5 Steps to Start a Nonprofit
Starting a nonprofit may seem daunting, but it doesn’t have to be! Here is an outline of the five typical steps to get your organization off the ground!
1. Name and Mission Statement: A name must be chosen for the nonprofit and a mission statement drafted. The name should be searched through the state name registry to make sure no other organization has that name or a name that is too similar. The mission cannot be changed (in some states it can but it's not easy) so make sure it encompasses everything you want to do and might do in the past without being too vague. (Approx. 2 weeks)
2. Select Board of Directors: It is now time to select a board of directors. A board should consist of at least 3 members (President, Secretary, Treasurer) but may include as many as needed (such as... VP, Chairperson, CEO, CFO, COO, etc.). There are three main types of boards (traditional boards, executive boards, and boards of trustees).
3. Incorporate with the Secretary of State: Once the name is cleared, a mission statement has been written, and the board has been selected, the nonprofit corporation must be registered with the Secretary of State in the state where the organization will exist or a majority of its work will be conducted. This process is called "incorporating." You will have to pay a state- filing fee, which usually range from $20 to $125 depending on your state. (Approx. 2 weeks)
4. Employer Identification Number/ Tax ID Number: Simultaneously, step four should occur. This step is acquiring what is known as an Employer Identification Number (EIN) also known as a "Tax ID Number." This is basically equivalent to the organization's Social Security Number. All information about your organization will be traced to this number and it is required to complete the process of forming your 501(c)(3) regardless of whether or not you have any employees. (1 Day)
When you receive a confirmation letter back from the Secretary of State you are completely incorporated, these incorporation documents along with your EIN - you need to have a document called a “Unanimous Consent” - the summary of your first board meeting with some specific resolutions which will allow you to officially start business. You can open a bank account and issue tax receipts, but the donations are not officially tax deductible until you complete step 5. Technically you can wait to complete step 5 if you are not taking donations, but it is VERY important not to delay long since you want your donors to receive the benefit of their donations being tax deductible.
5. Form 1023 "Recognition of Exemption": This process takes your nonprofit from its local/state recognition to national recognition by the IRS. All nonprofits are based out of the state in which they are doing business (where they are incorporated) and the work of the nonprofit should be restricted to that state unless otherwise specified and worked out in writing (known as "qualifying"). The IRS requires the submission of Form 1023 in order to be officially recognized as a nonprofit corporation. The IRS includes hefty filing fees for this form ($400 for organizations planning on making under $10,000 annually and $850 for organizations planning on making over $10,000 annually.) It will take six to nine weeks to hear back from the IRS for small organizations and six to nine months to hear back form the IRS for larger organizations regarding your acceptance/denial of 501(c)(3) status. The response will either ask for more information (to which you will have to respond) approve your organization, or decline your applications. Upon approval, your organization will receive a letter on IRS letterhead stating that you are a tax-exempt 501(c)(3) corporation. This letter will be stated retroactively to the date of your incorporation. It is this letter that large donors and foundations will want to see before donating. (Approx. 3 Months on Average)
6. (Optional) Sales Tax Exemption: In some states, the sales tax exemption is separate from incorporation and in other states it is automatically granted upon incorporation. Your organization may need to apply for sales tax exemption separately. Because this is considered unnecessary for nonprofit status and because many nonprofits do not want this done, this is not included in any of the packages. It can be done for a small fee.
Ongoing Work: At the very least you must meet all financial reporting requirements and have at least one annual board meeting - plus whatever you outline in your bylaws.
A note on Financial Reporting: Depending on the nature of your organization, you may need to file quarterly or annual reports. For example, if your organization is selling items that are taxable, you will have to file a report for sales tax each quarter. All nonprofits regardless of their business must file an annual Form 990 with the IRS. This form shows how much money your organization has brought in and how much is spent. This form is like a tax return but for a nonprofit. Note: some religious-based organizations (Catholic, Christian, or other denominational) can apply to become exempt from this requirement.
If you are interested in starting a nonprofit, schedule a "Get to Know You" session to see if we'd be a good fit. There are many options from my online course to full-service start-up. I'd love to chat.