Are You Ready to Start A Nonprofit Business?
You might have a fantastic idea and a willingness to help people, but operating a legal and compliant nonprofit organization requires time and resources. It’s essential to ensure you’re entirely ready before jumping in and starting a nonprofit business. Answering these initial questions will help your organization begin on a path to success.
Will you fill a need in the community?
All nonprofit organizations require a clear and specific purpose. Sometimes called a mission statement, the IRS calls it the organization’s primary purpose. This purpose guides all activities for the lifespan of the organization.
When developing your primary purpose, it’s important to think about the community you intend to aid. Are there other nonprofits that cater to that community and offer similar services? If so, that’s ok, but determine what will make your organization different. Find ways to add value where other organizations might fall short. Once you have a primary purpose, it’s vital to ensure it is specific and focused.
Do you have a name picked out?
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. While Help, Inc. might be the perfect name for your organization, there is most likely already a Help, Inc. registered in your state. It’s important to search the Secretary of State database for instances of your intended name. A note of caution: some states will consider anything that sounds like a registered name off-limits. So even if a search nets no results, it does not guarantee the name is available. Having availability rules vary by state.
Additionally, many states and the IRS do not allow any form of punctuation in the name. Consider these rules when determining a potential name. For example, an organization might be called “Joe’s House, Inc.” but on the IRS paperwork, it would appear as “Joes House Inc” instead. Ultimately, the lack of punctuation is not a big deal and does not affect the origination’s activities, but it is worth considering.
Do you have an Initial 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. While you might want to do all the work for your organization, it’s essential to find a team of people who not only share your vision but the workload, too.
While three people are the minimum, a Board of Directors can have as many members as it desires. The board may consist of three officers and two additional at-large board members. Or maybe four at-large board members. It is up to the aims of the organization. When considering the number of board members, know that you need to provide Directors and Officers insurance for each member. We’ll discuss this later in the guide. Ultimately the more board members an organization has, the more costly its annual insurance.
The majority of board members (51% or more) cannot be related by blood or marriage. If an organization has a three-person board, no-one related is permissible. There are different rules for Private Foundations, which are explained later in the guide.
Additionally, board members are always volunteers. While board members can fulfill paid staff roles (if they exist), the majority of board members (51% or more) cannot receive any compensation from the organization. For example, in an organization with three board members, one person can also serve as the organization’s Executive Director and draw a salary. The other board members cannot receive compensation, even if they also fill employee roles.
Do you have initial funding?
Forming a nonprofit can be a costly endeavor.
State incorporation filing fees range from $8 in Kentucky to $220 in Maryland. States also have other required filings with a wide range of filing fees. 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. You may also consider seeking the aid of a nonprofit consultant, like BryteBridge, which adds to the initial expenses but will remove a lot of the headaches involved in the process.
It’s essential to consider the initial costs and develop a fundraising plan almost entirely made up of private donations to cover planned expenditures. While private donations will make up most of your funding (especially to start), there are other options available. We’ll explore all of those later in this guide.
Are you a public charity or private foundation?
There are many different categories of nonprofit organizations. Generally, though, the IRS classifies them into two major buckets: public charity or private foundation. The difference between the two depends on whom the organization supports and how it receives funding.
Private foundations operate to support individuals and other 501c3 nonprofit organizations through grants and scholarships. Private foundations receive most of their annual revenue (greater than 67%) from a single source.
In most cases, all other nonprofits are public charities. Public charities are formed for public benefit, meaning their services and programming are available to the entire community. While public charities can focus on a specific charitable class, for example, elder care, their services are considered open to anyone who is part of that class.
As a public charity, the organization receives funding in several different ways. These include private donations, corporate sponsorships, grants, and gifts from private foundations. We’ll cover all the options a public charity has for funding later in this guide.
Churches are a form of public charity. While their donations might come mostly from member’s tithes, those are considered personal and public contributions. All other rules governing public charities, including unrelated board members, apply to churches.
Are you ready for tax-exempt status?
If you answered yes to all of the questions above, then you’re ready to launch a nonprofit organization! BryteBridge is prepared to partner with you. We’ll provide a dedicated specialist to walk you through each one of the next steps, ensuring your organization is ready to succeed from the start!
Visit www.brytebridge.com or call us at 877-857-9002, and we’ll begin this journey together!