Step 1: Do Your Homework
Conduct a needs analysis
Find out if organizations (nonprofit, for-profit, or government) are already doing the same or similar work in your community. It will be harder to get support if you are just duplicating existing services rather than improving or adding to them. Also find demographic or population data that shows a need for your services, and explain how that need is not being met. Where can I find demographic information about my community?
Is a nonprofit right for you?
Public charities must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code. If you want to start a nonprofit so you can get grants to pay yourself a salary, stop now and find another option. Realistically, many new nonprofits aren’t even ready or eligible to get grants. Learn more about whether a nonprofit is right for you:
- Can My Business Be a Nonprofit? (recorded webinar)
- What are the advantages/disadvantages of becoming a nonprofit organization? (Knowledge Base Article)
Know the alternatives
Forming a new nonprofit might be the most complicated way to act on your passion to serve your community. The biggest challenge for most new nonprofits is to develop and maintain reliable income streams. Estimates vary, but most experts agree that less than half of nonprofit startups survive beyond five years. Of those that survive, perhaps one-third are in financial distress.
Consider alternatives that can let you essentially operate as a nonprofit but with far less effort and cost. Thus, you can focus your efforts on serving your community right now while you develop experience and support that will serve you well if you eventually decide to form a separate organization.
Step 2: Build a Solid Foundation
Draft your mission statement
Developing your mission statement is a critical first step. It communicates your nonprofit’s purpose, what groups it serves, and how it will serve them. Every decision and action in your organization should support and further your mission. Where can I learn about nonprofit mission statements?
Write a business plan
Just as with a for-profit business, a business plan can help a nonprofit describe how it intends to achieve its mission in more specific details. It also can be used to outline a new project or venture. How do I write a business plan for a nonprofit organization?
Develop your board
As your nonprofit’s governing body, your board fulfills a variety of roles and legal responsibilities. In order to carry out these duties effectively, the board will change as your organization grows and matures. While recruitment is an important step in this process, a systematic approach to board development, including orientation, training, evaluation, and the cultivation of prospective board members, is critical to ensuring its long-term success.
Step 3: Incorporate Your Nonprofit
Now that you have reached this step, it’s time to find resources that are specific to your location. The best place to start is by clicking on our Nonprofit Startup Resources by State.
Why should you incorporate?
- Having a formal structure will give credibility to your programs and services.
- The corporate structure limits the liability of the organization’s officers and directors.
- The IRS requires organizing documents and governance policies and procedures that are usually associated with corporations.
Learn more about how to incorporate your nonprofit. Filings and fees will vary by state. Also note, incorporation registers your nonprofit, but it does not make it 501(c)(3) exempt.
Step 4: File for 501(c)(3) Tax-Exempt Status
Apply for exempt status with the Internal Revenue Service (IRS). Be aware, the user fee will be $275 or $600, depending on your application method. It also can take 3-12 months for the IRS to return its decision, depending on how many questions the IRS has about your application. Where can I get help filling out my incorporation and tax-exempt 501(c)(3) paperwork?
Step 5: Ongoing Compliance
Register with your state’s agency
Each state has an office charged with the oversight of charitable organizations and charitable solicitations (usually the Attorney General). If you plan to solicit contributions in other states, you may need to register there, too.
Prepare for annual reporting requirements
In most cases, an exempt organization must file some version of Form 990 with IRS, depending on its financial activity. Form 990 shows your finances, activities, governance processes, directors, and key staff, and it is open to public inspection. States have their own reporting and renewal requirements, too, and these will vary with each state. Thus, consider tracking your organization’s finances and activities in a such a way that will help these annual reporting requirements occur smoothly.