If you’re a community leader with a drive to change the world, starting a business may not create the enormous impact that you’re looking to make. To take your passion for helping others to the next level, start by learning how to start a nonprofit.
Starting a nonprofit organization isn’t a no-profit gig. Just as with any other type of business entity, nonprofits offer the chance for founders to turn their passions into a living.
Whether you want to work from home, work part-time, or build a full-time career, creating a new nonprofit can unlock opportunities for you to put your organization’s revenue towards something meaningful.
This article will guide you through everything you need to know about creating the most common type of nonprofit: the 501(c)(3) organization.
What Is a 501(c)(3) Nonprofit?
Nonprofits that hold the 501(c)(3) designation are charitable organizations — including public charities, private foundations, and private-operating foundations — that receive the special benefit of federal and state tax exemption.
While this tax-exempt status isn’t unique to this type of nonprofit, receiving the 501(c)(3) status allows your donors to add their contributions to their itemized tax deductions.
Having a 501(c)(3) designation also makes your tax-exempt organization more likely to receive funding. The status tends to increase credibility, opening access to more grants and more trusting donors. Many for-profit businesses will even give you hefty discounts to lessen your expenses if you have proof of this prized status.
In order for the Internal Revenue Service (IRS) to even consider recognizing your organization as a 501(c)(3) nonprofit, your work must help a community in a manner that abides by the law.
Specifically, you must be able to categorize your work under one of these purposes:
- Charitable
- Educational
- Literary
- Religious
- Scientific
- Fostering of national or international amateur sports
- Prevention of cruelty to animals or children
- Testing for public safety
Your 501(c)(3) nonprofit is restricted from engaging in political activities and from using its assets to benefit a specific individual, so make sure that this works for you before getting started.
How to Start a Nonprofit
When learning how to start a nonprofit, it’s important to recognize that entering the nonprofit sector isn’t always an easy path.
Compared to business entities like the sole proprietorship, which has a low barrier to entry, launching a nonprofit requires quite a bit of paperwork, fees, and funding.
With these six steps, you can get your nonprofit organization on the right track and keep it there:
1. Select a Nonprofit Name
If you’re inspired to start a nonprofit, the odds are you already have an idea or mission in mind. Your first step to bringing this idea to life is choosing a name for your nonprofit.
While for-profit business names have the luxury of being symbolic or vague, it’s in your best interest to choose a nonprofit name that reflects what you do (think “Feeding America” and “American Cancer Society”).
This will both build your credibility and offer potential donors an instant idea of your greater purpose. At the same time, your nonprofit name needs to be unique from others before it can be approved.
2. Create a Business Plan
While you may be running a nonprofit organization, operating with a business mindset is the best way to keep your revenue flowing. After all, your nonprofit needs money to continue its great work and to help people (or animals) in need.
To start, you can write a business plan that fully describes your purpose, who you’re serving, and how you’ll continue to grow.
Much like a regular business plan, your nonprofit’s plan should include some market research. You should know how you compare to similar organizations and how you meet a unique need. It’s also important for you to include your mission statement. which offers guidance as you distinguish yourself from other nonprofits, and a marketing plan.
Where your business plan may differ the most is in the financial projections section. Instead of figuring out how much you expect a product or service to sell for, you need to note how much you expect to raise and from whom.
Think about what grants, sponsors, or partnerships are available to groups like yours. Also, brainstorm what types of donors would be willing to support you and what may inspire giving throughout the year.
As you write out your financial plan, note that public charities are required to receive a third of their income from the general public (government sources of funding qualify).
3. Build Your Board of Directors
One of the most important steps when starting a nonprofit is recruiting your board of directors. Don’t rush this process.
Your board members need to be passionate about your cause and capable in their positions. A significant amount of your members should be influential in your community or otherwise be able to help raise money.
At a minimum, your board should be comprised of a president, treasurer, and secretary in the beginning, though the average board has about 15 members. If you need help finding nonprofit board members, consider reaching out to professionals and community builders on LinkedIn.
Make sure you outline the level of commitment that they’ll be expected to make as well as the benefits they may receive from joining.
4. File Your Nonprofit Articles of Incorporation
The first official document that your organization should file is your nonprofit articles of incorporation at the state level.
Some common pieces of information that you’ll need to provide in this document are:
- A nonprofit name
- Who your board members are
- Your nonprofit’s official address
- Your registered agent‘s address
- Your purpose
To find your state requirements for incorporating your charitable nonprofit as well as what permits you may need to raise money, you will need to contact or go to the website of your secretary of state or attorney general.
You can head to this state government list to figure out exactly where to find resources for incorporation.
Expect to pay anywhere between $8 and $270 to incorporate your nonprofit, with filing fees varying based on where you live.
5. File Form 1023
Once your articles of incorporation are submitted, you’re an officially recognized nonprofit. However, to be fully tax-exempt and recognized as a 501(c)(3) organization, you must file Form 1023 or Form 1023-EZ with the IRS.
Form 1023 is the traditional form to use and requires you to submit information about your organizational structure, finances, bylaws, and nonprofit programs. This form is extremely long, requires a hard copy to be submitted, and costs $600 to file. It also takes up to six months to process.
Many new nonprofits qualify to submit Form 1023-EZ instead, which is a streamlined version of Form 1023 that must be submitted online. The filing fee for this is only $275. The form can also be processed within three months.
6. Stay Compliant
As soon as your Form 1023 or 1023-EZ is approved, you’re all set to start operating as a 501(c)(3) nonprofit.
Once you start getting funded, you may start thinking more about your strategy, necessary hires, and how to start a website. If you haven’t created them already, you’ll want to create your nonprofit bylaws to help govern your organization.
No matter what your strategy is, one of the most important things to remember is that you must stay compliant to retain your 501(c)(3) status. The most important requirement for this is filling out Form 990.
Form 990 is the federal tax return that all nonprofits need to fill out to continue to be exempt. We recommend working with an accountant who has experience with nonprofits to ensure you’re filling it out properly.
Beyond IRS Form 990, you should check if your state requires any annual reports or permit renewals.
Frequently Asked Questions
Now that you understand how to start a nonprofit, you can get the ball rolling by following our steps. If you’re still unsure if the nonprofit path is right for you, here are our answers to some frequently asked questions to help you make a more informed decision:
1. How much should an executive director of a nonprofit expect to make?
The median income of nonprofit executive directors in the United States is just over $144,000.
While it’s common for founders to start their nonprofits simply as a good deed, it’s also important to fully compensate yourself for the work you do if you’re taking on the executive director role. This goes for part-time and full-time directors.
Of course, the IRS and your board of directors will both expect your salary to be reasonable, so research what executive directors with a similar level of responsibility are making.
2. Can a nonprofit founder be an executive director and a board member?
While there is no law against it, many founders choose to act as one or the other. This is because the board partially exists to balance out the power of the director. It’s typically best to avoid conflicts of interest, even if you have a large board that can easily outvote you.
3. What other types of nonprofits can I start?
If your nonprofit idea doesn’t quite fit the requirements for a 501(c)(3) nonprofit, the good news is that there are over 20 types of nonprofits recognized by the IRS. Some of the most common alternative forms of nonprofits include:
- 501(c)(4) nonprofits: These are civic leagues and social welfare organizations that are allowed to participate in lobbying, unlike 501(c)(3) nonprofits. A well-known example is the American Civil Liberties Union (ACLU).
- 501(c)(6) nonprofits: Organizations in this category are membership-based nonprofits. Common types of 501(c)(6) nonprofits include chambers of commerce and trade associations.
- 501(c)(7) nonprofits: These are social and recreation clubs, which commonly include country clubs, fraternities, and sororities.
Most nonprofits that do not hold the 501(c)(3) designation do not get the benefit of tax-deductible donations, though many can be exempt from state and federal income taxes.
If a nonprofit doesn’t quite suit your entrepreneurial idea, you can also choose to create a B corporation, a for-profit business entity that actively helps the community.
Make Your Impact
Changing the world may seem like a distant dream, but by learning how to start a nonprofit, you’re taking the first step toward it by changing your community first.
Nonprofit corporations aren’t always simple to start or run, but as your organization makes a real difference in people’s lives, you’ll find your work will be extremely meaningful. Start building your business plan and forming a motivated board today to begin the process.
If you don’t necessarily have a big idea for starting a nonprofit, but you still want to make a living while contributing to a cause, grant writing may be a great fit for you.
Learn how to become a grant writer and help nonprofits get the funding they need.
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