12 Steps to Making Your Nonprofit Organization a Reality
Recently, through my purpose course, An Introvert’s Guide to Finding Purpose, I had the pleasure to consult someone who was interested in starting a non-profit. The problem was that I had never been through that process and found myself asking as many questions as she was. Anyway, it led me to do the research for this blog article.
I can happily say that even though I have never started a non-profit, I have uncovered the work that needs to go towards creating one and I’ll gladly share that with you now. I’ll even answer a few common questions along the way.
What is a Nonprofit?
A 501(c)(3) is a corporation formed for not-for-profit purposes. The not-for-profit purpose is declared when that nonprofit entity is formed. The difference between a nonprofit corporation and a for-profit corporation is what the organization does with its profits. While for-profit businesses may distribute profits to shareholders, nonprofit organizations must reinvest profits in the organization's cause.
Most nonprofits would register as a 501(c)(3), however, there are 27 designations for a nonprofit. Learn the type that best fits your business.
How Long Does it Take to Start a Nonprofit?
Starting a nonprofit is going to encompass quite a few things. You’ll have to get organized, assemble a board of directors, incorporate your business, and do quite a bit of documentation. The entire process can take months. You’ll have to apply for tax-exempt status, and it could take the IRS three to twelve months to get back to you with their decision, just for that part of it. So, be patient, this is not going to be a quick process, but one that will be worth it for the cause.
What Startup Costs Do You Need to Consider?
Here are a few of the startup costs you can expect:
Cost to Incorporate Your Organization. Depending on your state, this can cost anywhere from $8 to $270. Incorporating is necessary to remove personal liability from you as the founder, as well as to attract grants and funding later on.
Cost to have 501(c)(3) Status. Expect to pay between $275 for Form 1023-EZ and $600 for Form 1023. A 501(c)(3) status will allow you to apply for grants, accept donations, be exempt from federal corporate income tax, and limit the liability of your organization’s officers and directors.
Cost for Office Space. This totally depends on the type of building/space you’ll be using and whether you’ll be renting or buying space. The type of non-profit you have will drive those types of decisions.
Cost to Hire Staff. This also depends on the type of nonprofit you have. You’ll need to decide if you will need staff and how many. You can also decide if you need permanent staff or if they will be contracted. There’s a huge cost difference between hiring staff and hiring contractors. Although most nonprofits start out with minimal staff if any. However, If you want to scale your nonprofit, expect a cost associated with staff.
Can You Make Money from a Nonprofit?
Technically, yes you can. However, the main goal of the nonprofit is to serve a cause (with emphasis on nonprofit). People donating to your nonprofit are expecting to see their money being used to help fund the mission of the nonprofit. Some of the expenses associated with the work can include things like rent, equipment and software, marketing costs, paying staff, etc., depending on the work of the organization.
Don’t worry! If this is your full-time commitment, you can receive a salary from it and paid staff. Your nonprofit will establish a Board of Directors (step 4). One of the things they will do is decide on a reasonable salary for paid staff, which will count toward expenses.
12 Steps to Become a Nonprofit
So, herein lies my 12 steps to becoming a nonprofit organization:
1. Establish A Need For Your Cause
In the state I live in (Virginia) alone, there are over 50,000 nonprofit organizations. So, before you start any efforts toward creating a nonprofit organization, do the research to ensure there’s a need. If another organization exists (specifically in your state or area) then you may want to consider working with them. Or consider any gaps in what they’re currently doing and what you could do to fill those gaps. As in accordance with my business motto: When entrepreneurs see a need, they fill it.
Once you’ve identified an unmet need or cause, you need to start building a foundation from which it will grow. These are the bits of information you will need to know moving forward:
Your demographics or the population or audience you will serve. Who are they? Be able to describe who your nonprofit will help. Start collecting data on your audience to answer questions like: Where are they located? How old are they? Basically, uncover enough data to be able to show why they need your nonprofit.
2. Build a Solid Foundation
Your nonprofit needs to be built on a solid foundation. That means there needs to be clarity, a clear vision, and values that it will run on. A clear vision and values make for a strong and well-run organization. Here is what you will need to do:
Come up with a great mission statement. A good mission statement is very important. It can help your nonprofit further clarify its purpose and can be very motivating for board members, staff, volunteers and organizations you partner with. It sends out a powerful message about what you stand for, and if clearly written and communicated – it focuses your energy and attention and helps you make decisions further down the line. Here are some ideas for writing your mission statement:
Make your nonprofit mission statement simple, and easy to understand and remember.
Your mission statement should be brief and to the point.
A mission statement should, above all, inform others about what you do and guide your team members and stakeholders.
Your mission is the beginning of your foundation, and it is from that, that your organization is built.
Develop a great vision for your nonprofit. Your vision may have some of the elements of the mission, but your vision statement is different from the mission. Your vision is forward-thinking. In other words, your vision lets the whole world know what your organization will be when it grows up. Your vision is the future of your organization and it’s a simple statement that shows how you will change the world. Here are some examples.
Feeding America: A hunger-free America
She’s the first: Invest in girls
Alzheimer’s Association: A world without Alzheimer’s disease
Habitat for Humanity: A world where everyone has a decent place to live
Oceana: To make our oceans as rich, healthy, and abundant as they once were
Develop a set of core values. The values you set for your nonprofit help to guide the actions of your organization and how you think. Your nonprofit's values should reflect who you are and what you stand for. That will ultimately reflect how you work and do business. Your values will create the culture for your nonprofit. Some examples of core values include:
authenticity
commitment
compassion
concern for others
consistency
courage
dependability
enthusiasm
integrity
kindness
loyalty
optimism
perseverance
pragmatism
positivity
reliability
Decide the human capacity you will need for the work. You will need to decide the people you will need to help you carry out the mission of the nonprofit. You’ll need board members, board members, volunteers, and maybe even a few staff members. Begin making a list of people you can trust and most importantly, will be as passionate about the work as you are. Some ideas to get your thoughts going include:
Someone who can offer legal advice
Someone who can help fill out the paperwork
Someone who’s started a nonprofit before and can mentor you
People in your network with expertise in things like finances, hiring, fundraising, marketing, etc.
People, businesses, organizations, and media outlets who can help spread the word about your new nonprofit
3. Decide on A Name
Your organization’s name establishes its brand and is also important for incorporating with the state. The legal name of your nonprofit corporation may not conflict with any other organization registered in the state. Make sure the name is available and meets state requirements. If you live in the state of Virginia, you’ll want to check with the Virginia Corporation Commission for a name search.
4. Recruit Board Members
With a nonprofit, oversight is provided by a board of directors. They are the governing body that aims to see the organization succeed and its mission fulfilled. These should be passionate individuals, as their passion will drive them to always do what’s in the best interest of the organization. The board members will focus on the high-level strategy, oversight, and accountability of the organization. While the staff and volunteers will carry out the work. Board members make key decisions that address the organization’s mission, strategy and goals. Your board can consist of anywhere from three to fifty members. For the most part, there are three main roles or officers that need to be appointed to a board: President, Secretary, and Treasurer.
President: The president of your board of directors is the head of your nonprofit board. They preside at board meetings and create meeting agendas. This individual also supervises all of the business affairs of the board and acts as the primary contact for the group. While this individual may serve as the executive director of the organization, the role is very different. Your executive director manages the daily activities of the organization while your board president is in charge of governance.
Secretary: The secretary of your board of directors is responsible for distributing your meeting agenda and recording the minutes of the meeting. They’ll also make sure all documentation is filed and organized correctly for easy access at a later date and ensure all actions are in line with the organization’s bylaws.
Treasurer: The treasurer on your board of directors is responsible for overseeing your organization’s financial condition by keeping track of receipts and disbursements. This person might be a part of your finance team, or at least in frequent contact with them. If you are required to conduct a financial audit, your treasurer will present the findings.
Your board members generally meet a few times throughout the year to make decisions and ensure the organization is on track. The law varies state by state as to how often the entire board of directors should meet, but most require them to meet at least once every year with all members in attendance.
Carefully select your board members, as they set your nonprofit up for success. Collectively, the board of directors strategizes, sets policy, and makes decisions for the nonprofit. Individually, each director should have certain qualities and attributes that add value to your organization. The IRS requires that there be a minimum of three members on the board who are not related to each other by blood or marriage, but additional board members are permitted.
5. Appoint an Incorporator and Registered Agent
The incorporator is the person who signs the Articles of Incorporation for your nonprofit. You will need at least one but can have more than one. A registered agent is responsible for receiving legal notices on behalf of your organization. The appointed registered agent must be physically located in the state and maintain an office that is open during regular business hours.
6. Hold Your First Board Meeting
Once you have a board in place, hold a meeting to select board officers (President, Secretary, Treasurer). All other members will be equal members of the board. When the board members meet, they will need to establish the following documents:
Prepare and File Articles of Incorporation
The board’s first duty is to review and ratify the articles of incorporation. Incorporation creates the legal entity of a nonprofit corporation and carries several benefits for the organization. Each state has different requirements for articles of incorporation, and many states provide templates for emerging nonprofits to follow. However, the IRS requires specific language in your corporate formation documents that may not be included in state templates.
Your nonprofit’s articles of incorporation officially mark the creation of your organization. They document where and when the organization was formed and capture other information necessary to verify its existence. While requirements for language vary from state to state, there are some basic provisions that the IRS will look for when you apply for a 501(c)(3) exemption. It is important to customize the articles for your organization and make sure you meet the state and IRS requirements. Meeting these requirements from the start will help avoid having to make amendments later or risk getting your 501(c)(3) application rejected. Some states will also require you to publish your articles of incorporation, so be mindful of any deadlines and publishing instructions.
Establish Bylaws
Your board will also help to establish the bylaws for your nonprofit. Your bylaws are the governing document for your nonprofit. They serve as your organization’s operating manual and should be consistent with your articles of incorporation and the law. Your bylaws will act as supplemental rules to those already required by the state and IRS. Bylaws are required if you pursue federal tax exemption. The bylaws will act as a guide and decision-making tool for the board of directors.
After you create your bylaws, you need to create a written conflict-of-interest policy. Make sure to check if your state of incorporation has specific requirements for what must be included in the policy. A strong conflict of interest policy will help ensure your organization is well-governed and protect your leadership.
At the same time, you’ll also want to create and adopt a conflict of interest policy. A conflict of interest is when someone in a key position in your nonprofit has competing interests and is making choices that could benefit themselves to the harm of the organization. Personal interests should be set aside, and organizational interests prioritized. If a conflict of interest does arise, it should be disclosed immediately.
Your application to the IRS for 501(c)(3) exemption will require that both the bylaws and the conflict-of-interest policy are approved and adopted. Once they’ve been adopted, safely store them in your records file.
7. Obtain an Employer Identification Number (EIN)
After you have officially created your organization, you can apply for your nonprofit’s Employee Identification Number (EIN). This unique, nine-digit number is assigned by the IRS to identify your nonprofit. All types of nonprofits will apply for an EIN, not only those that hire employees. You will use your EIN to open a bank account, apply for 501(c)(3) status, and submit 990 returns to the IRS. There is no fee to apply for an EIN.
8. Store Nonprofit Records
As you launch your nonprofit, you will receive a number of official documents. Organizing these documents in one place will save you headaches down the road. You will soon have numerous items to keep in your records including your EIN letter, bylaws, meeting minutes, 501(c)(3) determination letter, and more.
9. Apply for 501(c)(3)
Applying for 501(c)(3) tax exemption can feel like the most daunting step in bringing your nonprofit dream into reality but obtaining tax exemption comes with many benefits. You will be able to apply for grants and grow your fundraising success in addition to being exempt from IRS income tax. A 501(c) is the chapter of the Internal Revenue Code that regulates nonprofit organizations. Like others, you may be most familiar with 501(c)(3) nonprofits, including charities and foundations. 501(c)(3) nonprofits apply using Form 1023 or Form 1023-EZ. Review the criteria for each application and make sure you meet the IRS's eligibility requirements. If able to, find someone with the expertise to ensure the form is completed accurately.
Most nonprofits would register as a 501(c)(3), however, there are 27 designations for a nonprofit. Learn the type that best fits your business.
10. Apply for State Tax Exemption
Familiarize yourself with your state’s requirements for recognizing your nonprofit’s tax-exempt status. Requirements for this vary by state. Many states issue their own tax-exempt certificate that can be used for sales and use tax purposes, but it may require an application and periodic renewal. Click here to obtain the application for the state of Virginia.
11. Register for Charitable Solicitation (Fundraising)
This is another area where laws differ from state to state, but most states require any nonprofit soliciting donations to register to do so on an annual basis. That means registering in the state prior to soliciting any resident of that state. Registering in your home state is essential, but you may also need to register in other states depending on the scope of your nonprofit work. Click here for the state of Virginia. Keep reading below to learn ways to raise money for your nonprofit.
12. Obtain Other Business Licenses & Permits
Make sure you also have any other necessary licenses or permits needed to legally run your business. The range of local, state, and federal requirements is wide. Take full advantage of the resources at the Small Business Administration Business License & Permit look-up tool and search by your business type and locality.
Stay Compliant
Once you have registered your nonprofit per the steps listed above, you will need to maintain compliance with all of the government agencies. Staying current with the IRS and state requirements is an ongoing responsibility.
Funding Your Nonprofit
Once you have completed the process of registering for charitable solicitations you are free to fundraise. It’s going to be crucial to fundraise for your nonprofit. A nonprofit with weak funding at the beginning is unlikely to sustain itself long enough to get a robust fundraising program going. Fundraising includes soliciting donations from individual donors, corporate sponsors, and fundraising events. For some people, fundraising can be extremely difficult and draining. One of the most reliable sources of fundraising for nonprofits is grants.
Grants
Grants are typically awarded to a nonprofit organization for a specific program or purpose. A grant generally focuses its giving on a specific population, certain types of nonprofits, or particular types of support (operating support, capital support, or program development).
While grants can fuel you at the start more easily than many other funding sources, applying for them can be very time-consuming. It first takes time to develop grant-writing skills that actually win grant proposals, then it takes time to write a winning application, and then it can take quite a while for you to see the funds in your bank account. So here are some tips for grant writing:
Consider if you can genuinely meet the grant requirements, whether you have the right staff and skills, and whether you’ll be able to continue the activities afterward.
Apply to grants whose missions and values align with yours.
Start small to build up grant writing expertise.
Research different grant opportunities and carefully choose the most suitable ones.
Build relationships and prepare.
Invest time and resources in writing a great grant proposal.
Here are some helpful places to begin your search for grants relevant to your nonprofit:
Catalog of Federal Domestic Assistance
The Puffin Foundation is a private fund for individuals and foundations.
I’ve got more! If you’d like to know more about funding your venture, contact me to get access to my presentation Funding Your Venture. It not only goes into more detail about grants, but it also provides other sources for funding your venture.
Pulling It All Together
The information in this article should be the essentials to getting your nonprofit started. Don’t have a nonprofit, but a for-profit business? Check out my blog, How To Start Your Business. Continue to look and read through other blogs that will be helpful to your business here.