If you’ve ever worked with a good nonprofit organization, then you know that it can be a very inspiring and rewarding way for a group to give back to those in need. However, establishing a nonprofit comes with its own set of challenges and requires just as much attention to detail as a traditional business structure.
If that sounds like the type of organization you’d like to begin, then here’s how to start a nonprofit business and what you need to know about each step of the process.
What Is A Nonprofit Organization?
According to USA.gov, a nonprofit organization is an entity that commonly performs some type of public or community benefit without the purpose of making a profit. Any profit they generate must be retained or reinvested back into the organization.
The IRS recognizes several types of nonprofits organizations:
- Charitable or religious organizations
- Social welfare organizations
- Labor and agricultural organizations
- Business leagues
- Veterans organizations
The Benefits Of A Nonprofit Business vs For-Profit
You might be wondering: If someone wanted to start a charitable business, what would make them want to create a nonprofit over a traditional for-profit business?
Good question! There are several benefits to making your business into a nonprofit organization:
- Tax-exempt status. Qualifying nonprofits do not have to pay federal and state taxes. When you consider how many thousands or even millions of dollars most businesses pay in taxes, the ability to become tax-exempt is a huge incentive.
- Limited liability protection. individual founders, board members, and some employees are not personally liable and can be shielded from creditors and courts.
- Legacy. The organization can continue perpetually even after the founders and directors move on or pass away.
- Eligibility for grants. Nonprofits can apply for certain public and private grants.
- Enhanced credibility. Donors may be more attracted to businesses with nonprofit status.
- Tax-deductible donations. Donations made by individuals to the nonprofit corporation may be tax-deductible.
- Reduced postage rates. Materials from nonprofits can be sent through the USPS at significantly reduced postage rates.
How To Start A Nonprofit Business
If you’re thinking about starting a nonprofit business, the process will be notably different than a traditional for-profit business. Below are the steps you will need to take.
1- Research The Market
Similar to any business, it will be important that you research the market first and see if any other business exists that is similar to the one you would like to start. Although competition isn’t a complete deal-breaker, it could make it more difficult for you later on to find support and donations if the community is already supporting another established cause.
2- Define Your Purpose
What is it that you want to accomplish with your nonprofit? Is there a social or charitable cause that you feel very strongly about? Is there are a niche of people who you feel are underserved and you want to make a difference in their lives?
For example, 19th century London during the industrial age was a bleak place to work and live. When twenty-two-year-old George Williams decided he didn’t like what this environment was doing to his fellow men, he and eleven other friends organized a refuge of Bible study and prayer for young men seeking escape from the hazards of life on the streets. Their group was named the Young Men’s Christian Association which became the YMCA nonprofit we know today.
The best way to communicate the purpose of your nonprofit is to draft a mission statement. However, you may wish to strategically word it as broadly as possible so that you do not exclude any potential support groups or donors.
3- Write A Business Plan
Similar to a for-profit business, such as a cleaning business or a party planning business, a nonprofit organization needs to have a business plan that sets up a roadmap for the next three to five years. Your goals should be defined and it should state how you intend to achieve those goals.
For help writing a business plan that is specific to nonprofit organizations, check out this guide here.
4- Recruit Your Board Members
Before applying for tax exemption, a nonprofit must establish a committee of board members who will represent the public interests of the organization and ensure legal / ethical accountability. As required by the IRS, this must be a minimum of at least 3 people.
5- Incorporate Your Nonprofit
Since a nonprofit must be a standalone legal entity, the next step will be to decide if it will be structured as a trust, corporation, or association. You can find out more detailed information about each type of structure here.
In addition, you’ll also want to obtain an employer ID number (EIN) for the new organization.
6- File Your Incorporation Paperwork
The last step before you can file for tax-exempt status with the IRS is to register your organization with your local state. You can look up your state’s requirements through the National Association of State Charity Officials (NASCO).
Don’t forget you may also need to obtain any necessary licenses and permits to comply with federal, state, and local rules.
7- File For 501(c)(3) Tax-Exempt Status
With your organization legitimately established and registered, its now time to apply for tax-exempt status recognition by the IRS under section 501(c)(3) of the Code. To do this, you will use a Form 1023-series application and submit it electronically. You can find more details about the application process at the IRS’s website here.
Generally this application must be filed within 27 months from the date of formation to be considered. If it does meet the IRS requirements, then it may be classed as either a private foundation or public charity.
8- Begin Fundraising
Because nonprofits don’t make money the same way a traditional business does, it must rely on the generosity of companies, individuals, and other organizations for revenue. Therefore it will be critical for a nonprofit to conduct various fundraising efforts to make an income.
There are many ways to conduct fundraising activities for nonprofits. For a comprehensive guide of strategies, check out these suggestions.
9- Prepare Your Annual Report
After your nonprofit has been created, it will have a responsibility to produce an annual report each year. The annual report is simply a detailed account of the nonprofits mission, growth, accomplishments, and acknowledgments.
Though the annual report is intended to be a way to communicate with its supporters as well as the general public, it is also a requirement of the IRS to hold its tax-exempt status. The annual report must be filed using IRS Form 990.
Final Thoughts: How To Start A Nonprofit Business
Just like with any business, starting a nonprofit business takes time, effort, and patience. A nonprofit business is a very rewarding sector to be a part of, and knowing you’re helping others makes all the struggles worth it. You’ve learned the steps for how to start a nonprofit business in this guide. Now take what you’ve learned and get your nonprofit ready to go and be successful! You can do it!