Ashley Dodson, CPA

The Complete Guide to Starting a Nonprofit Organization

In this comprehensive guide to nonprofit organizations, also known as not-for-profits, we will cover:

SECTION 1

What is a Nonprofit Organization?

SECTION 2

Starting a Nonprofit Organization

SECTION 3

Researching Your Cause

SECTION 4

Establishing a Solid Foundation

SECTION 5

Incorporation and State Registration

SECTION 6

Filing for Federal Tax-Exempt Status

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Ongoing Reporting and Compliance

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Fundraising and Accounting

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Expanding Your Reach with Marketing

Information in this guide is provided in part by the National Council of Nonprofits, a trusted resource and proven advocate for America’s charitable nonprofits. Please visit their website for more information.

SECTION 1

What is a Nonprofit Organization?

Nonprofit describes a type of organization that does not earn profits for its owners. All of the money earned by or donated to a nonprofit organization is used in pursuing the organization’s objectives and keeping it running. Typically, nonprofit organizations are charities or other types of public service organizations.

Breaking Down Nonprofit

Nonprofit organizations can apply for a tax exempt status so the organization is not subject to most forms of taxation. Donations made to a tax-exempt, nopprofit organization may also be tax deductible for the donor.

Differences Between For-Profits and Not-for-Profits

Aside from the distinguishing feature that a nonprofit organization does not distribute profits to it owners, many nonprofits have much in common with for-profit organizations. For example, while some nonprofit organizations use only volunteer labor, many large or even medium-size nonprofits are likely to require a staff of paid full-time employees, managers and directors. Indeed, since nonprofit enterprises wish to accomplish their objectives in the same way as for-profit enterprises, business tactics and management techniques honed in the for-profit world often work well in nonprofit organizations as well.

Finally, while for-profit businesses can engage in a huge range of activities, nonprofit businesses must operate exclusively as a charity or for scientific, religious or public safety purposes. Additionally, nonprofits may also exist to collect income to dispense to other qualifying charities.

Do Nonprofit Organizations Pay Taxes?

Nonprofit organizations do not pay sales tax or property taxes. For example, if a church is established as a nonprofit organization, it does not pay property taxes on the house of worship it owns. Similarly, if a nonprofit charity accepts clothing donations, sells the clothing and uses the money for its charitable purposes, it does not pay property tax on the building used as its store. However, nonprofit organizations must remit payroll taxes on behalf of their employees. Similarly, the employees and directors who receive income from a nonprofit must report the payment as income.

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Starting a Nonprofit Organization

Almost anyone can start a nonprofit. If a person sees a need in their community or elsewhere in the world, they can research their idea and put together a business plan, outlining the proposed nonprofit’s objectives and how it plans to meet those goals. To achieve tax-exempt status, the organization needs to request 501(C)(3) status from the Internal Revenue Service (IRS). If desired, the nonprofit can also opt to incorporate. Once registered and running, the organization has to maintain compliance with the appropriate state agency regulating charitable organizations.

Types of Nonprofit Organizations

A nonprofit organization commonly performs some type of public or community benefit, without the purpose of making a profit. There are various categories of nonprofits recognized by the Internal Revenue Service (IRS): 

Each category has different tax benefits and requirements. While the majority of nonprofits are classified under 501(c)(3) of the IRS Code as charitable organizations, you should review the categories to determine the right choice for your nonprofit organization.

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Researching Your Cause

There are many ways to make in impact in your community and starting a nonprofit is just one. Starting and sustaining a nonprofit can be a significant challenge, particularly in light of today’s economy. There are currently more than one million charitable nonprofits in the United States, but many struggle to attract increasingly limited funding. Before starting out, you will need to identify and quantify the need for your specific organization, to research whether there are other groups already engaged in the same or similar work, and to ensure that starting a new nonprofit is the right solution.

Have a Plan and Do Your Homework

Answering the following questions can help you determine if starting a nonprofit is right for you, or if an alternate solution would better benefit you and your community.

  • Is there a demonstrated need in the community for a new nonprofit with the mission we envision?
  • Do we have a solid plan for financing the organization during start-up and in the future?
  • What are the costs to start the organization?
  • Where will I get not only start-up funding, but also operational funding to continue thereafter?
  • How will this newly formed nonprofit demonstrate its impact?
  • Is this the right solution for our community?

Moving Forward with your Nonprofit Organization

In many cases, there may be better options to accomplish your goal of making a difference. If there is a nonprofit in your community that you admire, have you considered volunteering for that organization? Working with an existing nonprofit to establish a new or expanded program to reach the people you are hoping to serve can often have a greater impact than starting an entirely new organization.

If you have decided that there is a need, and it’s feasible for you to create a new organization and make a commitment of time and resources to getting it off the ground and sustaining it over time, then you’re ready to move forward to the next step.

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Establishing a Solid Foundation

Once you have determined the need for a new nonprofit organization, and put core plans in place, you will next need to build the structure for your organization. It is helpful to think of this step as answering the questions of who, what, when, where, why, and how.

Who will be involved?

Just as it takes “takes a village to raise a child,” it takes much more than a solo founder to keep a nonprofit alive. Having lots of people willing to help launch a nonprofit, such as board members, volunteers, etc., can signal broad community support and a better chance of success. In addition, many states have requirements for how many board members your nonprofit will need

What do you need to do?

As with all things, there is no shortage of things that you will need to do in order to establish a solid foundation for your nonprofit. You will want to give special consideration to the following items:

  • Determine feasibility by considering the economic climate and funding needs for the organization.
  • Continue to develop your detailed business plan, considering all aspects of the proposed plan: mission, organizational structure, 3-year budget, marketing plan, resource development, and fundraising.
  • Consider potential community partnerships, and the skills needed for volunteer and paid staff.

When should you file paperwork?

There are three steps involving paperwork, followed by ongoing reporting on an annual basis:

  • Incorporating at the state level (completing the state forms required to create a nonprofit corporation).
  • Securing your tax exempt status from the federal government (Applying for “tax-exempt status” with the IRS).
  • Filing for tax-exempt recognition at the state and local levels (which you can only do after the IRS issues a “Determination Letter” of your organization’s tax-exempt status).

Where can you get quality assistance?

For help filling out and filing the mountain of papers at the state and federal levels, make sure you turn to true experts, not just friends who are free. Your next door neighbor just won an award for her skills as a lawyer, yet being “Prosecutor of the Year” doesn’t mean she is qualified to give you advice on nonprofit law. Seek help from an accountant who has direct experience working with nonprofit organizations.

Why start a new organization to accomplish your mission?

There are over a million charitable nonprofits operating in the United States, and each needs a board of directors, funding to operate, and volunteers/employees to keep its activities going. Is starting a new organization necessary? The answer to this question will be the core of your efforts to recruit board members, staff, volunteers, and donors.

How do you sustain your nonprofit organization?

This may be the most important question, and the answer depends on your business plan. If the organization can achieve its mission in less than three years, it would likely be better as a program housed at an existing nonprofit organization. You may consider reading about the option of fiscal sponsorshipsustainable and sound management practices, and strategic and business planning for nonprofits.

SECTION 5

Incorporation and State Registration

Once you have a solid foundation for your organization, it is time to begin the process of incorporation. State laws and regulations that address the formation of, and requirements for, nonprofit corporations vary from state to state. We recommend that you connect with your local state association of nonprofits for state-specific resources.

Consulting with a local Certified Public Accountant (CPA) experienced with charitable, tax-exempt organizations is essential to ensure you follow the proper process for starting your organization.

Basic Steps for Incorporation and State Registration

Below are the basic steps for incorporation and state registration of your nonprofit organization. Regulations differ greatly from state to state, so this listing should not be considered comprehensive, or a substitute for a competent Certified Public Accountant.

  • Reserve/register the intended name of the nonprofit corporation to make sure that no one else has created a nonprofit of the same name.
  • File Articles of Incorporation (called a “Certificate of Incorporation” in some states.) Some states require supplemental information, such as:
    • Certificate of Disclosure
    • Proof of Corporate Name
    • Filing fees – Be sure to follow the instructions on the forms and pay all applicable filing fees.
  • In many states you must publish your of articles of incorporation a certain number of times in a local newspaper, then file proof of publication with a state agency.

Once your organization has been incorporated, it is time to move on to filing for federal tax-exempt status.

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Filing for Federal Tax-Exempt Status

As noted in prior sections, the information provided in this guide should not be considered comprehensive, or a substitute for the advice of a competent Certified Public Accountant. We recommend you review the IRS StayExempt Tutorials that offer background on what it takes to become a 501(c)(3) organization that is recognized by the IRS as tax-exempt, in addition to IRS Publication 557. 

Consulting with a local Certified Public Accountant (CPA) experienced with charitable, tax-exempt organizations is essential to filing for federal tax-exempt status.

Does the organization have an appropriate legal form?

For the Internal Revenue Service (the IRS) to recognize a nonprofit organization’s exemption, the organization must be organized as a trust, a corporation, or an association. It is possible for unincorporated associations to gain recognition as a tax-exempt organization, but not having a corporate form could expose all those volunteering for the organization to legal liability.

How long does it take for the IRS to issue a determination letter?

The process of receiving a determination letter from the IRS may take anywhere from a few weeks to several months, and may require the submission of additional information to the IRS for them to rule on your application. Once you have received your determination letter from the IRS, it is time to move on to ongoing reporting and compliance.

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Ongoing Reporting and Compliance

Once you have received your determination letter from the IRS, the real work begins. Many states and local governments will require you to complete additional filings to receive recognition as tax-exempt from those institutions. Be sure to check with your local Certified Public Accountant to ensure you are compliant with local initial filing requirements. You may also want to review the IRS resources for information on how to maintain your tax-exempt status.

State and Local Government Filings

Before starting operations, review state and local laws with your Certified Public Accountant to ensure compliance on topics including, but not limited to:

  • Registering (if necessary) before starting any fundraising 
  • Registering (if necessary) before engaging in any lobbying
  • Securing (if necessary) permits and licenses required because of:
    • Goods or services provided (e.g., health care)
    • Types of clients served (e.g., fingerprinting of employees dealing with children)
    • Types of employees hired (e.g., educators or health care providers)
    • Location (e.g., zoning in certain areas)
  • Completing state tax exemption requirements (usually must wait until IRS acts)
  • Registering (if necessary) for unemployment insurance and reporting to officials
  • Registering (if necessary) to secure any additional tax exemptions (e.g., property tax, sales tax collections, exemptions from paying sales tax)

Regular, Quarterly, and Annual Activities

Regular activities:

  • Setting up systems and policies
    • Accounting
    • Fundraising (e.g., that required legal disclosures are made)
    • HR and employment filings
    • Risk management reports
    • Board of Directors meetings
  • Tax withholding

Quarterly activities:

  • Reporting taxes withheld (federal/state/potentially local)

Annual activities:

  • File annual report with state government
  • File Form 990 information return with IRS (and any similar form required by the state)
  • Re-register any required items (e.g., charitable solicitation)
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Fundraising and Accounting

Most charitable nonprofits rely upon the generosity of donors for some or all of their funding. Consequently, fundraising is an activity of major importance to the charitable nonprofit community. Fundraising from private foundations requires research to learn which foundations provide grants for which missions. The Foundation Center provides free funding information through more than 400 Funding Network locations, many in public libraries, community foundations, and other nonprofit resource centers. Fundraising capacity is just one of many muscles that an effective and sustainable charitable nonprofit needs to be in “top form” to advance its mission.

Is nonprofit fundraising considered a regulated activity?

Yes. Before your nonprofit solicits donations, consider that the state where your nonprofit operates has the authority to regulate its fundraising activities. We have compiled a list of guidelines to help outline acceptable fundraising practices for your nonprofit:

What are the New FASB accounting standards for nonprofit organizations?

Nonprofits operate under accounting standards governed by the Financial Accounting Standards Board (FASB). There are several new standards effective for fiscal years starting after December 2017. New guidance found in FASB Accounting Standards published in the Update 2016-14 (Topic 958), Presentation of Financial Statements of Not-For-Profit Entities, outline three significant changes (among many others) for nonprofit organizations, and how the new standards will show up on nonprofit financial statements.

These changes include: (1) restricted and unrestricted net assets; (2) liquidity disclosures; and (3) functional expenses.

To help understand the three significant changes contained in these new standards, and to understand the difference between for-profit and not-for-profit accounting, be sure to check with your local Certified Public Accountant, and read our summary here.

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Expanding Your Reach with Marketing

Nonprofit marketing consists of activities and strategies that spread the message of the organization, as well as solicit donations and call for volunteers. Nonprofit marketing involves the creation of websites, social media pages, logos, slogans and copy, as well as the development of a media campaign to expose the organization to an outside audience. The goal of nonprofit marketing is to promote their ideals and causes to get the attention of potential volunteers and donors.

Breaking Down Nonprofit Marketing

Not all nonprofit marketing is the same; how a nonprofit markets itself and its mission can vary with each cause. There are some similarities in how nonprofit organizations and for-profit companies approach marketing, but the differences are significant. For one, nonprofit marketing has a handicap in ideas, and causes can be harder to market and sell than products and services. On the upside, nonprofits, by their nature, have something that business to consumer or business to business marketers lack: a well-defined mission.

Nonprofit Marketing Types

Nonprofit marketing can take many forms. For example, donors may be asked to add a donation to their purchase at a store (point-of-sale campaign). Another strategy encourages behavioral change or consumer action, or drives awareness (message-focused campaign). In transactional campaigns, consumer action (a purchase or social media post) is spurred by a corporate donation. Similarly, non-transactional campaigns require no consumer action.

Nonprofit Marketing Challenges

Nonprofit marketers also have diverse demographics to content with. Older, wealthier donors to charitable causes need to be communicated with and appealed to in ways that are entirely different from how Millennials prefer to be communicated with. For example, older donors (Baby Boomers or Gen X) may still prefer print solicitations via direct mail, while younger donors might prefer to receive a prompt for them to donate via text or app. Print may be on the way out, but nonprofit marketers cannot afford to give it up because it still works with some donors. Similarly, nonprofit marketers cannot afford to ignore the mobile marketing space, which many younger donors expect.

Social media is now dominating marketing, and it is more of a pay-to-play game. That means that nonprofit marketers, with their more limited budgets, will always be at a disadvantage. Accordingly, the best way may be making a nonprofit’s social media effort the responsibility of each employee as part of a concerted, grassroots social media marketing effort.