Have you ever thought about giving back to the community? A nonprofit organization is a perfect way to do that. Nonprofit organizations further a sohttps://www.patriotsoftware.com/blog/accounting/what-is-nonprofit/cial cause or provide a public benefit, like a hospital or a public school. There are several different types of nonprofit organizations to choose from. But before giving back to the community, you must know how to start a nonprofit organization.
Read on for a step-by-step guide to get your nonprofit up and running.
What is a nonprofit organization?
Again, the sole purpose of starting a nonprofit organization is to further a social cause or provide a public benefit, not make a profit for its owner and board. Nonprofits use profits to support the organization’s mission, keep the lights on, and pay administrative costs.
Nonprofits organizations can include:
- Churches (e.g., synagogues, mosques, and temples)
- Foundations
- Hospitals
- Public schools
- Labor unions
- Museums
- National charities
- Research institutes
Because nonprofits work for the benefit of the community, they can qualify for 501(c)(3) tax-exempt status with the IRS. To be tax-exempt, nonprofits must apply with the IRS.
What’s the difference between a nonprofit and a not-for-profit?
Remember, there’s a difference between nonprofits and not-for-profit organizations. Unlike nonprofits that meet the community’s needs, not-for-profit organizations work hard to meet the owner’s goals.
Check out this chart for more differences between nonprofits and not-for-profits:
| Nonprofits | Not-for-profits | |
|---|---|---|
| Goal | Want to meet the needs of the community | Want to fulfill the goals of the owner |
| Legal entity | Can have a separate legal entity | Cannot have a separate legal entity |
| Operation | Operate like a business and try to make a profit to help fund operations | Don’t operate to generate revenue and all money generated goes helps fund operations |
| Hiring | Hires employees and volunteers | Hires volunteers |
| Tax-exempt status | Can apply for tax-exempt status under IRS tax code 501(c) | Can apply for tax-exempt status under IRS tax code 501(c) |
Not-for-profits can include sports clubs, trade and professional associations, and community associations.
What businesses can become a nonprofit?
According to the IRS, there are three key components for an organization to be tax-exempt as a nonprofit 501(c)(3). To qualify as a 501(c)(3), organizations must:
- Be a corporation, trust, or unincorporated association
- Operate solely to further its exempt purpose and not engage in political campaigns, lobbying, or illegal activities
- Fulfill one or more exempt purpose (e.g., charitable, educational, religious, scientific, literary, or the prevention of cruelty to children or animals)
See Publication 4220 for more information.
How to start a nonprofit organization
Just because you have a great idea to help the community doesn’t mean your nonprofit will survive. Up to 30% of nonprofits fail in the first ten years. Starting a nonprofit and keeping it up and running is hard work, but it isn’t impossible. Here’s a step-by-step guide to getting your nonprofit off on the right foot.
1. Do some research
Running a nonprofit isn’t that different from running a for-profit business. For example, you need to make sure that customers and funding are there to help keep the lights on. Otherwise, you’ll close up shop pretty quickly.
Before you get started, conduct a market analysis. Here are some questions you need to ask yourself:
- Is there a need for my nonprofit in the area?
- Are there other nonprofits like mine already in operation nearby?
- How are those nonprofits doing?
- Are people excited about what my nonprofit can offer?
- Do I have enough funding and people to start a nonprofit?
If you realize that other nonprofits in your area are similar to yours, you may want to consider your options. You can either work with the nonprofit already in the area or create a new type of nonprofit to run yourself.
2. Lay out the nonprofit’s core commitments
You want to make sure that your nonprofit’s core commitments are clear, easy to understand, and inspiring. These core commitments are statements for the public, employees, and shareholders.
To help communicate your core commitments, use a:
- Value statement
- Mission statement
- Vision statement
Value statement
The value statement doesn’t have to be long, but it should be actionable and memorable. A value statement works best when it helps define the organization’s philosophy and helps guide how the nonprofit operates. These values can shape day-to-day culture and help create a standard of conduct.
Value statements can be short phrases or a list of phrases. However you format your value statement, make sure it helps answer these questions:
- What does the nonprofit stand for?
- What are its guiding behaviors?
- How does the nonprofit engage with team members and the community?
What does this look like in action? Let’s look at an example of a value statement. The Smithsonian Museum’s value statement states:
- Our operations and activities will reflect our status as a public trust administered on behalf of the American people
- We remain committed to following the highest standards of ethical conduct
- We will conduct our business within an ethos of transparency
Mission statement
A mission statement outlines an organization’s purpose and lets the public know how it will help society. At the same time, a mission statement helps motivate employees toward a common goal.
A mission statement is strongest when it’s clear and direct. Avoid a long-winded statement or vague language. Your mission statement should help answer questions like:
- What does the nonprofit want to accomplish?
- What is its long-lasting impact?
- Who does the nonprofit serve and how does it serve them?
Let’s take another look at the Smithsonian Museum for an example of a mission statement. The Smithsonian mission statement is “Understanding the natural world and our place in it.”
Notice the difference between the museum’s value statement and its mission statement? The Smithsonian’s value statement covers various behaviors and mentions the American people as stakeholders. By contrast, the mission statement is short, sweet, and leaves no confusion about the Smithsonian’s mission.
Vision statement
A nonprofit’s vision statement is all about the future. It speaks to the nonprofit’s aspirations and long-term hopes. The vision statement serves two purposes: 1) it provides a road map for the nonprofit’s future growth, and 2) it helps motivate employees and other stakeholders to achieve those long-term goals.
An effective vision statement should look to the future and set realistic and achievable goals. Your vision statement should consider the following questions:
- What does the nonprofit want to achieve in the future?
- How will the nonprofit impact future communities?
For an effective example of a vision statement, let’s check in with (you guessed it) the Smithsonian. Here’s what the Smithsonian’s vision statement sounds like: “A future-facing Smithsonian museum that confronts the big questions in nature, science, and society.”
The Smithsonian’s vision statement makes it easy to understand what it seeks to accomplish in the future.
3. Organize your nonprofit organization
Once you fully understand where your nonprofit fits in your community and how it will operate now and in the future, you need to organize it. In other words, you need to make your nonprofit a legal entity.
To set your nonprofit up, you must:
- Choose a name for your nonprofit
- Recruit a board of directors
Choose a name
Your nonprofit’s name should be memorable and align with the nonprofit’s values and purpose. Make sure your nonprofit’s name is:
- Easy to write and spell
- Short enough to fit in URLs and social media handles
- Easy to remember
Before purchasing company letterhead, make sure that another business doesn’t already use your nonprofit’s name in your state. Check with your state’s business filing agency to make sure your name is one of a kind.
Recruit a board of directors
You must select a board of directors. Like any organization, nonprofits need legal, financial, and marketing skills to keep things running smoothly. Depending on your nonprofit’s field, you’ll also need industry-specific skills. The board of directors allows you to bring in individuals with skills to help your nonprofit thrive.
Before you bring individuals to the board, make sure their goals match up with the nonprofit’s.
4. Incorporate
There are several things you must do to incorporate your nonprofit:
- Decide on a legal structure. For a nonprofit to have 501(c)(3) status, structure it as a corporation, trust, or unincorporated association.
- File paperwork to incorporate. Check with the National Association of State Charity Officials (NASCO) to see what the regulations are for your state. If you plan to receive donations from more than one state, you must also register in those states. Generally, states provide templates and instructions to help your nonprofit file articles of incorporation.
- Apply for an Employer Identification Number (EIN). An EIN is a federal taxpayer identification number that identifies your business. EINs are unique nine-digit numbers assigned by the IRS. Apply for an EIN with the IRS.
See IRS Publication 557, Tax-Exempt Status for Your Organization, for more information.
5. File for tax-exempt status
Nonprofit organizations benefit from tax-exempt status. Tax-exempt status means your business doesn’t have to pay taxes to the IRS. Nonprofit organizations must apply for tax-exempt status with the IRS.
The most common form of nonprofit tax-exempt status is 501(c)(3). To apply for 501(c)(3) tax-exempt status, file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1023-EZ.
Maintain your tax-exempt status by:
- Adhering to by-laws
- Keeping detailed records
- Filing federal and state tax forms annually
Nonprofits have to worry about accounting just like any other business. Patriot’s online accounting software is fast, accurate, easy to use, and has free USA-based support. Try it for free today!
This is not intended as legal advice; for more information, please click here.
