Starting a nonprofit can be a wonderful way to support a cause you're passionate about while contributing to the greater good of your community. While this can be an immensely rewarding pursuit, it requires careful planning. You can't simply declare yourself a charitable organization. Nonprofits are legally recognized entities with unique tax benefits and must, therefore, meet distinct legal requirements in terms of organizational structure, reporting, and more.

A systematic approach to starting a new nonprofit will ensure success. With careful planning, you should be able to set up a charitable organization that meets the needs of people in your local community.

This article outlines the steps needed to start a nonprofit organization.

What Is Considered a Nonprofit Charity Organization?

A charitable nonprofit organization is set up with the distinct goal of providing services without the intention of making money from those services. A nonprofit uses any profit it generates through its products, services, donations, or sponsorships and puts that money back into the organization to further its goals. Nonprofits serve communities or promote social causes (e.g., humanitarian aid, education, research, etc.).

Since nonprofit charity organizations are generally established to serve the public and fulfill unmet needs in local communities, they may be categorized as exempt from federal taxes by the Internal Revenue Service (IRS). The majority of nonprofits can also seek tax exemption from relevant state-level and local taxes (e.g., property taxes). However, nonprofits can't be exempt from all types of tax; for example, they still have to withhold payroll tax for employees.

Why do governments allow nonprofits to skip out on taxes? The logic behind this is that the nonprofit is doing something that alleviates a burden on the government. By addressing unmet needs, such as hunger or housing, nonprofits take care of tasks that the government might otherwise have to step in and handle. However, certain criteria need to be met for the IRS to provide a nonprofit entity with tax-exempt status.

How to Start a Nonprofit Charity Organization

Successfully establishing a legal nonprofit organization recognized by the government as a tax-free organization requires thorough planning. Understandably, the government wants to carefully vet any organization that claims to be not-for-profit and ensure that this is the case before awarding coveted tax-exempt status. To gain this recognition, you'll need to meet certain requirements in terms of organization, purpose, and legal and financial conditions.

Read on for an overview of the essential steps needed to start a nonprofit organization.

Research and Create a Business Plan

A business plan will serve as a guidebook for your nonprofit, detailing everything from the intended services and products it will provide to how it will be managed. Further, a nonprofit business plan may be used for practical purposes like requesting funding from donors or lenders. This is a critical document.

As you formulate your nonprofit concept, ask yourself these questions:

  • Does your prospective nonprofit startup fulfill an unmet need in your community? Do your research to demonstrate the reality of the unmet need. For example, if you're starting a nonprofit geared toward providing housing, you might gather data from local homeless shelters regarding how many beds each one has and how many people they have to turn away every night. Facts, figures, and expert opinions can help attest to an unmet need.
  • Are there other organizations in the nonprofit sector already fulfilling the need you plan to serve? This doesn't mean there's no need for your nonprofit. For example, a single large city will often have multiple homeless shelters to serve diverse needs (e.g., there might be a women's shelter exclusively for women and children versus a general shelter for all). However, it's important to recognize how an existing nonprofit in the same space may impact the unmet need you've already demonstrated. Check the National Council of Nonprofits locator tool to scout out existing nonprofits in your area.
  • What are your prospective nonprofit's charitable objectives? Your nonprofit organization will require support from the community, both financial (e.g., individuals who donate their money) and practical (e.g., volunteers who donate their time). Clearly articulating your nonprofit's objective will make it easier to identify supporters. For example, if you want to address a housing crisis, the community at large can benefit from greater security.

These three questions will help you formulate your nonprofit concept and ensure the objective of your new organization is clear upfront. You're then ready to draft your business plan. The U.S. Small Business Administration (SBA) explains the essential elements, including:

  • Executive summary
  • Nonprofit description
  • Market analysis
  • Organization and management structure
  • Service or product description
  • Sales and marketing plan (e.g., social media, webinars, and fundraisers to connect with the community)
  • Funding request (used to approach potential donors)
  • Financial projections (to explain how the profits you make will be funneled back into the organization)
  • Appendix (to provide the data demonstrating unmet need)

As you write your business plan, you can also take care of some basic tasks that will support your new organization's success, like figuring out a business name, writing a mission statement, and developing your brand.

Legally Form Your Nonprofit

To qualify for tax-exempt status, you must first establish your nonprofit as a legally recognized nonprofit entity and then apply for tax exemption through the IRS. Aside from being a legal requirement, incorporating your nonprofit will also offer practical benefits, like:

  • Lending your organization greater credibility
  • Protecting the liability of yourself, the nonprofit's board of directors, organizers, and other members in case legal or financial issues arise from the nonprofit's activities
  • Ensuring your organization is entitled to all the benefits that come with formal nonprofit status (e.g., some banks and payment processors provide special services for nonprofits, like unique bank accounts or partial exemption from transaction fees)

Nonprofit status is governed by state law, so you will have to register your nonprofit through your state. The exact requirements, paperwork, and filing fees for establishing not-for-profit entities vary between states. Make sure that you're abiding by nonprofit law and check your secretary of state's website for more information on setting up a legal business entity.

While registering your new nonprofit with the state will establish it as a legally recognized entity, this step alone won't automatically qualify your nonprofit as a tax-exempt organization. Tax-exempt status is defined by Section 501(c)(3) of the federal Internal Revenue Code. Under Section 501(c)(3), there are two types of nonprofits:

  • Private foundations: Any organization having a single funding source falls under this category. Note that public charities typically get their funds from families as gifts.
  • Public charities: Public charities are churches, hospitals, schools, and similar organizations involved in fundraising programs actively and accept donations from the general public, private foundations, government agencies, etc.

To qualify for tax exemption, the IRS requires that your nonprofit startup present certain documents, like articles of incorporation and bylaws. You'll need to apply for exemption by submitting Form 501(c)(3) and paying a fee of $275 to $600 (depending on the application method). The IRS website has details. Note that it can take anywhere from three to 12 months for the IRS to make its final decision based on how many questions they have about your application.

Conduct Meaningful Work

When you wrote your business plan, you identified your nonprofit's core objective and the unmet need it intends to fulfill. Now, the question is how you will concretely meet that need. Many nonprofit businesses struggle to create tangible value. Do your research to understand what resources will help achieve the change you want to make. Then, determine what events, collaborations, partnerships, and other forms of support will achieve that end goal.

For example, let's say your nonprofit is committed to meeting the unmet needs of homeless women. Providing temporary housing is just one component. The long-term goal is presumably to get people off the street altogether. This requires attention to many other aspects, like giving women the training they need to apply for and get a job, providing basic personal hygiene products and facilities and clothing needed to attend interviews, and finding low-cost permanent housing to help women transition out of shelter life.

This is where the for-profit business or an existing organization can step in and lend a hand. For example, your nonprofit might partner with a local salon to get women interview-ready — and you might team up with a local library to use computer facilities after-hours, giving the women valuable training and an opportunity to access resources needed to find and apply for work. On top of that, you need people to give their time to staff the salon, provide computer training, etc.

Having a clear value proposition will help attract support and allow you to foster the relationships that will help your nonprofit business achieve its aims. Value propositions are a short description of what an organization offers to its customers in exchange for money. With nonprofits, the concept of value proposition is a bit different. Instead of money, the value proposition must highlight how the community will benefit. For example, reducing homelessness can create a more secure community for all.

A nonprofit value proposition needs to be compelling enough to attract the support of donors, volunteers, and partner organizations. Here are a few things that should be included in your nonprofit value proposition:

  • A detailed outline of the problem the nonprofit charity organization is addressing (look at your business plan for some useful data regarding unmet needs)
  • A clear solution the nonprofit is proposing (provide clear points on how your nonprofit is seeking to address that need)
  • An in-depth mission statement that satisfies both the problem and the solution (How can your target audience help?)

A successful value proposition will clearly articulate these three points. It should further be presented in a professional manner, reflecting your nonprofit's brand. This encompasses the look and feel of your website, your services, your events, the way you treat your members, and more.

Manage Finances and Legal Compliance

Once you've incorporated your nonprofit's organizational structure, there are a number of things you must do annually to maintain your tax exemption status. To be on the safe side, seek professional legal advice to understand the requirements in your state and according to federal law. You don't want to lose your tax-exempt status because of an error.

The very first thing you should do is file a 990 form, which collects information related to your revenue, expenses, board members, achievements, and other operational details. However, which application form you fill out depends on your gross receipts:

After you file your Form 990, it's important to complete your Charitable Solicitation Registration. Many states require this before you can accept donations from potential donors or engage in fundraising activities. You can do this at the time of incorporation. If all nonprofit board members have followed all the compliance regulations, there shouldn't be a problem maintaining your tax-exempt status.

How Much Money Do You Need to Start a Nonprofit?

Starting a nonprofit organization requires a significant financial investment. Here are some of the costs you can expect to incur for your nonprofit business:

  • Incorporation fees: Incorporation costs can vary depending on the state. Check with your local SBA office for details on your state's fees. Expect to pay anywhere from $100 to $500 in total fees.
  • 501(c)(3) status: Expect to pay $275 if you fill out the more straightforward Form 1023-EZ or $600 for the more complex Form 1023. Form 1023-EZ is a simplified version of Form 1023. Any organization planning to apply for exemption from federal income tax under Section 501(c)(3) will need to fill out these forms.
  • Business tools: A nonprofit is still a business. You will likely need computers, mobile phones, and software (e.g., project management, payroll, video conferencing software, etc.) to maintain daily operations.
  • Physical space: You may need to lease a commercial space to serve as your nonprofit headquarters unless you establish a virtual office. Further, if your nonprofit is providing tangible goods or services that require a physical brick-and-mortar location, this is a consideration.
  • Marketing costs: You should have an online presence if you want people to find your nonprofit corporation. You can use a website builder like WordPress, Squarespace, or Wix. These platforms have several templates that can match your requirements. Other marketing costs might include social media and events.
  • Staff: To fulfill your nonprofit mission, you may need to hire staff to help. To hire staff, note that you will need to apply for an employer identification number (EIN). The great news is that you can get your EIN for free. Apply via the IRS here.

Manage Your Nonprofit Organization Finances With Skynova

By now, you probably understand that starting a nonprofit involves a lot of paperwork. Fortunately, Skynova can help. Skynova's accounting software is tailored to the needs of small businesses just like yours, providing double-entry accounting and allowing you to easily switch between cash basis and accrual basis for better management of your business bank account and finances. You can also get a prompt overview of owed tax and paid tax with easy expense tracking and receipt uploading.

See how Skynova's software products can help your nonprofit grow.

Notice to the Reader

The content of this article is meant to be utilized as a general guideline to starting a nonprofit organization and may not be applicable to your situation. Always consult with a professional accountant to ensure that you're following all required accounting standards for your planned nonprofit.