How To Start A Nonprofit In 6 Steps – Forbes Advisor

In many ways, starting a nonprofit is similar to starting a for-profit business. You need a solid plan, an understanding of the people you serve, legal registration and long-term tax planning.

But a nonprofit’s goal is different from that of a business, and you have to build with that in mind from the start.

Follow these steps to set your nonprofit up for success.

1. Research Feasibility and Need

As with any business, make sure your nonprofit is not only viable but also needed by the community it’ll serve. Viability, in this case, isn’t about growth and profits, but it’s still important to assess whether you have the funding to get started and will be able to maintain the funding to run the organization. Running into unplanned costs could derail your entire plan.

Answer these questions to assess the feasibility of your nonprofit:

• Do you have the resources to start the kind of organization you want to start? Will funding, such as grants and nonprofit business loans, be available once you’ve set up the organization? Are you connected with a network of willing donors?
• Do you have the people you need? Are you connected to a community and network that will support the work of this organization and help you reach people in need? If you won’t run the organization full-time, who’s available to do it?
• Are you prepared to handle challenges to the organization? Nonprofits face difficult times like any business does. Consider how you’ll approach challenges like attracting donors, economic shifts, leading volunteers, hiring and managing employees, and more.

Answer these questions to assess the need for your nonprofit:

• Have you identified a true need in the community you’ll serve? You might want to see a change in a community, but does the community want it? Are you part of the target community and/or have you spoken with people on the ground to assess their needs and interests?
• Are other organizations already addressing this need? Starting a new organization isn’t always the best way to contribute because it splits efforts and resources. Would you have a greater impact by teaming up with an existing effort?
• What are the gaps in current efforts? If you can’t fulfill a need by working with another organization, still try not to duplicate its efforts. What does the community need that other organizations are missing? How can yours fill those gaps?

2. Write Your Mission Statement

Your nonprofit needs a business plan just like any other business, but some elements are different. Instead of describing a path to profitability, it explains the mission and purpose of the organization, the impact it’ll have on the target community and the funding sources it’ll draw on.

A nonprofit business plan opens with a mission statement that describes for internal stakeholders what you do, how you do it and why you do it. It’s a description of the services you provide and the outcomes you hope to achieve by providing them. It can also include an explanation of the values your organization espouses and how people in the organization live out those values through daily work.

You’ll also write a purpose statement, which is similar to a mission statement but is for external stakeholders. This is the description of the organization you’ll use as a foundation to attract donors and apply for grants. It explains your services and desired impact, as well as what differentiates you from organizations with a similar mission.

3. File Articles of Incorporation

Registering a nonprofit as a business with your state follows the same process as starting any corporation in the state. You must:

• Choose a name.
• Appoint a board of directors (usually a minimum of one to three people, depending on state).
• Name a registered agent (founder, director, another employee or a third-party registered agent).
• Prepare articles of incorporation, which most states help you do by answering a few questions online.
• File the articles with your state and pay the filing fee, which varies by state but is usually around $100 to $300.

4. File for Tax-Exempt Status

Your corporation isn’t a nonprofit organization until you’ve been granted tax-exempt status by the IRS and your state. That status exempts the organization from several federal and local taxes and, for charitable organizations, lets your donors deduct their contributions from their taxable income.

You apply for recognition of tax exemption through the IRS first. Unlike a for-profit business, the IRS also requires a nonprofit to get an employer identification number (EIN) even if you don’t have employees.

Once the IRS accepts your tax-exempt status, you can apply in your state. Some states’ processes might be more complex than those at the federal level.

“I thought filing for our 501(c)(3) status would be tricky, but it was getting registered as a charity in New York State that proved to be challenging,” says Nicole. “The wording in the bylaws had to be incredibly specific, and we had our application kicked back three times [before approval].”

Check your state’s link for exempt organizations from the IRS to find information about setting up a tax-exempt organization in your state.

5. Build Your Team

Depending on what kind of services you offer, you might be able to get started with just your board of directors—or just you, the founder. But you might have to build a team of employees and volunteers to carry out your organization’s work.

A mission-driven organization might easily attract people who support your mission and believe in the work you’re doing. But you also need to bring in people who can help you navigate the financial and organizational needs of the organization.

“At the start, you’ll lean heavily on friends and family,” says Poe. “And while their support matters, they may not be the team to carry the mission long-term.

“Build with people who don’t just believe in you emotionally, but in your vision strategically. Fill your gaps. Hire your weaknesses. And most importantly, empower your team to grow beyond your organization if that’s where their path leads,” she adds.

6. Make a Financial Plan

Every business needs a plan for managing money and taxes—but nonprofits come with unique requirements. Build these needs into your processes and accounting systems from the beginning to ensure ongoing compliance.

Annual Tax Returns

Even though you’re exempt from paying taxes, you’re required to file an annual tax return for your organization (except for churches and related affiliates). You’re also required to make tax returns and applications for exemption publicly available. If you earn any business income unrelated to your charitable purpose, you also have to pay income tax on that income and file a special form with your annual return.

Payroll Taxes

Nonprofit organizations have the same payroll tax responsibilities as any business. You have to withhold and file income tax for W-2 employees, as well as Social Security and Medicare taxes.

Acknowledgement of Donations

Donors can only claim a tax deduction for their donations if your organization provides a written acknowledgment. Set up a system for providing a receipt for any donation of $250 or more.

You can get help with tax questions for nonprofit organizations through the IRS Exempt Organizations Division.

Accounting for Impact

Every business needs a basic accounting system. Nonprofits have a special need, though, to quantify their impact for donors. This usually comes in the form of an annual report sent to major donors that’s made publicly available.

This kind of reporting requires your ongoing records to include not only the money going in and out of your organization, but also the results of your spending. Which goods and services do you deliver to the community, and how many people do you reach?