How to start a nonprofit organization in 8 steps
Nonprofit startups aren’t easy. But the end result can be incredibly rewarding. In this guide, learn the steps to get a nonprofit off the ground, secure funding, and stay compliant.
1) First, build a solid foundation
The U.S. has 1.54 million organizations in the nonprofit sector, according to the National Center for Charitable Statistics (NCCS)—there’s bound to be another nonprofit doing similar work. So, a solid foundation is crucial to the success of your organization.
Find the need for your nonprofit
Many types of nonprofits exist. Every good business starts with a solid foundation, and the bedrock of a nonprofit is its purpose. Think about why you need to start a nonprofit. What demographic (group of people) do you wish to serve? What problem do you intend to solve?
Your answers will help differentiate your organization from the others, which will be essential to your success. Here’s additional guidance on how to solidify your purpose:
- Establish the needs of the population you want to service and decide if your intended solution will provide value.
- Find existing organizations (nonprofit and for-profit) that are already filling the need you wish to serve.
- Think about alternatives to starting your own nonprofit—join existing organizations, become a consultant, help with fundraising or sponsorship.
Wanting to help others is a natural part of being human. However, starting a nonprofit takes strategy and critical thinking.
With all that in mind, ask yourself if you still want to go through with creating a nonprofit. If you’ve gone over the questions to ask yourself before you start a business and determine it’s worth the challenges up ahead, keep reading to discover the next steps to build your new nonprofit business.
Name your nonprofit
A clear vision is crucial to establishing a strong organization, and a vision starts with a name. What you choose as your business name is a distinct decision that can influence how others view your organization for years to come.
Spend some time thinking through name ideas. Brainstorm with your team, friends, and family to see which names inspire confidence and are more memorable. Consider the mission and purpose of your organization, your location, and who you want to serve—those factors can help you find themes around which to name your business.
Before settling on a choice, make sure it’s easy to say and remember. Because having a web presence can be a good business decision, you might also check the availability of domain names.
Additionally, keep in mind that some states require nonprofits to have a specific designation. You may need to include “incorporated,” “corporation,” or “limited” in your name.
Create a mission statement
By now, you should have a clear understanding of the population you want to help, what you want to help them with, and the solution you’re providing. It’s time to formulate a written mission statement that:
- Is simple and easy to understand
- Communicates what you do
- Avoids buzzwords and generalities
Your mission should guide your organization and help you and future stakeholders make solid business decisions.
2) Next, create a business plan for your nonprofit organization
A good non-profit business plan acts as a GPS for structuring, operating, and growing your organization. A big part of your plan will include competitive research. But remember: Competition isn’t bad. In fact, you could make a bigger impact on your cause by collaborating with an existing organization or positioning yours to provide complementary services.
Your business plan can increase your chances of success because it helps you identify where and how your nonprofit fits in the existing environment. Your document should be broken down into 5 main parts:
- Executive summary: Describes your company’s mission and purpose, summarizes the need your organization will fulfill, and includes high-level growth plans to help with fundraising down the road.
- Products, programs, and services: Explains how your organization will meet the needs of your targeted demographic and how your solution will create positive change.
- Marketing and sales plan: Tells how you’ll spread the message about your services, including how you’ll communicate your message and which channels you’ll use to attract and retain consumers.
- Operational plan: Answers the question of how you envision your day-to-day operations, defines your organizational structure (will you have a staff or active volunteers?), outlines legal requirements (small business insurance, licensing, or permits), and specifies your business location.
- Financial plan: Your financials are the meat and potatoes of your business plan. It should include cash flow statements, balance sheets, potential revenue streams, how much startup funding you need, and how you’ll fundraise money for your business.
The Small Business Administration has a Business Plan Tool with templates to help you through the process. It isn’t as hard as you might think, and you don’t have to get it perfect on the first try. Instead, your business plan should bend and grow as your organization reaches new milestones.
3) Put together a team
To create a great organization, you need great people. While you might discover that partners who share your passion are hard to come by, it’s entirely possible to find reliable people and put together a committed leadership team.
Find board members
Every nonprofit organization must have a board of directors. Finding your board is a crucial decision—your board is legally responsible for regulatory compliance and strategic oversight of the entire nonprofit corporation. They’ll approve the bylaws, manage the budget, and make sure the organization stays true to its mission.
But before you pick your members, you must decide if you’ll set up a working or governing board.
- A working board takes the place of paid staff. Its members work within the organization, carrying out operational responsibilities.
- A governing board has members that oversee the operations, compliance, and finances, while paid staff take care of the day-to-day responsibilities.
The right board for you depends on your goals and your budget. For example, a working board could be an excellent choice if you’re short on cash and starting with smaller goals.
When choosing board members, the most important qualifying factor is whether they share the same passion for your organization’s mission. Your members should come from diverse backgrounds, have some business skills, and be able to help make financial decisions.
When hiring staff, your first task is to define the roles you want to fill—your employee search will depend on the job duties you’ll have them perform. A few roles you might start with include:
- Membership Manager
- Fundraising Manager
- Events Manager
- Communications Director
Unlike board members, your employees are paid. The minimum pay for hourly employees is $7.25, according to the Fair Labor Standards Act (FLSA). However, many states have minimum wage laws that may be higher than the federal wage. For example, Michigan’s minimum hourly rate is $9.65.
Volunteers are often the heart of a not-for-profit organization. They can also be essential to carry out day-to-day operations. Before setting out to recruit volunteers, think about what you expect from them:
- How many volunteers do you need?
- How much time do you want them to put in?
- How will you train your volunteers?
Finding high-quality volunteers is possible. You could include a volunteer section on your organization’s website, spread the word through family and friends, or partner with faith organizations and civic groups.
4) Register your nonprofit with your state
Your nonprofit must comply with legal rules and regulations, including registering with the state. It’s how you legally create your nonprofit. Many choose to register as a corporation, but you can register as an association, trust, or limited liability company (LLC). A corporation typically offers the most benefit (protection from liability and eligibility for grants), but it isn’t always the right fit.
For example, a ski club or parent-teacher organization can register as an association. The group has legal rights, such as being able to open a bank account, but you’ll have less legal protection with this structure. It’s best to get legal advice from an attorney about which type of nonprofit is best for your situation.
When it comes to registering, each state can have a different process. However, it typically consists of several steps:
- Choose directors
- Name your nonprofit
- Determine your legal structure
- Create and file Articles of Incorporation
- Apply for tax-exempt status
- Draft nonprofit bylaws
- Hold a board of directors meeting
Your state can also mandate specific permits. Check with your county clerk’s office, secretary of state, or local town or city hall for licensing and permit requirements.
5) File with the IRS
You’ll need two separate filings with the Internal Revenue Service (IRS) to start your nonprofit business.
Get your EIN
First, you’ll request an Employer Identification Number (EIN). The EIN is how the IRS tracks your company’s financial activity. You’ll need the number to open a business bank account and hire paid employees.
In most cases, you can apply for an EIN online and get your number in a matter of minutes. The IRS requires that your nonprofit is formed legally before applying, so be sure to complete that step first.
File for tax-exempt status
The IRS requires you to file for 501(c)(3) tax-exempt status to avoid federal income tax. The term “501(c)(3)” comes from the section of the Internal Revenue Code. Generally, there are 3 business categories that can qualify for tax-exempt status:
- Charitable organizations
- Churches and religious organizations
- Private foundations
There’s a $600 filing fee, and you may be eligible to use the simpler IRS Form 1023-EZ. Otherwise, you can file the long-form version of Form 1023 to file for tax exemption. The IRS has a guide to completing and filing Form 1023 that walks you through the application process.
According to the IRS, “an organization must file its exemption application within 27 months from the end of the month in which it was formed.” This way, your tax-exempt status can go back to the date of formation. If you’re past the 27-month mark, you can still file Form 1023—but your exempt status may only apply from the filing date forward.
You may also need to file for state tax exemptions. Find your state’s department of revenue for more information.
6) Secure startup funding
Funding is a challenging yet crucial task nonprofits face. Before you begin, you must choose a funding model for your organization:
- Think about your existing sources of funds—can you build on that
- Learn how similar organizations approach funding
- Identify funding model options and narrow your choices
- Analyze how much money your nonprofit needs and what you might expect from each model
Once you understand the types of funding options, you can narrow your choices. Then, you can make a plan, create a timeline, and take action to cover the startup costs.
There are 6 general types of charitable solicitation, and the right plan can make sure money flows into the areas where it will do the most good.
Individual donations make up 69% of total giving, making it the largest source of charitable giving, according to the National Philanthropic Trust. As you can see, focusing on individual donors is a smart option for your funding model.
You can set up several ways for donors to give, including website portals, crowdfunding, direct mail, events, auctions, and more. Donors can make one-time or recurring donations, depending on the type of giving you offer.
Grants are one of the most common ways to get your hands on startup funding. Because you typically apply for a distinct program or purpose, securing grants can be time-consuming. However, it can be rewarding—especially if using government grants, which account for 21% of revenue for tax-exempt organizations.
Besides governments, you can also look for grants from public charities, community foundations, family foundations, and private foundations. The National Council of Nonprofits has a grant research tool to help you get started.
Grant money is a great way to fund your organization early on. If you choose to go after grants for startup funding, you can switch to another funding model later if it makes more sense.
You might not think of corporations as a source of funding. But corporations are becoming more aware of their impact as socially responsible organizations. For example, consumers have become more likely to buy products from companies that support corporate social responsibility (CSR).
Corporate sponsorships can take many forms:
- No-strings-attached philanthropic donation
- Sponsoring an event
- Donating an employee’s professional services pro bono
- Matching contributions made by their employees
- Product donations (in-kind gifts) instead of cash
- Allowing consumers to “round up” their purchases when checking out
The key to making this funding source work is to accept donations from corporations that align with your nonprofit’s mission and values only.
While it won’t work for every type of nonprofit, membership fees can provide a constant source of revenue for some. It’s generally more effective if your organization offers exclusive programs or benefits to the members.
Running a membership program takes time and effort, so you may encounter overhead costs to keep it running.
Selling goods and services
Smaller nonprofits aren’t likely to depend on this type of funding, but larger organizations can benefit from selling goods and services. You might sell branded t-shirts, tote bags, mugs, cookies, and other items.
You could also sell tickets to an event, create and sell a publication, or charge for writing, consultancy, or other services. The federal government has charity and tax laws if you’re selling goods or services. You’ll want to get expert advice if this makes up a significant portion of your revenue.
7) Start operating your nonprofit
Now that you’ve named your organization, set up your team, registered, and secured startup funding, you can move into operations. It’s finally time to do the work you’re passionate about! Here are the first steps to operating your new nonprofit:
- Build a professional network to increase visibility and attract new donors, staff, and volunteers.
- Set up your online presence with a website and social media to share information about your events, fundraising opportunities, and business information.
- Create a marketing and content strategy to outline how you’ll communicate with your audience.
- Draft job ads and hire employees, and put programs in place to take care of your people so you can retain your team.
- Set up systems to manage donations, email marketing, team communications, and task management.
- Find physical space to set up your office. If you prefer a virtual team, you might still need a PO box so your nonprofit can receive mail.
If you opted for a working board, you wouldn’t need to worry about hiring staff at this point. But the budget is still important! Consider the program costs to start your projects or implement services, and create a plan to sustain them.
8.) Stay compliant
Whew! The hard work is done—your nonprofit is set up and operational. But you’ll still need to keep your business in good standing by staying compliant. The requirements vary by location and type of nonprofit you have, but here are a few things to keep in mind:
- File IRS Form 990 to retain tax-exempt status
- Abide by your bylaws
- Regulate board meeting schedules and meeting minutes
- Keep licenses and permits, if any, up to date
The IRS has a 501(c)(3) compliance guide that can help. It includes information on recordkeeping, changes you must report to the IRS, and activities that could jeopardize your tax-exempt status.
Additionally, don’t forget to review your nonprofit insurance coverage. Your small business insurance needs can change as your organization grows and expands. Instead of letting this task sit on your to-do list, get a fast online quote from Huckleberry. Seriously—it only takes a few minutes, and there are no strings attached.