Although there’s no direct profit motive, starting a nonprofit is much like any other business. You must plan to compensate directors, workers, and yourself, following rules and laws specific to your tax-exempt status, but if you’re unsure how to begin, visiting with a nonprofit finance expert like Jacobson Jarvis can be a huge boon to your business. Until then, consider our in-depth guide for starting your own nonprofit organization to get things rolling on the right foot.
Establish In-Depth Background Research
There are more than 1.5 million registered nonprofits in the United States, accounting for just under 10% of all wages and salaries paid in the U.S. Understandably, this leads to incredible competition for funds and grants, of which the pool is considered very limited.
When considering beginning a nonprofit organization, the first step is among the most important. One must define and quantify the problem your organization would hope to address in the community, country, and world. Just as you would when starting a business, defining the demand and market for your nonprofit’s intended services goes a long way to securing financing. Demonstrating the necessity and importance of your organization’s work through surveys, data science and analytics, market research data, and testimonials or interviews should be completed before establishing your organization by legal means.
As with any business plan or strategy, you’ll need to answer the following questions: Where are you going? What are you trying to achieve? What will it take to get you there?
This process not only defines your efforts for prospective investors and donors, but shapes your messaging and intentions as you bring on members of a board, employees, and prospective volunteers. Start-up nonprofits tend to follow this format for their initial business plan:
- Cover Page
- Table of Contents
- Executive Summary
- Overview of Proposed Structure
- Competitive Analysis
- Overview of Programs and Services
- Contingencies/Risk Aversion
- Financial Details
While it’s not a requirement for starting a nonprofit, it may help to have legal assistance when outlining structure and tax exempt status. In the United States, it’s important how you characterize your plans when incorporating and applying for tax-exempt or tax-deduction with the IRS. Otherwise, you may end up footing a hefty tax bill on whatever income your organization brings in. At the very least, consider having an attorney familiar with nonprofits look over your documentation before you file.
Build a Foundation for Success
With more than 1.5 million nonprofit organizations registered in the United States covering causes ranging from cancer treatment research to providing clean, accessible water for people all around the world, it can be hard to find a niche that isn’t already well-covered by a current organization. This shouldn’t mean you should give up hope and abandon your plans for your nonprofit, however. Consider reaching out to other founders doing nonprofit work in your area of interest and seeing what worked for them, how your organization can be different, and how you both may work together to achieve a common goal.
About “Founder’s Syndrome” and How to Prevent It
A common downfall of many nonprofits stems from a situation known as “Founder’s Syndrome,” or the failure of an organization to deviate and define itself outside of the personality of its founder.
Founder’s Syndrome has been known to hamper the efforts of many nonprofit organizations as they grow. Throughout the early stages of an organization’s life, strong leadership with tenacious planning and resolve are crucial to navigating its infancy. However, when an organization becomes more established and defined, those skills are not as necessary, taking a backseat to organizational prowess, management, and strategy implementation. In these instances, the core central leadership group (often the board of directors) tends to stagnate, leading to problems when the organization’s needs change.
Avoiding Founder’s Syndrome is difficult, but achievable. First, entrusting a neutral or third-party data analysis provider to help guide your decision making will help build your credibility in the early days of your organization and guide its progress through the initial stages. Establishing checks and balances in your organization’s bylaws that encourage diversity and inclusion of outside voices on the board of directors, succession planning for staff, and even an exit strategy for your eventual departure can help keep your personality and influence from holding the organization back should it grow beyond your wildest imagination.
Information Technology and Nonprofits
Did you know that small organizations who experience a data loss tend to dissolve after only two years? With reputation and stability are primary concerns among nonprofits, it’s important to safeguard against data loss, hacks, and other cybersecurity threats as your organization grows and prospers.
One could argue the benefits of incorporating an IT and cybersecurity strategy as part of your nonprofit’s beginning phases. Due to the diminished profile and limited web presence of most nonprofits when compared to larger, well-established corporations, hackers see nonprofits as valuable targets for phishing scams and other intrusions.
Because nonprofits handle donor information such as financial records and confidential emails, the appeal of this information on the black market is very high. Bringing in an IT or cybersecurity consultant to devise and implement a cohesive, ongoing cybersecurity strategy is a crucial aspect of protecting your organization, its clients, and your reputation.
Incorporating in Your State
Each state has its own laws for nonprofit organizations and charities and depending on your location, you may have a tougher time getting off the ground than in other places.
Before you set about drawing up paperwork, it’s wise to consult with your state’s charity officials to find out what information you’ll need to provide.
Despite the vast differences in policy between the 50 states, the basic requirements are as follows:
- Reservation or registration of name
- Articles of Incorporation (may require an additional Certificate of Disclosure, Proof of Corporate Name, and any filing fees applicable)
- A qualified nonprofit attorney will help guide you through the required steps to ensure your paperwork is in order, but most importantly, finding an experienced nonprofit lawyer can be a valuable asset to your organization as you grow and evolve.
Incorporating a Nonprofit in the State of Washington
Washington requires the following information in addition to the previously listed prerequisites:
- Name of corporation
- Duration of operation or existence
- Mission statement
- Information regarding distribution of assets, limitation of powers of the corporation, and any limitation of liability of a director and members
- Address of registered office
- Names and addresses of each incorporator
- Names and addresses of individuals or corporations to whom assets will be distributed in the event of dissolution
For a complete list of all states and their individual requirements, visit the National Association of State Charity Officials.
Federal Tax-Exempt Status – How to File
In order to file as a 501(c)(3), your organization must be organized and operated “exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports, or prevention of cruelty for children or animals.”
The Internal Revenue Service requires the following from each applicant for nonprofit tax-exempt status:
- Completion of Form 1023-EZ
- Employer Identification Number (EIN)
- Organizing Documents
- Bylaws
- Conformed Copy
- Description of Activities
- Financial Data
After completion of the forms detailed above, send all documentation to:
Internal Revenue Service
PO Box 12192
Covington, KY 41012-0192
A determination letter either approving or denying your application for tax exempt status under federal tax code can take anywhere from several weeks to a few months, so it’s wise to begin planning for this very early on in the life of your organization.
For detailed information on IRS requirements for Articles of Organization, visit their reference chart.
Ensure Compliance (and Success) Moving Forward
Once your determination letter arrives in the mail, your organization will get very busy. In addition to the federal exemption filing, you may need to complete further documentation for state and local officials in order to receive exemption status from those institutions.
Depending on your organization’s area of focus, you may require additional registration to ensure compliance going forward. For example, many states require nonprofits to apply for Charitable Solicitation Registration before seeking fundraising and other registrations for any lobbying efforts. Furthermore, depending on the services you offer, you may need to complete further permits and registration for goods and services provided, employees hired, location, and types of clients serviced.
Organize, Organize, Organize
As your organization comes to fruition and begins work in earnest, it’s time to start operating like an organization with a goal. At the outset, you’ll have to deal with hiring, securing physical space, and direct operations to provide your services as offered.
The number and scope of departments within your organization are ultimately up to you, but because of the additional pressure to maintain and abide by changing rules and regulations for nonprofit organizations, we recommend you establish an experienced accounting arm of your nonprofit to ensure compliance going forward. Specialized accounting firms for nonprofits are easy to find, but not every company will fit with your profile and philosophy, so do your homework and choose wisely.
Not only will a dedicated accounting team help you at tax time, nonprofits must also report regular tax withholdings, prepare quarterly reports on taxes withheld, and assist your re-registration on required items each year.
As you begin to balance your budget and utilize your available resources, it’s important to establish a clear, concise chain of command and workflow in the event your organization ramps up very quickly. As with any organization, HR and employment issues will occasionally arise, as well as risk/reward scenarios that will guide the future of your nonprofit. Because of the nature of the work, many of your employees may be looking for positive, socially-responsible work rather than salary or status, which can make things difficult when it comes to employee retention – the incentives just aren’t as clear as with traditional businesses. That’s why employee retention in nonprofits is so important. Creative, expert talent is hard to come by and even harder to keep happy, so ensuring your employees are fairly compensated and motivated by their work are good starting points for a first-time nonprofit founder.
Get to Work
Nonprofit work is exhausting, exhilarating, fascinating, and wholly rewarding, but the best part is working with others to achieve a common goal. As your organization grows, consider visiting other nonprofits in your related field or joining your state’s association of nonprofits. There you’ll learn from other experienced founders and employees, share insights into compliance and resources for nonprofits, and even find talent to attract to your organization someday. Despite the relative lack of funding, there’s never been a better time to establish a nonprofit – as long as you love the work, there will always be a need for charitable, selfless endeavors.
Good luck and get to work!
