How to Start a Nonprofit Organization: Checklist, Tips & Resources
In 2015, there were approximately 1.56 million nonprofit organizations registered with the Internal Revenue Service (IRS). This is according to a 2018 report from the Urban Institute’s National Center for Charitable Statistics. That same year, nonprofits contributed nearly $1 trillion to the U.S. economy. Without question, nonprofit organizations are integral to the United States and its citizens.
These 1.56 million nonprofit organizations are dedicated to a variety of causes that help lift communities and people’s lives. Some nonprofits may be dedicated to improving the health of individuals or stopping the spread of ailments and diseases. Others might provide funding and financial resources to persons of disadvantaged backgrounds. Other causes may include promoting awareness and enthusiasm for the arts, wildlife, or public media.
Nonprofit organizations have a strong impact on the U.S. and its residents, but starting and maintaining one can be a difficult process. New nonprofit founders may face challenges in soliciting donations and funding for their organizations, or may have trouble building awareness and an audience for their group. Even with the noblest of aims, some nonprofits just don’t succeed.
Leading and starting a nonprofit requires strong managerial skills, effective collaboration and strategic thinking, and an inspiring vision for future success. For those who want to start a successful nonprofit that can help change people’s lives, the following information can be helpful.
Understanding Nonprofit Organizations
Before planning and creating a dynamic nonprofit organization, professionals should know the difference between these organizations and other companies and groups.
According to Investopedia, a trusted finance and business news resource, a nonprofit organization, or NPO, is “a business that has been granted tax-exempt status by the Internal Revenue Service because it furthers a social cause and provides a public benefit.” This means that nonprofit organizations generally do not pay taxes at the federal, state, or local levels, and donations made to such organizations are tax-deductible. One of the most common types of tax-exempt status that a nonprofit can obtain is 501(c)(3). However, depending on its type, a nonprofit or organization may fall under a different tax status. For example, a social and recreation club, such as a college fraternity or sorority, would likely have a 501(c)(7) tax status, according to the IRS.
To maintain their tax-exempt status, nonprofits need to be dedicated to a cause, service, or goal that benefits the public good, such as increasing literacy among youth, feeding the hungry, or providing shelter to the homeless. Tax-exempt nonprofits also must disclose information regarding their finances and operations to the public, according to Investopedia. This helps to generate transparency for donors who can review such information and determine if the organization is making appropriate use of its funds. Some nonprofits, such as UNICEF or the Bill & Melinda Gates Foundation, may also disburse donations directly to disadvantaged populations or to organizations and groups that can help these individuals.
For-profit organizations, such as Apple or Disney, are clearly different from nonprofits. These organizations are primarily dedicated to earning profits and may not be aligned with or dedicated to any particular cause. Non-governmental organizations, or NGOs, are nonprofits but operate on a much larger scale. They also are generally dedicated to addressing international or global concerns, such as disaster relief or helping eradicate a widespread global disease, according to the Houston Chronicle.
How to Start a Nonprofit
Nonprofits can serve different needs and communities, but leaders and managers must take certain steps to ensure their nonprofit can be successful and make a positive impact.
Determine if Your Nonprofit Is Viable
It takes more than just a great idea or passion to make a nonprofit viable. Ultimately, leaders of nonprofits need to start by determining if their potential organization will have the financial resources, leadership, and planning to see their vision through. According to the National Executive Service Corps, reasons that nonprofits fail financially include leadership with limited financial experience, disengaged board members, lack of resources or diverse revenue streams, and inability to respond to changes in the larger market.
For example, a new nonprofit may be dedicated to giving donated suits and business clothing to homeless individuals as they go on job interviews and try to improve their situations. The idea is noble, but the organization’s founders may not have considered some key questions. Do the leaders have enough financial literacy or experience to run the organization? Are collaborators or board members passionate about the group’s goals? Can a steady supply of donations of clothes be sustained over several years? Are there new technological or digital advancements that may make the organization or its services outdated?
Before nonprofit leaders begin to create their organizations, they must carefully consider and address all of these factors.
Incorporate and Apply for Tax Exemption
Once nonprofit leaders have determined the idea for an organization is plausible and sustainable, they can then start their nonprofit organization by incorporating and obtaining tax-exempt status. According to USA.gov, the steps for incorporation are as follows:
- Choose a business name: Some states may have laws regarding what a business can be named, so nonprofit organizations should research the guidelines in their state.
- Appoint a board of directors: USA.gov suggests nonprofit founders draft bylaws with guidance from a board of directors. Ideally, the board of directors reflects knowledgeable individuals who are passionate about the nonprofit organization and its aims.
- Decide on a legal structure: Nonprofit founders can choose to organize as a trust, corporation, or association. Corporations are among the most common, as they allow protection from liability and also allow the organization to receive grants. Protection from liability means that if something were to happen to the nonprofit itself, such as it amassed too much debt, the members of the nonprofit would generally not be held responsible.
- File incorporation paperwork: Paperwork for filing may differ by state. USA.gov suggests nonprofit organizers should learn their state’s requirements at the National Association of State Charity Officials (NASCO). The next step is to file formal paperwork, or articles of incorporation, and pay a small filing fee. State office resources may be found through NASCO.
- Apply for tax-exempt status: Many nonprofit organizations are able to obtain tax-exempt status, but not necessarily all. Leaders should read this document from the IRS to determine if they qualify for non-exempt status and to learn specific application instructions, USA.gov notes.
- Obtain necessary licenses and permits: Depending on the location of the nonprofit and the services it provides, leaders and members may need to obtain additional licenses and permits.
Seek Advice and Funding from External Sources
After the organization has been incorporated and received tax-exempt status, the next action in starting a nonprofit can be seeking advice and funding from different individuals, groups, and organizations.
The Standard Social Innovation Review discusses 10 distinct strategies for obtaining nonprofit funding. These include gathering donations from those who are strongly impacted by the nonprofit’s emotional message, obtaining small or large grants from other organizations, receiving government funding, or even reaching out to larger donors or collecting money at regular events. The funding process itself can vary from nonprofit to nonprofit, as well as the types of funding/donations the organization may be eligible to receive.
It is also wise for nonprofit leaders to reach out to other organizations in their field for advice, suggestions, or recommendations about how the organization should operate. For example, if a new nonprofit is dedicated to increasing access to music education in a major city, that nonprofit’s leader can consult with other music and educational groups regarding planning for the present and future.
There are also a variety of donation services available online that can help nonprofit organizations obtain funds, including Fundly, Donately, and Paypal Donations. Similar resources exist for researching and obtaining grants online, such as the Grants.gov resource. Individual states and cities may also offer digital resources that can aid in finding nonprofit grants.
From crowdfunding to sponsorships to cold-calling, there are many different ways to start nonprofit funding. One nonprofit organization may be able to obtain a significant amount of individual donations from just going door-to-door, while another may be able to solicit strong funding through online sources. It comes down to discovering the best and most reasonable options for each nonprofit.
Appoint Leaders to Help Manage the Organization
These leaders may include individuals sitting on the board of directors, but this also can include dedicated employees of various professional backgrounds who are passionate and committed to the nonprofit’s cause. According to FoundationList.org, an organization that provides nonprofit hiring tools and resources, leaders and recruiters at nonprofits should seek candidates who have a passion for the organization and are proactive. They should also clearly advertise the nonprofit’s unique characteristics and the rewarding attraction points that each job offers.
Additionally, FoundationList.org notes that nonprofits should keep in mind job titles and what they can realistically offer candidates in terms of compensation. For example, a newly formed nonprofit may be seeking a marketing director, but it may not be able to offer the same level of salary that marketing directors at more established nonprofits or even for-profit organizations usually earn.
Not all leaders must work for the organization directly. A nonprofit can regularly engage consultants, reach out to its own audience and community to gauge feedback and encourage involvement, and create other opportunities for talented individuals to share their thoughts and insights.
Additional Resources on How to Start a Nonprofit Organization
There are additional resources that can help nonprofit organizations as they continue to grow.
Help with Filing for Tax Exemption
For some nonprofits, obtaining tax exemption can be a difficult and complicated process. This is why it may be beneficial to seek the advice of experienced accountants or legal professionals to help ensure paperwork is being filed properly and the organization has met all the requirements to obtain a necessary status or exemption.
The IRS also offers extensive educational resources and guidance to nonprofits for both obtaining and keeping tax exemption. The National Council of Nonprofits also offers a list of resources that can help leaders throughout this process.
Managing Funding and Donations
In an article in Forbes, Neela Pal discusses several strategies that can help nonprofit organizations better maintain their finances. These include transforming the finance office into a place of thought leadership, being reasonable and transparent about sharing financial information, and planning for potential hurdles down the road.
For example, a nonprofit that is dedicated to providing food to impoverished residents within a community may not have prepared for any future scenario where it loses one of its major grants. Starting a nonprofit backup fund, or having monetary resources to sustain viability after the loss of a grant or major funding source will help that nonprofit thrive.
As stated earlier, in 2015 there were about 1.56 million nonprofit organizations in the United States, and many of them were turning to the same or similar sources to obtain funding or build awareness. This can make it difficult for nonprofits as they try to establish and separate themselves from the pack. But there are tools that can help.
Social media is an immensely valuable tool for nonprofits when building a national and local audience. For example, leaders of a new nonprofit organization can use Facebook to create a page for their organization, invite their existing friends and community to participate and engage with their content, and encourage those individuals to spread the message to their connections.
Established nonprofits or those just starting their nonprofit should also extend their awareness efforts into the real world. This includes participating in local or community events where individuals can get a firsthand glimpse of the nonprofit and what it has to offer. It can also include partnering with other nonprofits or organizations in the area and lending needed services. This can assist in increasing the organization’s reach and brand awareness.
Additional Information and Educational Resources
The Council of Nonprofits offers helpful tools and resources for emerging and established organizations on everything from fundraising to cybersecurity to abiding by new legal standards or guidelines.
The Educational Foundation of America gives a similar extensive list. It also provides links to resources including advice regarding nonprofit Facebook management, managing finances, and preparing for risks and future conflicts.
501 Commons provides tools and information regarding real estate, hiring leadership, strategic planning, and more.
Google for Nonprofits enables nonprofits to reach new audiences and obtain funding through specialized tools and digital programs.
501 Commons, Tools and Best Practices
Facebook, For Nonprofits
Forbes, “Five Tips To Better Manage Nonprofit Finances”
FundlyGoogle for Nonprofits
Houston Chronicle, “NGOs vs. Nonprofits”
Investopedia, “Nonprofit Organization (NPO)”
IRS, Educational Resources and Guidance for Exempt Organizations
IRS, “Tax-Exempt Status for Your Organization”
National Executive Service Corps, “Budget Planning: 5 Reasons Why Nonprofits Fail Financially & How To Avoid Them”
Stanford Social Innovation Review, “Ten Nonprofit Funding Models”
The Council of Nonprofits, Tools and Resources
The Educational Foundation of America, Nonprofit Resources
The National Council of Nonprofits, Protect your nonprofit’s tax-exempt status
Urban Institute’s National Center for Charitable Statistics, “The Nonprofit Sector in Brief 2018”
USA.gov, Starting a Nonprofit Organization