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Nonprofit Education

Nonprofit Setup Guide Part I: Initial Steps for Starting a Nonprofit

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Do you have a fantastic idea for a nonprofit organization? Will your nonprofit organization fill a need in the community? Once you have a great idea that meets a need, there are several important nonprofit setup parameters to consider. This part of our three part nonprofit start up guide will take you through all of the initial, legal steps to starting your nonprofit organization.

Are You Ready to Start a Nonprofit Business?

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It’s essential to ensure that you are completely ready before you start a nonprofit. Prior to taking the legal steps to set up a nonprofit, make sure that you are extremely clear on the purpose and name, the initial funding and board of directors, and your status as a public charity or private foundation.

Develop Your Primary Purpose and Name

All nonprofit organizations must have a clear and specific purpose, known to the IRS as the organization’s primary purpose. This purpose guides all activities for the lifespan of the organization. 

Because every nonprofit is a legal company, it needs a name legally permissible in your state. Naming rules vary by state but generally require including “Inc.” at the end. “Inc.” is short for “Incorporation” and defines the organization as a corporation.  

Your organization’s name must also be unique in your state. It’s important to search the Secretary of State database for instances of your intended name.

Appoint a Board of Directors

A Board of Directors manages every nonprofit organization. These people, referred to as board members, trustees, or officers, volunteer their time to provide direction, guidance, and operate the nonprofit.  

Every nonprofit organization requires at least three initial board members. They must fulfill the roles of President, Secretary, and Treasurer. These positions, known as the officers, must be filled by different people in compliance with the IRS rules.

Find Initial Funding

Forming a nonprofit can be a costly endeavor. State incorporation filing fees range from $8 to $220. The IRS charges between $275 and $650 in filing fees, depending on the type of tax-exempt organization you create. Programming expenses, websites, and operational costs should also factor in the initial costs.

Public Charity or Private Foundation

There are many different categories of nonprofit organizations. Generally, the IRS classifies them into two major buckets: public charity or private foundation. 

Private foundations operate to support individuals and other 501(c)(3) nonprofit organizations through grants and scholarships. Public charities are formed for public benefit, meaning their services and programming are available to the entire community. 

Create the Initial Nonprofit Setup Documents

Once you have identified a clear purpose, decided on a legal name, and established a Board of  Directors, you are ready to start the process of officially forming your nonprofit! 

The first step in every nonprofit organization’s startup journey is what we at BryteBridge Nonprofit Solutions call your initial documents.  These documents help set the organization up for legal operation in the state and prepare the nonprofit to file for federal tax-exempt status.

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While the process to start and operate a nonprofit organization is different in every state, the initial documents are uniform. They are: 

  • Incorporation: Establishing a legal corporation in the state of operation. 
  • Employer Identification Number (EIN): Creating a federal tax identification number. 
  • Bylaws: Developing a set of governing practices. 
  • Conflict of Interest Policy: Developing rules to prevent potential profitability conflicts.  

The initial documents for a nonprofit setup create a corporation capable of legally operating in the state. These documents provide the necessary documentation to open a bank account, rent an office, and begin operations. They also allow for you to accept donations, as anything donated to an organization before it legally forms is not tax-deductible. 

BryteBridge provides multiple options for nonprofit startup packages that include all or part of the initial documentation.

Apply for Tax-Exempt Status

Establishing a nonprofit corporation is only the first of many steps required to create and operate a legal nonprofit organization. The next step is filing for federal tax-exempt status.

Tax-exempt status is the most important step in starting a nonprofit. The IRS alone determines a  nonprofit organization’s exempt status. Once recognized as tax-exempt by the IRS, the organization is not required to pay federal and, in many cases, state corporate income taxes. 

Without obtaining tax-exempt status, an organization is responsible for corporate taxes at both the federal and state level, even if incorporated as a nonprofit corporation.

Depending on the type of tax-exempt status issued by the IRS, donors may also claim donations to the organization as tax-deductible gifts on their taxes. Tax-deductible contributions are a big part of fundraising for your nonprofit. 

Types of Tax-Exempt Status

There are many types of tax-exempt status. The most common form is a 501(c)(3) organization. The vast majority of nonprofits fall into this classification, though other tax-exempt types exist depending on the organization’s purpose. 

Different types include 501(c)(4) for politically focused organizations, 501(c)(6) for business leagues, and 501(c)(8) for fraternal societies. These are just a small selection of the 14 types of tax-exempt organizations. Understanding what type of tax-exempt status to file for is a crucial step in forming your nonprofit, and our team at BryteBridge can help you determine which designation is right for your cause.

Applying for Tax-Exempt Status

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Once you have identified the correct tax-exempt type, applying for IRS tax-exempt status is a time-consuming and detail-oriented process. There are multiple applications, known as Form 1023 EZ, Form 1023, or Form 1024. These applications are extremely long and often require many attachments and other IRS forms, providing additional explanations and information.  

The average person will spend between eight and ten hours filing out the IRS tax-exempt application. You do not have to go through this process alone! Our nonprofit setup specialists are well versed in every question asked on the IRS applications. They work with your vision and correctly fill out the application on your behalf.

How Long Does it Take to Get Tax-Exempt Status?

After an organization applies, it typically takes the IRS between three and six months to issue a determination. While the organization is waiting for its status designation, it is free to operate as a nonprofit. However, there may be restrictions on soliciting donations. 

When the IRS issues tax-exempt status, it sends a Letter of Determination through the USPS to the organization’s address. This simple letter is a nonprofit organization’s most important document. It contains all information necessary to prove and maintain tax-exempt status. Organizations should keep this letter safe, though copies are often available on the IRS website a few months after the physical letter arrives.

Filing State Documents

After creating the initial documents and filing for federal tax-exempt status, it can often feel like the nonprofit setup is complete. However, there are still several steps to go!

In most states, applying for federal tax-exempt status alone is not enough to start asking for donations. Nonprofit organizations must file additional state documents with various agencies to complete their registration. Unlike the initial documents, which are uniformly required across the country, state document requirements vary wildly. Knowing which documents your state requires is the difference between smooth operation and hefty penalties and late fees.  

While the process varies by state, the most common state documents are: 

  1. Charity Registration: Required to legally ask the public for donations. 
  2. State Tax Exemption: Required for exemption from corporate income taxes. 
  3. State Sales Tax Exemption: Required for exemption from paying sales tax on purchases. 

When and if an organization is required to file these documents depends on the state of operation. Some states allow filing on the same day as applying for IRS tax-exempt status. In contrast, others require receiving tax-exempt determination before filing. Since asking for donations often requires filing a charity registration, understanding your state’s document and filing requirements is a necessary step in starting a nonprofit. 

Organizations may also need to register with their local county or municipal government. This registration, sometimes called a Business Permit or Occupation License, pays any necessary local taxes and grants the organization permission to legally operate in their place of business. BryteBridge specialists can assist clients to ensure their organization is operating legally. 

These initial three legal steps—filing initial documents, applying for tax-exempt status, and filing state documents—are vital for beginning your nonprofit. 

Parts 2 and 3 of our nonprofit startup guide will cover marketing and raising funds for your nonprofit business, as well as operations and compliance.

If you would like professional assistance for your nonprofit startup, we offer startup solutions to help you start, grow, scale, and operate your nonprofit smoothly. Visit www.brytebridge.com for more information, or get in touch with us today!

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