Starting a nonprofit organization can be a daunting challenge, but it can also be a gratifying opportunity to make a positive difference in the world and help empower others. You'll need to take several steps to get the organization up and running, but when done carefully and thoughtfully, starting a nonprofit allows you to use your talents in service of a worthwhile endeavor and make a real difference in people's lives. If you’re wondering “how do I start a nonprofit,” continue reading to learn about the steps you'll need to take to create your organization and ensure it is successful and beneficial for years to come.
What Is a Nonprofit Organization?
A nonprofit organization is an organization that is charitable in nature. These organizations usually focus on providing goods, services, or other benefits to the public or in the name of a cause, such as animal rights or environmental sustainability. Nonprofit organizations can be anything from schools, hospitals, and churches to relief charities or environmental protection initiatives that provide such services as education, housing assistance, health care, and legal help for those who need it. Depending on the structure of the particular nonprofit organization, it may be governed by either one person or a board of directors.
Nonprofits rely on money, resources, and time contributions from individuals, businesses, foundations, and other organizations to serve their core mission. People often volunteer their time, money, and resources to help these causes. Although nonprofits do not aim to make money from their activities, they strive for sustainability to continue helping those in need. No matter the size or mission of the organization, they all share a common goal to do good in the world.
Common Types of Nonprofit Organizations
Did you know that the IRS has over 27 types of 501(c) nonprofit designations, each with a distinct and crucial purpose? Depending on an organization's mission, leadership structure, and other factors, one type of designation may be more appropriate than another.
Nonprofits must understand which type of 501(c) designation best meets their purposes. The following are three of the most common types of nonprofit organization designations: 501(c)(3), which is for charitable groups; 501(c)(4) for social welfare entities; and 501(c)(7) for recreational organizations.
501(c)(3): Best Type for Charitable Nonprofits
A 501(c)(3) is a designation given by the Internal Revenue Service to nonprofits that are legally organized as charitable, religious, educational, scientific, or literary organizations that are eligible to receive tax-deductible donations. 501(c)(3) organizations must be formed within the United States and operate exclusively for one of these purposes. These organizations typically receive tax-exempt status, meaning they are exempt from taxes related to their operations and don't have to pay regular taxes on their income. Generally speaking, all income generated by the nonprofit is used to support its operations and goals—no profits are allowed to be distributed to individuals or entities outside of the organization except as allowable under specific circumstances. Operating as a 501(c)(3) increases credibility with potential donors and grant makers, ultimately strengthening the organization and allowing it to do more for its cause.
501(c)(4): Best Type for Political/Lobbying Nonprofits
A 501(c)(4) designation includes nonprofit organizations such as social welfare, civil rights, or public policy advocacy groups representing issues like civil rights or environmental protection and labor unions responsible for collective bargaining. Because contributions to 501(c)(4) organizations are not deductible from individual or corporate income taxes, these groups can lobby government representatives and use those funds for political campaigns without public disclosure. Though contributions to these organizations are not tax deductible, donations can be used for operational purposes, which allow them to promote their social objectives. Therefore, 501(c)(4)s can be powerful tools for advancing specific causes and interests in our society. All 501(c)(4) organizations must abide by federal election laws and transparency regulations that require them to disclose certain financial information annually.
501(c)(7): Best Type for Social or Recreational Clubs
A 501(c)(7) is a specific type of nonprofit organization, mainly social and recreational. Examples of this include country clubs, fraternal societies, veteran organizations, and other groups focused on leisure activity. This type of organization is often composed of like-minded individuals who come together to provide and strengthen social connections, develop a community, or further particular interests that they may have. If an organization meets the criteria of being a 501(c)(7), it will receive favorable tax treatment from the Internal Revenue Service due to its status as a nonprofit entity. Many organizations form with this purpose in mind instead of primarily seeking to generate profit for owners or shareholders. Of course, the IRS does impose certain guidelines and regulations on these nonprofits to ensure organizational transparency and fairness.
The IRS also provides other types of 501(c) classifications for entities such as political campaigns, houses of worship, fraternities, and veterans' organizations.
6 Steps for Starting a Nonprofit
1. Network
Leveraging a robust network is the key to a successful and rewarding nonprofit experience. The right connections can help you source essential resources, such as volunteers and funding, while giving you a much-needed platform to promote your cause. Building an extensive network with specialists in the field of that particular cause will grant you invaluable access to their expertise and help shape ideas into reality. Prospective volunteers and donors are out there; it's up to you to find them and make sure they believe just as passionately in your cause as you do.
2. Do Your Research on Need and Feasibility
Research into both need and feasibility is essential for the success of your mission. You should start by researching the need for the services your nonprofit will provide—do those services already exist, or is there an existing gap? You also need to understand who your target demographic is and what their specific needs may be. Once you have researched the need, you must begin exploring its feasibility. Are there available resources that satisfy the scope of your project? Can you access the necessary funding? Make sure to do due diligence here to maximize the impact of your efforts.
3. Build a Solid Foundation
The best way to begin setting up your organization is to build a solid foundation. Setting up an effective organizational structure and governance to ensure compliance with required laws and regulations will help protect you in the long run. This involves generating an innovative mission statement that accurately captures your nonprofit's objectives, following the applicable laws and regulations governing nonprofits, and assembling knowledgeable board members who share your vision. Planning well and building this solid foundation for your nonprofit can take you much further in achieving your vision.
4. File the Correct Articles of Incorporation
Filing the correct articles of incorporation is a must. Doing so will officially create your nonprofit organization and make your entity recognized by the state. Filing these articles also make the nonprofit run smoother, as it outlines its corporate structure, purpose, and operating rules. To ensure that everything is done correctly and that all critical information is included, it's recommended to seek help from an attorney specializing in nonprofits. In addition, if you plan on filing for tax-exempt status with the IRS, you must file with them before submitting your articles to the state.
5. File for Tax–Exempt Status
One of the most critical steps when creating a nonprofit is filing for tax-exempt status with the IRS. Filing for tax-exempt status is essential to separating your business from your personal finances. So, take time to ensure you accurately present the necessary financial documentation to secure this important designation.
6. Maintain Your Tax-exempt Status
To ensure that your organization maintains its tax-exempt status and can take advantage of its many benefits, make sure you familiarize yourself with Internal Revenue Service requirements. By understanding what's necessary for terms of financial reports, annual filings, and local or state licensing requirements, you can be confident that your organization has taken the proper steps toward gaining and sustaining tax-exempt status. It may seem daunting at first, but if you set up strong systems from the start, many tools are available to help manage the process.
Learn More Today
If you're interested in starting a nonprofit organization, the Master of Professional Studies in Civic Engagement from the University of Minnesota College of Continuing & Professional Studies can help. This program is designed to give you the knowledge, tools, and expertise to make a sustainable difference. One of those ways is through starting a nonprofit organization. You can gain an understanding of business operations, including visioning and strategic planning processes. You can also explore how to develop cultural and community programs and social justice initiatives. You'll have access to renowned faculty who can support you as you explore ways to further your career and enact positive change in your community. Contact U of M CCAPS today to learn more!
