Do you want to know how to start a nonprofit organization and turn your idea to serve the community into a reality? You’re in the right place! Starting a nonprofit organization is an admirable endeavor that allows you to positively impact your community. However, we know the process can be daunting!
This comprehensive “How to Start a Nonprofit” guide is based on our experience helping over 40,000 organizations and will explain the key steps on how to start a nonprofit, from defining your mission to navigating the legal requirements. We’re here to help you at every step of the journey and will make the complicated legal and tax process as easy to understand as possible.
How to Start a Nonprofit Step One: Define Your Mission
The first step in our “How to Start a Nonprofit” guide is defining your mission and the type of work you intend to undertake. Defining your mission requires clearly articulating the purpose and goals of your organization, ensuring they align with a specific cause or issue.
While your idea may be intended to serve the community, it may not be considered an exempt organization by the IRS. Many non-exempt (for-profit) companies do great work and serve the public benefit. Applying for tax-exempt status as a nonprofit requires clarity of mission that meets the IRS definitions.
Generally speaking, all nonprofits fall into one of a few categories:
- Charitable Organizations: This is the most common form of nonprofit. All charitable organizations serve the public interest, operate on a not-for-profit basis, and provide a charitable, educational, scientific, or religious benefit. It’s a broad description, which is why it is so common. Don’t worry; we’ll try to better define it for you later in this guide.
- Churches and Religious Organizations: Organizations that operate as places of worship with defined beliefs can qualify as tax-exempt nonprofits. Typically, the key here is running a regular worship service in a designated place led by a credentialed leader.
- Private Foundations: By default, all nonprofit organizations are private foundations unless it proves that most financial support comes from the general public. Private foundations primarily support other organizations through grants and must donate at least 5% of the foundation’s annual revenue.
- Political Organizations: There are particular rules for any organization wishing to conduct political advocacy, lobby, or provide candidate support. These organizations qualify as tax-exempt nonprofits but have additional regulations.
Even if you don’t intend to give away goods or “offer charity” in the traditional sense, your organization will likely operate for charitable public benefit as defined by the IRS.
Once you confirm that your organization will operate as a nonprofit, it’s time to define the mission. While many organizations create a mission statement based on their activities, developing a mission statement highlighting what the organization believes is far more important.
For example, say you want to help homeless veterans in your area. Some organizations may create a mission statement that reads, “Our mission is to help veterans with their needs.” This mission statement is acceptable, but we want your organization to be great and stand out!
A high-quality mission statement is personal to the organization, should be memorable, and highlight the nonprofit’s beliefs. Consider this mission statement instead: “We ensure everyone who served never goes unserved.” It defines the same mission of “helping veterans” based on the belief that all veterans deserve opportunities and support. Plus, it stands out and is easy for your board members and volunteers to remember.
How to Start a Nonprofit Step Two: Incorporate with State
Anyone can serve the community. However, operating without the legal protections of a nonprofit corporation can raise liability issues. Did you know you can’t legally ask people for donations in most states without a permit?
Operating a nonprofit organization requires creating a legal corporation. This process varies depending on your location but generally requires filing Articles of Incorporation with the Secretary of State where you plan to operate.
Generally speaking, all nonprofit organizations are corporations (or C-Corps). These are defined by having a public board of directors with at least three unrelated individuals (private foundations can have related board members).
You may have heard about limited liability companies (LLCs) since they are common for small for-profit businesses. While there is one very specific situation in which an LLC can be a nonprofit, it is extremely rare and must include multiple existing nonprofit organizations. If you’re reading this guide, you want to stick with the traditional C-Corp nonprofit structure.
Each state has a different process for incorporating. Some will allow you to file Articles online, while others only operate by mail. Understanding your state’s specific requirements and procedures is important, TK: Link to the updated State Requirements Page when complete. but the process generally involves:
- Choosing a Name: Select a unique and meaningful name that accurately reflects your organization’s mission. Each state has its own naming requirements, but typically, the name will have Inc. at the end.
- Drafting Articles of Incorporation: Prepare the necessary legal documents, including the articles of incorporation, which outline your organization’s purpose, structure, and governance. Most states have a template or form to fill out to capture the necessary information. However, the IRS also has specific information that must be in the Articles that only some states add automatically. Failing to include these IRS-required clauses will require the organization to file an amendment before applying for IRS tax-exempt status to ensure they are included. While that’s typically an easy process, it adds time and expense to the formation process.
- Filing with the State: Submitting the articles of incorporation and any additional required forms to the appropriate state agency along with the required filing fee. These fees vary by state, as does the processing time. Generally, online filings happen quickly, but states requiring postal mail filings can take a few months.
The organization is a legal company once the Articles of Incorporation are filed. As a corporation, nonprofit entities can sign contracts, engage in real estate transactions, and operate with all the benefits of a legal company. In other words, once you complete this step, your organization is official!
How to Start a Nonprofit Step Three: Determine Which Type of 501(c) Your Organization Is
While an official corporation, you are not yet a tax-exempt nonprofit recognized by the IRS. You need to apply for 501(c) tax-exempt status to get this crucial determination. This is where things can get pretty confusing.
The IRS recognizes over two dozen types of tax-exempt nonprofit organizations! Each type has its own requirements, application process, and restrictions. Don’t worry; a few types are far more common than others.
501(c)(3) is the most common type of tax-exempt nonprofit organization. Remember that “charitable, educational, scientific, or religious benefit” description we discussed earlier? That’s the definition of a 501(c)(3). Your idea will most likely fall into that category, but we’ve included all the tax-exempt types below just for fun. Warning: there are a lot of them!
- 501(c)(1): Corporations Organized Under Acts of Congress. The general public cannot file for this type of tax-exempt nonprofit.
- 501(c)(2): Title Holding Corporations for Exempt Organizations. Used when a nonprofit organization creates a separate entity with the sole purpose of owning revenue-generating property.
- 501(c)(3): Charitable, Religious, Educational, Scientific, Literary, et al. Organizations. This is the most common type of tax-exempt nonprofit organization. Most organizations typically fall under this type, including all Private Foundations, places of worship, schools, and most service-oriented nonprofits. Generally speaking, donations to 501(c)(3) organizations are tax-deductible for donors, which is not the case with most other types.
- 501(c)(4): Civic Leagues and Social Welfare Organizations. Typically, political advocacy-focused organizations fall into this category.
- 501(c)(5): Labor, Agricultural, and Horticultural Organizations. Labor Organizations are typically unions providing a benefit to members, while Agricultural and Horticultural Organizations raise livestock, cultivate the land, and conduct similar pursuits.
- 501(c)(6) Business Leagues, etc. This type also includes chamber of commerce, real estate boards, and boards of trade.
- 501(c)(7): Social and Recreation Clubs. Typically, a (c)(7) nonprofit is anything where members pay dues and receive some benefit. College fraternities or sororities, country clubs, and adult activity clubs (tennis, garden, sports, etc.) fall into this type.
- 501(c)(8): Fraternal Beneficiary Societies and Associations. Organizations that pay their members or dependents for life, health, accident, or other insurance benefits.
- 501(c)(9): Voluntary Employees Beneficiary Associations. Similar to a (c)(8), these organizations are for voluntary election by employees.
- 501(c)(10): Domestic Fraternal Societies and Associations. Similar to a (c)(8), these organizations instead make beneficiary payments to other charitable organizations.
- 501(c)(11): Teachers’ Retirement Fund Associations.
- 501(c)(12): Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations. This type includes multiple descriptions, like nuclear decommissioning transactions and grants, contributions, and assistance provided under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
- 501(c)(13): Cemetery Companies. This type includes organizations solely operating a cemetery, burial, or cremation services. If your organization is a place of worship with a cemetery on its property, it will likely fall under the (c)(3) determination.
- 501(c)(14): Credit Unions and Other Mutual Financial Organizations. State-charted credit unions fall into this type. Due to the Federal Credit Union Act, Federal Credit Unions are exempt under section 501(c)(1).
- 501(c)(15): Mutual Insurance Companies or Associations.
- 501(c)(16): Cooperative Organizations to Finance Crop Operations.
- 501(c)(17): Trusts Providing for the Payment of Supplemental Unemployment Compensation Benefits.
- 501(c)(18): Employee Funded Pension Trust (created before June 25, 1959).
- 501(c)(19): A Post, Organization, Auxiliary Unit, etc. of Past or Present Members of the Armed Forces of the United States.
- 501(c)(21): Black Lung Benefit Trusts. Funded by coal mine operators.
- 501(c)(22): Withdrawal Liability Payment Fund. Used to provide funds to meet liability when employers withdraw from a multi-employer pension fund.
- 501(c)(23): Veterans’ Organization (created before 1880).
- 501(c)(25): Title Holding Corporations or Trusts. Similar to a (c)(2), but when there are 35 or fewer beneficiaries.
- 501(c)(26): State-Sponsored Organization Providing Health Coverage for High-Risk Individuals.
- 501(c)(27): State-Sponsored Workers’ Compensation Reinsurance Organization.
- 501(c)(28): National Railroad Retirement Investment Trust.
- 501(c)(29): CO-OP Health Insurance Issuers. This type is used when a qualified insurance issuer receives a loan or grant under the IRS CO-OP program.
- 501(d): Religious and Apostolic Associations.
- 501(e): Cooperative Hospital Service Organizations.
- 501(f): Cooperative Service Organizations of Operating Educational Organizations.
- 501(k): Child Care Organizations.
- 501(n): Charitable Risk Pools.
- 501(q): Credit Counseling Organization.
- 521(a): Farmers’ Cooperative Associations.
- 527: Political Organizations. Unlike (c)(4) organizations, these are typically political parties, committees, funds, and associations for political campaigns.
We told you there were a lot of tax-exempt types! We also promised we’d make things easy. Most organizations fall into the 501(c)(3) category. While there are exceptions, that is likely the first place to look. However, if your organization has members who pay dues and receive a benefit of some kind, you will likely fall into the (c)(6) or (c)(7) categories.
If you need clarification on which type of nonprofit you are forming, we are here to help! Contact one of our consultants; we can help determine your organization’s type.
Once you determine which type of 501 nonprofit your organization is, you need to file the appropriate IRS application, likely 1023, 1023 EZ, 1024, 1024 A. Each application has a filing fee ranging from $275 to $600 and can take multiple months for the IRS to process.
While most IRS applications are submitted online, they only respond via postal mail. If you’ve already submitted a tax-exempt application and have yet to hear from the IRS, check the IRS Exempt Organization Search Engine. Sometimes they update the online database before you receive the letter.
How to Start a Nonprofit Step Four: Charity Registrations and Other State Filings
Many organizations think obtaining IRS tax-exempt status is the final step in establishing their nonprofit. However, there are typically additional steps with your state of operation.
Most states require all nonprofit organizations to register for a permit to solicit before they begin asking the public for funding. This typically can only happen after the IRS issues tax exemption. Yes, this is confusing since the organization is fully operational and determined as a nonprofit by the IRS. However, a permit to solicit, or charity registrations as they are often called, is filed with Attorney General and is designed to protect the public.
Failing to file a charity registration can land you in hot water. For example, Florida considers soliciting without a permit a felony! You want to avoid falling into this category.
Depending on your state, additional documents may also be required to file. Some of them may include:
- State Income Tax Exemption: Some states with a corporate income tax have a process to exempt nonprofits. This process is typically begun once the IRS issues a tax-exempt determination.
- State Sales Tax Exemption: This is less common, but some states allow nonprofit organizations to be exempt from paying sales tax. After the IRS issues a Letter of Determination, you can typically apply for a sales tax exemption. In some cases, it is a blanket exemption. In others, it is only valid for a specific purchase.
It’s important to know that almost every state filing has a filing fee. Operating a business of any kind can be expensive, and a nonprofit is no different! These are also typically not one-time filings.
You must file renewals for your articles of incorporation (an annual report), tax-exempt determination (an IRS 990), and charity registration every year. In the nonprofit world, that’s called compliance. But we’ll save that topic for another day.
It’s time to turn your idea into a fully functioning, legal nonprofit organization. There are a lot of steps that require careful planning, thorough research, and adherence to legal and regulatory requirements. However, you can establish a successful nonprofit organization by defining your mission, incorporating at the state, determining your 501(c) type, and filing a charity registration!
Once all of these steps are complete, your organization will be fully operational, able to provide services, and (depending on your 501c type) seek public donations. You can then make the impact you dreamed about!
BryteBridge Nonprofit Solutions is here to help guide you through every step of the nonprofit journey. We don’t just help nonprofits, we help folks learn how to start a nonprofit. Whether it’s starting a nonprofit, maintaining compliance, or finding ways to grow, we’re here for you! Reach out to one of our consultants to see how we can help.