money is needed and how much the nonprofit can realistically raise. Use these considerations to hone your nonprofit's focus and make it as effective as possible.
#2 - Research and identify potential partners
What organizations, businesses, or individuals do you believe share the same mission as yours? Seek out foundations, corporations, and government agencies that could benefit from partnering with your nonprofit.
You might find potential partners in your own network. These could include volunteers and local businesses to be corporate sponsors and donors. There are many opportunities for partnerships within your local community. Be ready to reach out to people you know or those in organizations you already work with.
Take to social media
Social media is a powerful tool for spreading the word to potential partners and sponsors. For example, LinkedIn, Instagram, and Facebook are great resources. You can use platforms like this to get your message out to people in your area - and even the world. In fact, social media giant TikTok is even giving Google a run for its money as the largest online search engine.
Start a search
Search for companies that share your mission or values. Look for businesses that would benefit from working with your nonprofit. Attend networking events and conferences to meet potential partners in person.
Reach out and start a conversation. Focus on building a relationship with potential partners, donors, and sponsors. Convince them that working with your organization makes sense for both parties.
#3 - Develop a business plan
Outline your concept, the target population, services and resources you will provide, and financial plan. This will give you an accurate picture of what you must achieve and how you plan to do it.
Your mission is one of the most important components of your business plan. It will serve as the framework for everything your nonprofit does. You’ll want to craft a powerful statement. It should contain at least some of the following components:
- A commitment to addressing a pressing need: Your organization’s mission should clarify the need it will serve. Consider what similar organizations have done. You might emphasize gap areas in the services and activities.
- Simple language: The mission should be easy to communicate. It should describe the core function of the nonprofit in the clearest possible language.
- Independent values: An organization’s values should direct the mission. However, they should be able to remain unchanged. They should be consistent even if the laws, technology, or the external environment change.
- Stamp of approval: A completed mission statement should be shared with all employees and stakeholders. Be sure your statement remains relevant. Missions statements need to be accurate guides for the activities of a nonprofit.
#4 - Choose a business structure
Consider what type of legal entity you should become. This may be different based on what you’ve identified in your business plan and research. If you’re unsure, speak to a legal professional, such as a lawyer, to get their advice.
Regardless of your chosen structure, you’ll have some paperwork ahead of you. Most nonprofits have some typical forms and filings in common:
Articles of Incorporation
Many nonprofits file this document, which contains the name, purpose, and structure of the nonprofit. The document shows that the entity is organized under 501(c)(3) of the Internal Revenue Code. It also identifies the legally designated agents who will manage the organization.
Nonprofit Articles of Organization
This document explains the bylaws of the organization and its governing board. It should also include details about the organization's membership structure and mission statement.
Nonprofit Declaration of Policy
This explains how the nonprofit will meet its goals and objectives. The document should cover its activities and donation process.
Additional state and federal filings
Once the other documents are filed, the nonprofit still must get state and other federal approvals. To obtain tax-exempt status, a nonprofit has to file with the IRS. Depending on the state where it is based, additional filing requirements may also be required.
Financial paperwork and tax filings
Organizations must keep good records of all activities, income, expenses, and charitable donations. Regular filing of tax returns, such as Form 990, is also required.
#5 - Secure financing
Devise a strategy for gaining the funding to implement each of the components of your business plan. There are several options for funding your nonprofit. Consider which might be right for you.
Nonprofits can host traditional fundraising events, such as galas or bake sales, to raise funds. Digital services like GoFundMe and Donorbox can make it easier for people to contribute to their cause. Crowdfunding websites like Kickstarter and Indiegogo are another way for nonprofits to receive donations. However, the nonprofit must always use the money for the stated purpose.
Grants from private foundations, government agencies, and corporate sponsors can also be options. The amount of funding can vary depending on the type of grant and the funding agency. Nonprofits may be eligible for up to a few thousand dollars or more.
Loans can also be a viable option for nonprofits. Many banks and credit unions offer special loan programs for nonprofits, with generous terms and often no fees. Nonprofits may use micro-lending services like the Small Business Administration’s Microloan Program.
Social impact investing
Nonprofits can turn to social impact investing as a form of financing. This involves using funds to invest in businesses that provide a social or environmental benefit. Nonprofits provide these businesses with needed capital by buying equity or providing loans.
There are many frequently asked questions about starting a nonprofit organization. Here are some of the common questions entrepreneurs have before they start.
What are the steps in starting a nonprofit organization?
Starting a nonprofit begins with an idea to support a cause or benefit a community. From there, the process can vary. Typically, you must organize your organization and register with the IRS. Writing a mission statement and creating a business plan to guide your nonprofit’s purpose is also important. You’ll also have to file other necessary paperwork with state and federal authorities.
How do I know if my organization qualifies as a nonprofit?
There are some rigid requirements for both 501(c)(3) and 509(a)(1) organizations. The IRS requires nonprofits to have objectives that benefit the public good. To qualify, they cannot benefit private individuals. They are also barred from engaging in inflammatory political activities.
What paperwork does a nonprofit need to file with the IRS?
To qualify for tax-exempt status, an organization must file IRS Form 1023. Additional information about the purpose of the nonprofit is also required. With this form, you'll have to file items like the mission statement and budget.
Does a nonprofit organization pay taxes?
Generally, nonprofits are exempt from federal income taxes. However, income unrelated to the organization's mission may not be exempt. Nonprofits may have to pay state and local taxes, as well as unemployment insurance and property tax. It’s important to research state and local laws to determine the specific taxes you'll need to pay.
What payroll taxes must nonprofits pay?
If a nonprofit has employees, it must pay the same payroll taxes as for-profit businesses. This means withholding applicable employment taxes. It also means paying the employer's share of Social Security and Medicare taxes. Sometimes nonprofits must also pay state and local taxes, so check with your jurisdiction.
Are there any tax advantages of being a nonprofit organization?
Yes. Nonprofits can claim deductions on their tax returns for certain expenses. Examples include payroll and operating costs. Deductions can offer additional savings on top of being tax-exempt.
Are donations to a nonprofit organization tax deductible?
Typically, yes. Donating to eligible nonprofits can result in tax deductions. Check the IRS website to confirm if the organization is eligible for tax-deductible donations.
Are nonprofit organizations subject to audit?
Yes. Just like for-profit businesses, nonprofits may be audited by the IRS or state entities. Accurate records of donations and finances are necessary to comply with regulations.
Tackling taxes as a nonprofit organization
Having a general overview of starting a nonprofit is important. Before diving into the process, you need to know what you’re getting into. Being prepared can help you be sure you’ve done all your homework and can set your organization up for success. It can also help you make sure you have missed no steps. You don’t want to overlook any part of the process. Doing so can delay or prevent your nonprofit from becoming exempt from federal income taxes.
Taxes, in fact, can be a big issue for nonprofits. Because they typically qualify for special status, they have more work to stay compliant. Taxes can raise questions for nonprofits from donors and volunteers. However, with the right information, you can help your organization to navigate the tax code. You can stay compliant by taking the time to understand the laws and regulations that apply to nonprofits.
With the right knowledge, you can maximize the benefits of a nonprofit. You'll also ensure that you are in good standing with the IRS. With tools like ComplYant, you can access free resources. You can also find and track vital deadlines for your organization. As always, if you have any concerns, consult professional advice. Speak with a qualified lawyer or tax advisor. You always want to ensure that you are meeting all legal requirements.