You’ve decided to start a nonprofit! You see a need in your community, and you plan to do something about it. So, where do you start?
- First, do some brainstorming:
- What do you hope to achieve, and how do you plan to go about it?
- What will your organization do that existing organizations aren’t doing?
- Where will the money come from?
- What other resources will you need?
- Will you be able to recruit volunteers?
- Will you have paid employees?
- Are there existing groups that you can partner with?
Write out a plan and a budget. Identify your goals, your own skills and resources, and potential sources of assistance.
Next, decide on a legal structure. Many nonprofits exist as unincorporated associations, but there may be advantages to creating a nonprofit corporation. You might want to consult an attorney to discuss the pros and cons. If you decide to incorporate, you will need to recruit a Board of Directors to manage the organization, register your Articles of Incorporation with your state government (in most states, this registration is done through the Secretary of State’s office), and meet any other state requirements. Whether or not you incorporate the organization, you will need written documents to outline how your organization will operate.
The next step is to obtain a Federal Tax Identification Number, also known as an Employer ID number (EIN), from the IRS. Even if the organization will have no paid employees, this will be needed to establish a bank account and to file reports with the IRS. The IRS has streamlined this procedure, and it can be completed on their website at https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein.
Once your organization has obtained an EIN, it needs to apply to the IRS to recognize its tax-exempt status. Nonprofits are exempt from income tax because they have no owners or shareholders; the money they receive is used to carry out the organization’s purposes, and any money left over is kept for future use or donated to other nonprofits. However, most nonprofits are still required to file annual reports with the IRS. If your organization wants to be recognized as a charity (its purpose must be charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals), you should apply to the IRS using Form 1023, Application for Recognition of Exemption from Income Tax Under Section 501(c)(3) of the Internal Revenue Code. If your nonprofit falls into a different category (for example, a social club or a political organization), you would use IRS Form 1024. More information is available on the IRS website and in IRS Publication 557.
Once the IRS has approved your application, they will issue a Letter of Determination that specifies your Federal tax-exempt status and whether contributions to your organization are tax-deductible. But depending on the state where you are located, you may have to apply for exemption from state taxes too. For example, California and Texas are two of the states that require a separate application to be exempt from state franchise tax. State laws also vary as to whether a nonprofit organization is exempt from other state taxes such as sales tax.
Your Letter of Determination will also specify whether you must file an IRS Form 990, Return of Organization Exempt from Income Tax, each year. That form is generally due four months and 15 days after the close of your organization’s fiscal year.
Nonprofit organizations are required to disclose information on their finances to the public. Your Form 990 is considered public information and you must provide copies upon request. You may also be required to include information telling how to request those copies on your website and in any solicitation literature.
And will your organization be soliciting donations from the public? If so, most states will require you to register to solicit donations in their state. We won’t go into the details here, because registration requirements and fees are different for each state. If you hire a professional fundraiser or fundraising consultant, they may also be required to register. Then most charitable solicitation registrations must be renewed each year, and you may be required to obtain an independent audit of the organization’s financial statements. It can get complicated, but that’s why we’re here–to make the process easier.