June 1, 2015 Update

How to Start a Nonprofit Organization: A Practical User’s Guide

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Table of Contents ABOUT THIS GUIDE ....................................................................................................................................... 2

Who is it for? ............................................................................................................................................. 2

IDEA PEOPLE.......................................................................................................................................... 2

BEGINNING NONPROFITS ..................................................................................................................... 2

SECTION I ...................................................................................................................................................... 3

So You Want to Start a Nonprofit? ........................................................................................................... 3

INTRODUCTION ..................................................................................................................................... 3

Self-Assessment ........................................................................................................................................ 4

20 QUESTIONS TO ASK YOURSELF ........................................................................................................ 4

SECTION II ..................................................................................................................................................... 5

Basic Steps to Starting a Nonprofit ........................................................................................................... 5

GETTING STARTED ................................................................................................................................. 5

OTHER CONSIDERATIONS ................................................................................................................... 15

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ABOUT THIS GUIDE

Who is it for?

IDEA PEOPLE You are a highly motivated person thinking about starting a

nonprofit but not sure what is required and need the tools to do so.

BEGINNING NONPROFITS You formed a nonprofit but have a nagging feeling that you may be overlooking certain legal

requirements. You feel responsible for the health of your organization and want to make sure

that you are on the right track. Simply review the Basic Steps to Starting a Nonprofit.

Congratulations for your proactive concerns!

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SECTION I

So You Want to Start a Nonprofit?

INTRODUCTION You have passion and ideas; you’re a visionary, but do you really want to start

a nonprofit? Starting a nonprofit is like starting a new business, and like

startup businesses, a large proportion of new nonprofits last only a short time.

Starting a nonprofit involves more than passion alone. Are you READY to start a nonprofit?

You’ll need to establish a board of directors, register the name your organization, create and file

Articles of Incorporation and By-laws, file federal, state, and city tax returns, and more. You’ll

need funding for government filings, professional fees (i.e. legal review) and operations (i.e.

marketing, website.) Starting and operating a nonprofit is a full-time job. You must financially

sustain the organization and comply with a number of legal requirements.

This user’s guide is a practical tool that will help you determine your readiness to start a

charitable organization. It takes you through the basic steps to form a publicly supported

nonprofit in the U.S.

Congratulations for your vision and dedication.

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Self-Assessment

Great ideas and commitment are the main starting points to forming a nonprofit. Before starting your quest, ask yourself the following 20 questions.

[Note: The following assessment addresses public charities. If you want to start a private foundation, supporting organization, or a charitable trust, other questions need to be made.]

20 QUESTIONS TO ASK YOURSELF

Business Checklist

1. Why do l want to start a nonprofit versus a for-profit business (cooperative, sole proprietorship, partnership, or corporation)?

2. Who is my target population?

3. What will be the legal structure of my nonprofit, as a separate legal organization?

4. What services will my nonprofit deliver (human services, education, art/humanities, recreation, etc.)?

5. How much money do I need to get started?

6. Am I prepared to spend the time needed to manage its operation?

7. Where will my nonprofit business be located?

8. Will my nonprofit duplicate services in the market? If so, what differentiates my nonprofit?

9. Who is my competition; what are their services; what segment(s) are they targeting?

10. What kind of staffing will I need and what skills and experience will be required?

11. What kind of suppliers do I need?

12. Will I need to pay taxes?

13. Do I need insurance? If so, what kind?

14. How will I manage operations?

15. How will I market my business?

Legal checklist – will your nonprofit be able to:

16. Form and maintain a board of directors?

17. Submit IRS Form 990, 990EZ, or 990N (for less than $50,000 gross receipts) annually?

18. File an annual report with the Secretary of State?

19. Regularly acknowledge donations in writing and in compliance with IRS requirements?

20. Prepare and maintain regular financial statements?

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Considering all that is involved, do you still REALLY want to start a nonprofit?

If so, then proceed to Section II and follow the Basic Steps to Starting a Nonprofit. If not, then review the 20-question assessment until you are confident you are ready to proceed.

SECTION II Basic Steps to Starting a Nonprofit

GETTING STARTED Starting a nonprofit corporation involves financial investment,

planning, operations, defining a mission, and completing a series

of legal activities.

See the following steps to take as you move forward.

1. Define your mission, vision and values

2. Define your nonprofit structure

3. Write a business plan

4. Form a board of trustees

5. Draft governing documents

6. Name and incorporate your organization

7. Apply for business licenses

8. Apply to IRS for an Employer Identification Number (EIN)

9. Apply to IRS for federal tax exemption status

10. Prepare for quarterly and annual filings and reports

11. Engage human resources when needed and viable

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Step 1 – Define your mission, vision and values

A nonprofit corporation has a mission to serve people. A well-crafted mission will provide

direction and purpose for the organization and appeal to donors and other supporters. The

mission should be written with input from board members, volunteers and other interested

parties. Ideally it should be brief and concise and embody the organization’s basic commission

to make something happen in the world. The statement answers the following questions:

Why do we exist?

What is the purpose or essence of this organization?

Who is the target population that will benefit from our services?

What do we desire to achieve in the long run?

What makes us unique from other similar organizations?

What human needs are compelling our organization?

Step 2 – Define your nonprofit structure

The steps you must take to form a nonprofit corporation are similar to those for starting a for-

profit business, but a bit more involved. You must apply to the same agencies and follow a

similar process, but satisfy a few extra requirements depending on the legal structure of your

nonprofit.

The following represent your basic options for legal structure:

Informal nonprofits: As the name implies, these organizations are loose-knit groups of

like-minded people who get together for activities or to be of service to the community.

Examples include local book clubs, self-help support groups, or graffiti cleanup patrols.

Informal nonprofits have no legal structure and typically raise and manage only small sums

of money. They aren’t big enough to fall under the watchful eye of the IRS.

Nonprofit corporations: By incorporating a nonprofit organization can protect its directors

and staff from certain types of liability, similar to the protection offered to for-profit

corporations. Incorporation also ensures that the organization can continue its activities

even when the founding members are gone. To get the details on incorporation in your

state, check with the office of your Secretary of State, Division of Corporations, or

Attorney General.

Nonprofits can receive favorable tax treatment when they are created to serve the public

interest. Nonprofit corporations with charitable, educational, scientific, religious, or cultural

purposes can apply to the Internal Revenue Service (IRS) under Section 501 of the Internal

Revenue Service Code for favorable tax status. Some sections of the code including 501(c)(4)

and 501(c)(6) offer exemptions from income taxes to nonprofits, but do not allow donors to

deduct their contributions to the nonprofit.

The major types of tax-exempt organizations included under section 501 are:

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Charitable organizations (ex. religious, educational, scientific, and literary

organizations)

Social welfare organizations (civic leagues and community groups)

Labor and agricultural organizations (labor unions and farm bureaus)

Business leagues (trade associations and chambers of commerce)

Social clubs (country clubs, fraternities, and sororities)

Fraternal organizations (lodges and other clubs)

Veterans’ organizations (armed forces groups)

Employees’ associations (employee-benefit groups)

Political organizations including campaign committees, political parties, and Political

Action Committees (PACs)

Donations to qualified nonprofits may be tax deductible – a distinction that can matter a great

deal to your contributors. Section 501(c)(3) of the IRS tax code not only exempts certain

nonprofits from having to pay federal income taxes, but also allows their donors to deduct their

contributions to the 501(c)(3) nonprofit from their federal income taxes.

Qualified organizations who can apply to the IRS for 501(c)(3) tax status include: religious,

educational, scientific, and literary groups, as well as child and animal welfare organizations,

certain veterans’ organizations, fraternal societies, and more.

Note: For information on whether your organization qualifies for tax-exempt status check out IRS Publication 557, revised February, 2015 at: http://www.irs.gov/pub/irs-pdf/p557.pdf.

Step 3 – Write a business plan

A business plan is essential for an organization’s success. Nonprofits have a lot in common with

for-profit businesses. Both must understand and follow common business practices. While most

for-profit companies start with a business plan, a nonprofit also needs the foundation of a

business plan as a roadmap for success. The nonprofit business plan outlines the route the

organization should take in order to deliver relevant, viable services to the public.

Start with an Executive Summary. This is a snapshot of your organization. A good Executive

Summary should include:

The Mission Statement – The purpose and reason your organization exists.

Organization Overview and History – This statement describes the organization, when it

was formed, how it was founded, population served and the geographic area where you

deliver services.

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Services – Briefly describe the services you deliver, what differentiates your organization

from others and the population you serve.

Goals and Objectives – Explain what you want to do in your community and how you will

measure your efforts.

Growth Highlights – If applicable, include examples of growth, such as the number of

people being served currently compared to the number served at or before inception of the

organization. Graphs and charts are helpful in providing a visual comparison of the data in

this section.

Financial Information – Summarize information about potential contributions and

revenues.

The main content of the Business Plan should include the Target Population, Program and

Services, Marketing Plan, and Financial and Fund Development Plan as described below:

Target Population

Be thoroughly familiar with the people you plan to serve - their needs, barriers, other providers

in the market, and how you will serve the target population more effectively.

Assess the following:

Statement of needs

Size and locations of the population

Duplicate services available to the population

What is your window of opportunity to serve this population?

Program and Services

Clearly describe your program, the resources and services you will deliver. They should align

with the mission, goals and objectives of the organization. Follow this checklist as you plan

program and services in your business plan:

Program structure with goals, objectives and outcomes

Draft a description for each service

Uniqueness of the program

List community partners/collaborators

How will you evaluate program efficacy, outputs, success indicators, outcomes, how

the program is changing the marketplace

Marketing Plan

A basic market plan should include analysis of your population, its needs and outlook and size.

Your marketing plan should include marketing analysis and your:

Target market – description, character and size

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Market forecast – market potential, i.e. calculation of people who will use your services

and how you plan to capture that market

List competitors – their services, target market, locations

Laws and regulations to follow – federal, state, city

SWOT analysis – strengths, weaknesses, opportunities, and threats of your nonprofit

Barriers that hinder you (e.g., technology, initial investment, lack of quality personnel)

Based on your market analysis, you should then describe your strategies to gain awareness of

your target market and serve those people.

Financial and Fund Development Plan

Because most charitable nonprofits rely on contributions for some or all of their operating

revenue, fund development is of major importance for success.

You first must know how much money you will need for start-up. What will it take to deliver

quality services? Where will you get the money? Will you need to use a combination of your

own money and contributions? Make a fund raising plan to determine how much money you

will need to raise and to plan revenue sources.

Start by preparing an annual budget listing sources of revenue and expenses. Consider

preparing a three-year budget for projection purposes.

Typical revenue sources for a public charity include:

Grants

Individual Gifts

Special Events

Corporate Sponsorships

Earned Income

A simple example of a mix of revenue sources for a fund raiser is:

Goal: raise a total of $100,000 with approximately:

- $25,000 in grants

- $25,000 in individual donors

- $50,000 in special events

Step 4 – Form a board of trustees

Most new nonprofits recruit and name their first board members as part of the process of

incorporating.

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The nonprofit's board manages the business affairs of the nonprofit corporation. It shoulders the

legal duty to keep the organization true to its mission to serve the public and remain compliant

with laws and contractual obligations. This "public trust" role explains why nonprofit directors are

sometimes called trustees.

Usually a board of trustees sets policy; determines overall goals, objectives, and related

strategies; set priorities; sees that resources are used wisely; oversees the budget, and ensures

that plans and programs are implemented.

Great boards have traits and qualities that enable them to lead creatively and effectively.

Whether board members are comfortable with legal, financial, marketing, and/or human

resources aspects of business, there should be a way for all board members to get involved. A

Trustee is not expected to be experts in every matter of the board considers. They are expected

to use common sense, practical judgement, their particular expertise, and rely on information

presented to them from competent and reliable sources.

Ideal board members:

share a passion for the organization's mission

have strong ties to their communities

are diverse in age, gender, race, religion, occupation, skills and background

act as an ambassador on behalf of the organization to its clients and contributors

contribute to the organization’s fundraising strategies and campaigns

One way to tell prospective board members what you expect is to create a "Board Candidate

FAQ" that communicates important facts in a simple one-page format. Here are some samples

questions that might be included in a board candidate FAQ.

Board candidate FAQ

What is the organization's mission?

What is the organization's history?

What are board members' responsibilities?

How long does a board member serve?

Are there legal issues that board members should know about?

Step 5 – Prepare your governing documents

Once deciding to form a non-profit corporation your organization will need to create and the

organization and governing documents, the Articles of Incorporation and Bylaws, with state

government.

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Articles of Incorporation bring an organization into initial existence; when filed and approved

they create the nonprofit corporation under state law.

The Articles of Incorporation contain structural information such as the name of the

organization, its address and other information. Nonprofit corporations also include tax-

exemption information in their articles, such as their tax-exempt purpose and related operating

information.

Bylaws are the rules and methods that your organization follows to insure legality and

productivity. Bylaws basically serve as an operating manual. Bylaws contain rules and

procedures for holding meetings, electing directors, appointing officers and taking care of other

essential business formalities.

Good news! There are a number of templates available to you to simply fill in and then file the document with the appropriate authority. Start with the Office of the Secretary of State in the state you will be incorporating in, SCORE, or your local nonprofit association.

The Bylaws and the Articles of Incorporation should be kept in your non-profit record book.

After your Articles of Incorporation are approved by the state government, your non-profit must

hold an organizational meeting where the Articles of Incorporation and Bylaws are adopted by

the board of trustees. Then the incorporation process is completed.

Step 6 – Name and incorporate your organization

Choosing a name for the organization is an important step in the business planning process.

Not only should you pick a name that reflects brand identity, but you also need to ensure it is

properly registered and protected for the long term. Legally, the name must not be "deceptively

similar" to any existing corporation in your state of incorporation or must be "distinguishable on

the record" of your state.

Here are some points to consider as you choose a name:

What connotations does your name evoke? – Does it reflect your mission? Will it

appeal to your donors?

How will your name look? – On the web, as part of a logo, or on social media.

Will you have a website? – Is there an available domain name for your nonprofit?

Register the name of your nonprofit with your state government.

CAUTION: DO NOT order letterhead, business cards or any printed materials with your

nonprofit name on it until is it approved by the state in which you are incorporating.

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Having your organization’s name approved, and your Articles of Incorporation and Bylaws ready

to go, you can now apply for incorporation as a nonprofit with the Secretary of State in the state

your nonprofit will be incorporated in. You may want to have an attorney review everything

before submitting the application to ensure that you have not missed any legal implications and

everything is complete.

Also apply for charities registration, if required by the Sectary of State in which your nonprofit is

incorporated in.

Step 7 – Apply for business licenses To operate as a nonprofit business, apply to the state Department of Revenue (DOR) or Business Licensing Service (BLS) for a state business license. Also if required by the city you will be operating in, apply for a business license to that city as well.

Step 8 – Apply to IRS for an Employer Identification Number (EIN) Every organization must have an employer identification number (EIN), even if it will not have

employees. The EIN is a unique number that identifies the organization to the Internal Revenue

Service (IRS). Do not apply for an EIN until your organization is legally formed.

The simplest way to apply for an employer identification number, is online. It takes less than

fifteen minutes. To apply for your EIN online go to:

https://sa.www4.irs.gov/modiein/individual/index.jsp

You can also apply by submitting IRS Form SS-4 by mail or fax. Make sure that you select the

correct type of entity, such as other nonprofit organization, church or church-controlled

organization.

The EIN is not your tax-exempt number. That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes. Contact your state Department of Revenue for additional information about tax-exempt numbers.

Step 9 – Apply to IRS for federal tax-exemption

Tax-exempt status is not automatically granted to nonprofits. You must apply for approval and

recognition of tax exemption. To apply you must complete and file Form 1023 or Form 1023-EZ

(for revenues up to $50,000) with the IRS. To determine whether or not you can use the easier

Form 1023-EZ, you must complete Form 1023-EZ Eligibility Worksheet.

For detailed, step by step information about Form 1023-EZ and Form 1023 search for the

following on http://www.irs.gov/Forms-&-Pubs

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Inst 1023-EZ – for instruction about completing Form-EZ and a link to the Form 1023-

EZ Eligibility Worksheet

Form 1023-EZ – for Form 1023-EZ to complete

Form 1023 – for Form 1023 to complete

Inst 1023 – for instructions about completing Form 1023

When the IRS receives your application it will perform an initial review and place your

application in one of two groups:

1. Those that can be processed based on the information submitted

2. Those that require additional information to be processed.

If your application falls in the second group, you’ll be contacted by a specialist in approximately

180 days for the additional information needed.

You may want to have an attorney review your application and attachments before you submit it

to the IRS to ensure you have not missed any information or misinterpreted the instructions.

After the IRS approves your nonprofit organization for 501(c)(3) tax exempt status you will be

notified by mail by the IRS. Only then should you communicate that status to contributors and

others.

Step 10 – Prepare for quarterly and annual filings and reports

You must comply with mandatory reporting requirements, beginning the year you incorporate:

Annual Report to the state Secretary of State

IRS Form 990-N, Form 990-EZ, or Form 990

IRS Forms 990-N, 990-EZ, and 990 serve two essential purposes:

First, it provides information that helps government agencies (the IRS and state charity

regulators) enforce the laws that govern nonprofits. For example, it helps government

regulators learn whether groups have been spending funds in a way that might cause

them to lose their charitable and tax-exempt status.

Second, the Form 990 provides a great deal of financial information about the filing

organization’s financial condition, its financial strengths or weaknesses and the sources

of its income.

Step 11 – Engage human resources when needed and viable

Serious thought should be given to the mix of human resources for your nonprofit organization

from start-up to full operations and continued long-term growth. There are several ways to

engage people in your nonprofit organization:

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Volunteers – are typically are inspired by the mission of your nonprofit and are not paid

monetarily for their services.

o There are many reasons why people serve as volunteers and it is important to

understand why people will view your nonprofit to advance in areas of their life

such as giving back to their community, sharing skills or gaining new ones,

enhancing their resume and make important networking contacts, feeling needed

and making a difference, and many more.

o What are the intangible benefits you will provide your volunteers?

o What range of time commitments do you expect from your volunteers?

o How will the work to be done be assigned to volunteers?

Contractors (independent, firms) – work to complete a defined scope of work within a

defined time period for an agreed upon monetary payment(s). With contractors:

o Be sure that you and the contractor have a mutually agreed upon and signed

Statement of Work (SOW) including the monetary payment amount for the

services and deliverables to be completed. This will help ensure the work

remains within your limited budget.

o You must prepare and file Form 1099 for these people who provided services to

your organization for the calendar year, even if your organization has a 501(c)(3)

tax status.

Employees (part-time and/or full time) - are legally hired to work for your organization

for monetary payment and benefits, until legally separated. With employees you must:

o Determine whether pay will be by hour based on a minimum number of hours per

week, or by salary. Your minimum wage must be at the least minimum wage

established by the federal, state, and city governments

o Adhere to all federal, state, county, city employment laws and regulations

including:

Job Descriptions and Compensation Levels

Unemployment Insurance

Benefits

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OTHER CONSIDERATIONS

Legal

You may be asking yourself, “Do I need an attorney?” An attorney is not a legal requirement to

form a nonprofit, but working with one may help clarify questions and concerns you have along

the way.

Gift Acknowledgement

You must establish a system for receipting gifts over $250 to comply with IRS substantiation

requirements.

Resources: Following are some sites for additional information related to starting a nonprofit organization are: http://www.sba.gov – Small Business Administration

http://www.score - SCORE

http://www.irs.gov - IRS

http://topnonprofits.com/examples/nonprofit-mission-statements/ - 50 examples of mission statements

http://www.councilofnonprofits.org National Council of Nonprofits