Forming and operating a nonprofit can be a highly rewarding way to own a small business for someone with big ideas and a socially conscious mindset. Beyond your dreams of shaping a better future for society, the logistics of starting a nonprofit are complex and time consuming.
To get your nonprofit corporation off the ground, you must create and gather documentation to prove your organization benefits the public and therefore deserves tax-exempt status from the federal government.
Once the bureaucracy is out of the way, you can focus on the business of fundraising, hiring, and actively improving the world around you.
What is a nonprofit organization?
A nonprofit is a business entity organized for purposes other than turning a profit. Officially, a nonprofit organization (NPO) is a business that has been granted tax-exempt status by the US Internal Revenue Service (IRS) because it advances a social cause benefiting the public in some way.
Think: historical preservation, scientific research, animal welfare, economic development. Nonprofits are prohibited from distributing profits they generate toward anyone or anything other than advancing the organization.
Nonprofits are sometimes referred to as non-stock corporations, or 501(c)(3) organizations—depending on the subsection of the Internal Revenue Code Section 501 that provides for their tax-free status.
📚Learn: Nonprofit vs. Not-for-Profit: What's the Difference?
What are the benefits of starting a nonprofit?
Some benefits of running a nonprofit startup are:
- The organization can receive federal tax-exempt status, which means it does not have to pay federal taxes on its income.
- Nonprofits are eligible for local and state tax exemptions.
- Nonprofits can receive donations from individuals and organizations, which can help to fund the organization’s activities.
- They also are eligible for grants from government agencies and foundations.
However, there are some drawbacks too. Nonprofits have to operate for public good, and not for the benefit of shareholders or private individuals. They must conduct regular board meetings, re-invest profits into the organization, and keep detailed financial records to retain their tax status.
How to start a nonprofit in 12 steps
- Build a solid foundation
- Create a business plan
- Pick a name
- Choose your structure
- Officially form your nonprofit
- Get an EIN and open a bank account
- Appoint a board of directors
- Draft the bylaws and conflict of interest policy
- Start fundraising
- Build a team
- Launch your nonprofit
- Start marketing your nonprofit
1. Build a solid foundation
Before drafting foundational documents and filing applications with tax authorities, it’s important to consider the community or demographic the organization will serve. Identifying a community need and backing it up with population data is a strong start to building the foundation for your nonprofit organization.
A clear, comprehensive mission statement is crucial for propelling your nonprofit forward and motivating staff, volunteers, and donors.
If written right, your mission statement focuses your organization’s efforts and will help its lead players make important decisions in the future. A few key guidelines for writing a mission statement are:
- Draft a statement that is clear, unambiguous, brief, and easy to understand and remember.
- A good mission statement informs others immediately about what work your organization does and what cause(s) it seeks to advance, ideally in one or two sentences.
- A mission statement can evolve with the goals of the organization.
2. Create a business plan
A detailed nonprofit business plan will give you an understanding of your organization’s estimated income and your subsequent ability to pay for certain things—such as third-party marketing, employees instead of volunteers, or even a president or CEO.
It will also determine how much your organization will need to rely on donations to supplement internal revenue-generating efforts. A solid business plan will include:
- An executive summary. A description of your nonprofit’s mission, a summary of your market analysis (proving a community need), and a short explanation of how your organization will meet that need.
- Offering. An in-depth description of the services, programs, or products your organization will offer, coupled with a detailed description of your impact goals.
- Marketing plan. Explain how you intend to get the word out about your nonprofit’s services, programs, or products.
- Operating plan. An overview of the organization’s day-to-day operations, along with a description of the organizational structure and an explanation of what each role will achieve.
- Financial plan. A description of the organization’s financial footing—cash flow statements, balance sheets, income statements, a budget, identification of revenue streams, startup cash needs, operating costs, etc.
Check if there are existing organizations addressing the same need as you. You’ll compete for donors and grants if you do the same thing as another organization. Use the National Council of Nonprofits locator tool to explore US organizations and make sure you’re achieving a different mission.
Get the template: Free Business Plan Template and Examples for Small Businesses
3. Pick a name
You’ll need to choose a unique name for your organization. Ideally, it should relate to the mission and activities of the organization. If you need help choosing a name for your own nonprofit organization, try Shopify’s business name generator to inspire some ideas.
4. Choose your structure
Nonprofit tax-exempt status is approved and regulated by the IRS.
The IRS recognizes roughly three dozen nonprofit organizations, ranging from general charitable organizations to benefit trusts for coal miners and teachers’ retirement fund associations.
Not all nonprofits enjoy an exemption from federal income tax, and not all types can extend tax deductions to their donors.
Five common types of nonprofits include:
501(c)(3): Charitable organizations
This category includes religious, educational, charitable, scientific, and literary organizations. It also encompasses public charities and private foundations, and amateur sports organizations that create national or international sports competitions. A 501(c)(3) organization can also include a fiscal sponsor, which provides fiduciary oversight and management services to help build charitable projects.
These organizations must serve the public good in some way. Donations to this type of nonprofit are tax-deductible for the donor.
501(c)(4): Civic leagues, social welfare organizations, local employee associations
501(c)(4) organizations include civic leagues, social welfare organizations, and local employee associations. They are allowed to engage in political activities, as long as it helps the organization's mission.
They often are focused on community improvement and social welfare issues, and include examples like community service organizations, homeowner associations, and advocacy groups.
501(c)(5): Labor, agricultural, and horticultural organizations
Labor organizations primarily fall under this category. They represent the interests of workers and collective bargaining, and include unions and agriculture organizations. Contributions are not tax deductible.
501(c)(7): Social and recreational clubs
This category is dedicated to social and recreational clubs. They are organized for the pleasure, recreation, and other nonprofitable purposes of their members. Some examples include country clubs, hobby clubs, sports clubs, and fraternities. Contributions are not tax deductible.
501(c)(9): Employee beneficiary associations
These nonprofits provide benefits like health insurance, pensions, etc. Think employee insurance organizations and benefit plans for employees. They provide life, sickness, accident, and other benefits to members. Membership is usually limited to employees from a particular employer or group.
5. Officially form your nonprofit
Once your foundational decisions have been made and key starting documents drafted, it is time to officially (and legally) incorporate your tax-exempt organization.
Different states require different procedures for incorporating locally, but generally speaking, the process involves filing articles of incorporation that include:
- Disclosing the name of your organization
- Detailing contact information for your appointed board members
- Determining your legal structure (a nonprofit corporation, LLC, partnership, etc.)
- Filing incorporation paperwork with the appropriate secretary of state office
- Filing registration forms for the necessary charitable solicitation registration for your state, and paying the accompanying filing fee
- Applying for tax exemption with the IRS
The main form you will use to register for tax-exempt status with the federal government is IRS Form 1023, also known as the “long form” option. Some organizations will qualify to use a short form, known as a 1023-EZ. To successfully file form 1023-EZ, organizations generally must project that their gross annual receipts will not exceed $50,000.
If your 501(c)(3) application is accepted, you’ll receive an IRS determination letter that lets you know your tax exempt status has been approved. It will explain your rights and responsibilities as a nonprofit organization.
6. Get an EIN and open a bank account
Getting an employer identification number (EIN) starts with an SS-4 form from the IRS. You can get this form online, by mail, or by fax. Fill out the form and send it to the IRS once you get it.
Next, open a bank account for the nonprofit. The bank will require your EIN. You’ll also need to provide your organization’s name, address, and contact info.
According to NerdWallet, the top four banks for non-profits are:
- LendingClub: Best online bank
- US Bank: Best brick-and-mortar bank
- Bluevine: Best non-bank option
- Live Oak Bank: Best checking and high-yield savings bank
7. Appoint a board of directors
Your state’s laws and your organization’s bylaws will determine the size and composition of your board. Most boards have between three and 31 members, with the majority being independent (not affiliated with the organization).
Board members are responsible for hiring and supervising the executive director, approving the budget, and ensuring the mission is followed. Once you have a few candidates, you’ll need to vote on them at a meeting of the organization’s members (if you have any).
After the board is seated, you’ll need to elect a president, vice president, secretary, and treasurer. These officers will serve for a set term (usually one year) and will be responsible for leading the board’s meetings and carrying out its decisions.
8. Draft the bylaws and conflict of interest policy
A nonprofit’s bylaws describe how the organization will operate, how decisions will be made, how officers will be chosen, and how the board will meet.
Conflict of interest policies prevent nonprofit officers, directors, and key employees from using the nonprofit for their interests. Boards should approve conflict-of-interest policies and keep them updated.
9. Start fundraising
Early on, your nonprofit will need to have a funding model in place and identify funding sources. Without robust funding at the outset, it is unlikely your nonprofit will be able to run long enough to get off the ground.
Options for fund sourcing might include:
Grants
Grants are a common way to secure startup cash for nonprofits. However, public and private grants are typically awarded based on a nonprofit’s distinct function, with grantmakers generally focusing their giving on niche services or programs.
While grants can be a great source for seed funding at a nonprofit’s outset, they can be time-consuming to apply for and are often dispensed only once.
Startup accelerators
Several startup accelerators for nonprofits can guide new organizations toward obtaining investment, mentorship, office space, fiscal sponsorship, networking, program development, and other resources.
10. Build a team
Good leaders are the key to running a successful nonprofit organization. You’ll want to identify partners who genuinely share in the organization’s mission and possess deep networks to leverage for the nonprofit’s advantage.
An ideal leadership structure will include a full board of directors and executive director, both of which will be responsible for ensuring the organization’s regulatory compliance, making strategic high-level decisions, and making key hires.
You’ll also want to build a robust network of paid staff or volunteers to accomplish the organization’s goals.
11. Launch your nonprofit
Once all your legal documents have been approved and your seed funding is secured, it’s time to launch your nonprofit officially. But that’s not where the journey ends.
12. Start marketing your nonprofit
Once the ribbon is cut, you’ll need to inform potential supporters that your organization is up and running. This is where marketing comes in.
A proper marketing plan outlines what you will communicate with your stakeholders—potential donors, community partners, etc., and via which channels. For example, young donors may be best reachable through a robust social media presence.
How long does it take to start a non-profit?
Nonprofit formation takes time. A lot depends upon how quickly you can organize your nonprofit organization and create your own corporate tax exemption application forms. In the case of most nonprofits, this stage may be months.
After submitting your forms, the IRS will have three to 12 months to contact you with a decision. If your organization makes more than $50,000 annually, it may be possible to file an expedited Form 1023-EX for processing in two to three weeks.
How do nonprofit owners get paid?
Compensation for nonprofit owners varies depending on the organization’s structure. In general, nonprofit owners receive a salary, stipend, or commission. They may also be eligible for health insurance and retirement plans.
Start a new nonprofit today
Starting a business is a great way to make a difference if you’re passionate about a cause. It’s a lot of work, but it’s worth it.
Start by choosing a name and mission for your organization, applying for 501(c)(3) status, and creating a board of directors. Once you have that in place, you can start making a difference in your community.
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Starting a nonprofit FAQ
How do I start a nonprofit with no money?
You can start a nonprofit by finding like-minded individuals passionate about the same cause and working together. You can also look for grants or other financial assistance to start your nonprofit. A new nonprofit can also seek pro bono assistance from individuals or businesses.
What is the difference between a nonprofit and a for-profit business?
The main difference between a nonprofit and a for-profit is that a nonprofit does not have shareholders, while a for-profit does. This means that a for-profit’s primary goal is to make money for its shareholders, while a nonprofit’s primary goal is to further its mission.
Is starting a nonprofit organization worth it?
Starting a nonprofit organization depends on many factors specific to your situation. There are several things to consider, such as how much time and effort it will take to start and run the nonprofit, the potential impact, and other resources available to you.
What are the 3 types of nonprofits?
There are three main types of nonprofits: public charities, private foundations, and advocacy organizations. Each type of nonprofit has different rules and regulations for how they operate.
