Written by: Guest | Best Company Editorial Team
Last Updated: June 19th, 2020
Guest Post by Travis Crabtree
People across the nation are starting new nonprofit organizations at an unprecedented rate. In March 2020, nonprofit organizations increased by 39 percent when compared to other types of businesses, according to Swyft Filings proprietary data.
It's no coincidence this spike in nonprofit formation is happening during a global pandemic. This crisis has inspired people who want to make a difference. For many, the best way to help is by starting a nonprofit to bring a mission to life.
Whether it's from the effects of a devastating pandemic or rampant social injustice, nonprofits assist communities in need by providing people, supplies, money, organization, and other much needed aid. If you want to start your own nonprofit to help those in need and further the public good, this guide can show you the way.
1. Determine your mission and create your purpose statement
The first step when creating any nonprofit is to create a purpose statement. Let's say you want to help people through the COVID-19 crisis. How exactly are you going to help?
Are you equipping healthcare workers with needed medical supplies? Donating financial resources to people who lost their jobs? Providing books, tablets, and internet access to disadvantaged kids whose schools have closed? Finding forever homes for all the puppies and kitties who were given up for adoption when their owners could no longer care for them?
Declaring your specific purpose doesn't just give your nonprofit clarity and direction; it's the law. The IRS requires that all 501(c)(3) organizations include a purpose statement in their articles of incorporation to receive tax-exempt status.
2. Organize your leadership
Many new nonprofits start as simple one-person operations. You might be the founder, executive director, and entire staff all by yourself. But as you grow, you're going to have to get organized.
To run efficiently, nonprofits, like any business, must appoint people to leadership positions. These include managers, directors, executives, and administrative staff. You'll need a board of directors to hire executives, provide oversight, and vote on major financial and strategic decisions.
In fact, many states require nonprofits to have at least three officers — two of whom cannot live in the same home. States view nonprofits as truly public entities. They want oversight from more than one person so the entity is not abused.
While not a legal necessity, incorporating your nonprofit can be an excellent idea. An alternative is setting up an unincorporated nonprofit association, but this only works for small, limited income organizations. On the other hand, you can incorporate even if you are the only employee of your nonprofit, and there are significant advantages if you plan on growing. Incorporation limits liability, adds authenticity to your organization, and typically only costs a few hundred dollars with filing fees.
Despite the obvious lack of profits, a nonprofit is still considered a business by state law. Your incorporation will be filed at the state level. Startup costs and processes can vary greatly depending on where you live, but most jurisdictions require your nonprofit to follow specific naming conventions and create bylaws and articles of incorporation.
Be sure your name accurately reflects your cause. Search both state and federal trademark listings to make sure that your chosen name is unique and not already taken by another organization in your state. To signify that you are incorporated, most states also require your nonprofit's to use an identifying suffix such as "company," "corporation," "incorporated," or "limited" in its official name.
Articles of Incorporation
Your Articles of Incorporation is a document necessary to officially form your organization with the state. It might also be called a "Charter Document" or "Certificate of Incorporation." Regardless of the name, your Articles of Incorporation should include:
- Organization name
- Type of nonprofit
- Purpose statement
- Registered agent and contact information
- Designation of stock or non-stock
- Statement of membership or non-membership-based
Your nonprofit should also have a set of bylaws. If you are going to file for tax-exempt status with your state or the IRS requirement, you will have to submit your bylaws. These establish the ground rules for how the nonprofit will be run, managed, and who will make certain decisions. The bylaws of every organization are different, but for nonprofits, they typically include:
- Board members
- Board meetings schedules
- Procedures for changing bylaws
- Voting rules
- Conflict resolution
- Committee creation and dissolution
- Winding down and dissolution procedures
4. Apply for licenses and tax exemptions
After incorporation, your next step is to apply for a local business license. This allows your nonprofit to operate locally, manage sales, and file employment taxes.
Nonprofits are usually tax-exempt, but it's not an automatic process. You need to obtain 501(c)(3) status by filing Form 1023 with the IRS. Apply for an Employer Identification Number (EIN) on the IRS website and follow their detailed Form 1023 checklist. This step becomes much simpler if your organization is already incorporated.
You're not done yet. Don't forget about state and local taxes. After you receive federal approval from the IRS, you'll want to seek exemption from sales tax, property taxes, and state income tax. To maintain your tax-exempt status, your organization must file Form 990 with the IRS every year.
5. Register to receive donations
Your nonprofit won't have much of an impact if you can't raise funds. State laws regulate charitable fundraising activities, and most states require you to register before you can solicit funds. This doesn't just apply to the state you're based in; you'll need to register in every state from which you take donations. If someone from Rhode Island wants to give you money, you better be registered in Rhode Island to legally accept, even if you're based in California.
To put it simply, if you're doing any kind of fundraising, especially online, your nonprofit should consider filing a registration form in all 50 states.
Consider outsourcing to simplify the process
All this might sound complicated, and it is, but don't let that dissuade you from starting a nonprofit and doing good in this world. COVID-19 has impacted millions, and we need people willing to help now more than ever.
If you're worried about all the little legal hurdles, consider outsourcing this part. There are companies that specialize in helping you navigate all the filing and paperwork for starting a nonprofit. They can make sure the proper forms are filed with the appropriate government bodies so you can concentrate on the important work of helping those in need.
Regardless of if you go through a filing company or tackle the typing yourself, thank you for working toward the public good. Get out there and make a positive impact.
Travis Crabtree is the president of Swyft Filings, a document filing service that assists clients with starting, growing, and managing businesses.