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Starting a nonprofit requires commitment, hard work, and plenty of patience. While the idea for a nonprofit may come to you instantly, actually getting one up and running can take several months – and often much longer.
If you’ve been wondering how to start a nonprofit, what follows are key things you need to know about starting a nonprofit, plus a step-by-step guide to help you get your new nonprofit off the ground.
Key Points
• A nonprofit is an organization established to serve a public or community benefit, focusing on social, educational, or charitable goals rather than generating profits for owners or shareholders.
• A nonprofit needs a clearly articulated purpose to guide the organization’s future decisions and operations.
• Most states require a board to oversee a nonprofit organization and help with governance, fundraising, and strategic planning.
• When forming a nonprofit, it’s necessary to file incorporation documents with your state and apply for tax-exempt status with the IRS to gain legal recognition and qualify for funding opportunities.
What Makes a Nonprofit a Nonprofit?
A nonprofit is a type of business that is organized with the intention of furthering a specific cause or mission rather than earning profits for its owners. When you’re considering how to get business capital for your nonprofit, you will likely turn to activities that may bring in money – like crowdfunding or applying for grants. But all the money that is earned by or donated to a nonprofit must go toward the organization’s programs and operating costs.
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How Do Nonprofits Work?
Unlike other types of businesses, a nonprofit organization can’t distribute the funds it brings in to the group’s directors or members. Instead, the money must be used to help the organization meet its objectives. This can include funding programs and events, paying salaries, and covering day-to-day operating costs.
Also unlike other types of businesses, nonprofits are generally exempt from paying taxes — they have what’s known as 501(c) status. In order to be recognized as a 501(c) organization, your nonprofit will need to apply for a Recognition of Exemption through the Internal Revenue Service (IRS).
Types of Nonprofits
There are many types of 501(c) designations for nonprofits. Here’s a look at three common types of nonprofits.
501(c)(3)
• The most common type of 501(c)
• May not participate in political campaigns
• Unrelated business activities (like selling merchandise or renting the organization’s space) are subject to limitations
• Exempt from paying federal income tax
501(c)(4)
• Used by civic leagues and social welfare organizations
• May participate in political campaigns and political lobbying
• Donations to the organization are not tax-deductible
• Exempt from paying federal income tax
501(c)(7)
• Used by social and recreation clubs
• Primarily funded by membership fees and dues
• May receive up to 35% of funding from nonmembers
• Exempt from paying federal income tax
Others
There are dozens of other types of 501(c) designations, including 501(c)(5) for labor unions and 501(k) for childcare-related organizations. If your plan is to create your own nonprofit, you may want to consult the IRS’s complete list of tax-exempt groups to make sure you pick the right designation for your organization.
11 Steps to Starting a Nonprofit
If you’re committed to starting a nonprofit, here are 11 steps that can help you get from concept to creation.
1. Research Need
Before you start a nonprofit, you’ll want to make sure there’s not already one near your area that is doing what you want to do. If there is, consider joining or donating to it. Alternatively, you might consider creating a new chapter. This allows you to receive some financial help from the existing nonprofit, which means you won’t have to start from scratch. You’ll also likely be able to access professional guidance and advice when needed.
2. Choose a Name
To come up with a great name for your nonprofit, think of descriptive words that represent your purpose, mission, and/or values. Ideally, you’ll want something that is easy to remember.
Once you’ve chosen a name, check to make sure it’s not already taken. It’s illegal to use a name that’s been trademarked or is already being used by another nonprofit in your state. Many state government sites offer a free online search tool to make sure there isn’t another nonprofit with the same name in your state. You’ll also want to make sure the name isn’t trademarked, and find out if it’s available as a website URL (domain name).
3. Create a Detailed Business Plan
Just as you would for a for-profit business, you’ll need to create a well-thought-out business plan for your nonprofit. Before you start, you may want to do some additional market research to fully understand the need your organization will serve and to gather as much relevant data as possible.
The purpose of a nonprofit business plan is to clearly lay out your organization’s objectives and provide details about how you’ll go about achieving them. Consider including these sections:
• Executive Summary: This succinctly explains the change you hope to make.
• Products, Programs, and Services: This section sets out the need you are addressing and all of the different ways you will address it.
• Operations: This is where you detail what type of nonprofit this is, who will be on your team, and where you will operate.
• Marketing: This explains how you’ll get the word out about your organization and its work.
• Finances: This outlines exactly where your funding will come from, as well as how your organization will spend those funds.
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4. Recruit Your Board of Directors
Your board will be responsible for regulatory compliance, strategic decision making, supporting everyday operations, and hiring staff. So who you choose is key.
Ideally, you’ll want to choose board members who not only have business management experience, but also share your passion for the mission. It can also be smart to choose people who bring a mix of skills and knowledge to the table, including financial, marketing, and legal expertise. Once you have a short list, you can reach out to each candidate to discuss potential involvement with your nonprofit. Keep in mind that board members typically aren’t paid.
5. Secure Startup Funding
The most common way to secure startup funding for a nonprofit is by applying for grants, which are typically awarded to a nonprofit organization for a distinct program or purpose. Competition for grants can be stiff, however, so you’ll need to invest time and resources into writing a great grant proposal.
Other common sources of nonprofit funding include: membership dues, event fees, fundraising, sales of merchandise, and donation-based crowdfunding campaigns.
You may also be able to qualify for different startup loans, even as a nonprofit business.
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6. Incorporate Your Nonprofit
To make things official, you’ll need to determine your nonprofit’s legal structure (you can choose between an association, corporation, or trust). Next, you’ll need to file articles of incorporation. This document is essentially a request for business recognition by your state. The process varies by state, so check with the National Association of State Charity Officials (NASCO) for your state.
Your nonprofit will also need to get an Employer Identification Number (EIN). An EIN functions like a Social Security number for your nonprofit. You will need it to perform a number of different tasks, including hiring staff, opening a business bank account, applying for permits, and filing tax forms. You can apply for an EIN online by visiting the IRS website.
7. File for Tax-Exempt Status
To apply for tax-exempt status, you will need to fill out IRS Form 1023. This form is complex and can be time-consuming to complete. If your nonprofit earns less than $50,000 annually and has under $250,000 in total assets, you may be able to fill out a shorter version of the form called Form 1023-EZ.
8. Hire Employees
Nonprofits need a variety of skilled employees to run smoothly. You may want to include the following positions on your staff:
• Events manager: If you plan on having frequent events or large-scale conferences to further your cause, then you may want to have a dedicated events manager.
• Membership manager: This is someone who will keep track of membership information and actively recruit and maintain current membership numbers.
• Fundraising manager: Organizing fundraising activities and applying for government grants can be a full-time job. If your nonprofit is going to receive income through fundraising activities, then a fundraising manager is a must.
• Communications manager: Whether you plan to communicate through social media, newsletters, or speaking events, a communications specialist can help ensure the tone and message is appropriate for your nonprofit’s mission.
9. Automate with Software
Not long ago, someone had to manually enter a supporter’s information whenever a nonprofit received a donation. These days, software can do most of the work for you. Whether it’s taking payments online, updating email lists, or registering members for events, the right software can do it all automatically.
Depending on your budget, you might want to pick and choose different programs for different needs. Or, you might want to go with an all-in-one nonprofit fundraising platform that offers all the features your nonprofit needs (and possibly more).
10. Get the Word Out
Before you broadcast your launch, you’ll want to set up a website and a social media presence. Often, these are the first places people will go to learn more about your nonprofit.
Next, you can start promoting your organization and its mission. Some strategies to consider:
• Emailing all of your contacts (and asking them to spread the word with their contacts)
• Hosting an open house event
• Connecting with similar organizations in other cities
• Posting industry-related blog posts
• Joining online and offline communities where your target market is
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11. Maintain Your Tax-Exempt Status
Once you get your tax-exempt status, you’ll need to put some time and effort into maintaining it. That means operating your nonprofit within the parameters you stated in your application, and following the rules of your 501(c) designation (such as not supporting any political parties, etc). It also means maintaining careful financial records that show you are following all of the rules.
In addition, you’ll need to file a Form 990 or 990-N (which one will depend on your gross receipts) electronically each year. This is an informational return that asks for details about your revenue and expenses, along with other information about your nonprofit. Generally, you need to file this form within five months and 15 days after the end of your fiscal year.
How Long Does It Take to Create a Nonprofit?
Creating a nonprofit can take several months to a year. Where you’ll fall on that timeline will depend on how quickly you can get organized, assemble a board, and prepare all of your paperwork.
Depending on the state that you’re in, having articles of incorporation approved by your state government may take up to a few weeks. Once that’s done, you can apply for tax-exempt status by submitting Form 1023 to the IRS. It can take the IRS three to six months to get back to you with their decision. If you think your nonprofit will make less than $50,000 in annual revenue, however, you can file the expedited version called Form 1023-EZ, which can often be processed within 30 days.
Starting Nonprofits vs Small Businesses
Starting and running a nonprofit is similar to starting and running a for-profit business. However, there are some notable differences. Here’s a side-by-side comparison.
| Small Business | Nonprofit | |
|---|---|---|
| Profits can go to the shareholders | ✓ | X |
| All profits must go back into the organization | X | ✓ |
| Can sell equity in return for capital | ✓ | X |
| Can ask for donations | X | ✓ |
| Should have a clear mission and purpose | X | ✓ |
| Can use volunteers | X | ✓ |
| Exempt from income taxes | X | ✓ |
| Requires a board of directors | X | ✓ |
| One person can own and run the organization | ✓ | X |
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The Takeaway
Launching a nonprofit doesn’t happen overnight. It takes research, planning, and plenty of legwork. But the rewards — being able to attract donors and use those donations to make a positive impact on your community (or the world at large) — can be well worth the time and effort you invest.
Whether you choose to start a not-for-profit or for-profit business, keep in mind that you may be able to access funding by applying for a small business loan. While banks and credit unions often have strict qualification requirements regarding time in business and annual revenue, online lenders tend to be more flexible and faster to fund (though rates can be higher).
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
How do you start a nonprofit with no money?
To start a nonprofit with no money, you’ll need to write a business plan, build a board of directors, find an online fundraising tool that’s free to start gather donations (from friends, family, and board members), find an attorney willing donate their services to help you register your nonprofit, plan free and low-cost fundraising events, and apply for grants.
How do nonprofit owners make money?
If you own a nonprofit, you can generally earn a salary as long as you serve as the organization’s executive director and do not sit on the board of directors.
Can you run a nonprofit by yourself?
Running a nonprofit by yourself is possible during its early stages, but it’s challenging due to legal requirements and operational demands. Most nonprofits require a board of directors, and managing tasks like fundraising, compliance, and program delivery typically involves collaboration to meet the organization’s mission effectively and sustainably.
What is the first step to starting a nonprofit organization?
The first step in how to found a nonprofit organization is generally researching the need. If you find there is another organization in your area already working on the issues you’re interested in, you may want to form a chapter rather than create a whole new nonprofit. If not, your research may help you find out more about exactly what your community needs and how to reach the people you’re trying to help.
How much does it cost to found a nonprofit organization?
As you consider how to found a nonprofit organization, you may wonder about the expense. How much it costs to found a nonprofit can vary. State registration can cost anywhere from around $8 to more than $200 and filing for tax-exempt status can cost either $275 or $600, depending on the size of your organization. Beyond that, other costs will depend on whether you can get pro bono legal help and/or other volunteer assistance.
Photo credit: iStock/SDI Productions
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