How to start a nonprofit in an uncertain market

14 Jul, 2021

How to start a nonprofit in an uncertain market

According to the IRS, you need a mission statement. This is not an exaggeration! In fact, it’s required by federal law for all 501(c)(3) organizations to have. Mission statements are often used as a way to summarize your nonprofit’s goals and objectives. The actual process of writing the mission statement should be a collaborative effort between you and stakeholders (board members, volunteers, donors), as they are most likely going to be using it when defining your organization’s long-term strategy. It should be clear and concise, fairly easy to understand (at least for everyone involved with the business), but at the same time provide enough information so that new readers will get interested in learning more about your nonprofit.

When it comes down to how to start a nonprofit, there are two things that come into play: federal laws as well as state/local statutes. When researching what sort of non-profit organization fits your needs/goals, make sure you know which one best suits your fancy. At first glance, they may look very similar but there are a few key differences between the two that could end up being the deciding factor between the 501(c)(3) and the 509(a)(1) tax-exempt organizations.

Step 1: Define the 501(c)(3)

First, start by defining what a 501(c)(3) is: this form of nonprofit status falls under Internal Revenue Code (IRC) section 501(c)(3). Under IRC section 508 all charitable organizations who apply for and receive tax-exempt status are automatically placed into classifications based on their primary activity. These two terms–501(c)(3) along with not-for-profit classification–are often used interchangeably so it’s important to remember they’re different when you’re trying to decide which type of organization best suits your fancy. The “not-for-profit” classification is simply a generic term when it comes to how we describe non-profit organizations. It’s the 501(c)(3) that’s specifically used to define charitable foundations, societies, or organizations (which are by law prohibited from active involvement in any political campaign and have limits placed on the amount of lobbying they can do within a given year).

Step 2: Define the intent of the primary activity

The first thing you’ll need to know before applying for 501(c)(3) status is what your intended primary activity will be i.e., what you’re going to do with it. Remember, there are certain limitations placed upon charities so you’ll either want to go with not-for-profit or a specific type of charity if possible. If the reason why you won’t open your own charity is that you want to help the local animal shelter put down fewer animals or you want to donate to a specific cause like breast cancer research then you should look into starting an animal charity (501(c)(3)) or a charitable foundation that focuses on breast cancer awareness. If what you’re trying to do falls under one of these two qualifications and fits with your personal values then applying for 501(c)(3) status should be easy–you have your primary activity already established!

If what you’re trying to do fails to meet the criteria placed upon those who receive 501(c)(3) status, don’t fret; there’s still hope. There are other options available if what you want to do isn’t considered “charitable” or doesn’t fall under one of the other three classifications. The next thing you need to do is see if your activity falls under one of the four remaining categories: social welfare organizations, business leagues, labor unions, and agricultural/horticultural organizations. To determine which tax-exempt organization status best matches what it is you’re trying to do simply write down what your primary goal /activities are. When choosing what’s best for you use this list as a guide:

Social Welfare Organizations: these organizations exist for purposes that include but aren’t limited to improving conditions in their community; defending civil rights; etc. Examples of “social welfare” activities include family counseling centers as well as senior citizen’s homes (both examples of nonprofits who provide “social welfare” activities).

Social Action Organizations: organizations that exist to concentrate on public policy issues relating to their cause. An example of this is a local environmental activist group whose intent is to lobby the local government for stronger pollution laws within their city limits.

Organizations Related to Cultural or Ethnic Issues: these range from groups like the NAACP ( National Association for the Advancement of Colored People ) and Planned Parenthood. What makes them distinct in terms of tax-exempt status is they must hold 50% or more assets/income outside of the US. If you wanted to start an organization whose single goal was women’s rights, consider starting one based out of Canada because domiciling at least 50% of your organization’s income assets in the US may cause you to lose your tax-exempt status.

Organizations Primarily Controlled by Individuals with Spiritual or Religious Beliefs: if you would like to start a church then applying for religious tax-exempt status should be easy! If what you’re trying to do isn’t affiliated directly with a certain religion but you still believe in promoting spiritual growth via meditation, self-help groups, and more than likely it’s safe to apply under this category (this is the catch-all for lots of smaller-scale activities that are difficult to classify). Business Leagues: business leagues as defined by Section 501(c)(6) include chambers of commerce and boards of trade. Labor Unions: labor unions are considered entities whose purpose is to promote better working conditions within a specific trade–for example, an organization that exists to help factory workers find better jobs even if those same factory workers are not union members. Agricultural and Horticultural Organizations: if your primary goal is to promote the growth of crops then you should look into applying for the 501(c)(5) Non-profit Cooperative status which includes any farming cooperative as well as fruit and vegetable growers who plant in order to distribute their own crop.

All organizations that receive tax-exempt charitable status must have purposes ranging from one of these 13 different categories :

Religion (church)
Charitable and educational institutions
3. ) Plus medical research institutes
Mutual instruction
Literary or educational associations
Testing for public safety
Prevention of cruelty to children or animals
Promotion of social welfare
Fraternal (business leagues)
Labor Unions and similar organizations
Rural electric and telephone cooperatives
Child care organizations
Business leagues

Step 3: Choose a name for your nonprofit organization

You need a name for your nonprofit, but before choosing one and crafting a mission statement you must have an actual physical location where the nonprofit’s employees will operate out of–this is usually in the form of an office building or shared workspace. If you’re doing something on a small scale (such as opening up an animal shelter) then your home address will suffice–if you’re trying to enter into a long term lease or purchase something for your nonprofit organization that requires outside funding then you’ll need some type of official address (such as a business address).

Step 4: Determine what types of tax-exempt activities your new nonprofit organization will engage in and choose the proper federal form

Your first step to becoming a 501(c)(3) company is determining what revenue streams your new company will have. Income from “unrelated” income sources can result in the loss of tax exemption status so make sure all revenue brought in goes towards the pursuit of your nonprofit’s specific mission. The second step is that you must determine whether or not any types of donations, grants, membership fees, etc. qualify for deductions on a federal level (specifically section 170). The second step is that you must determine which federal tax-exempt form applies to your new business–this will usually be the one that is most closely related to your nonprofit’s main mission (“public charity” status for organizations whose purpose involves religion and education or “private foundation” status for organizations who are involved with raising money as well as carrying out of charitable programs).

Once you have both of those steps figured out then it is time to move on to the legal incorporation phase. This includes deciding what types of property fall under the nonprofit umbrella–there should only be personal assets/property listed which cannot be sold off in order to profit from the organization–these are known as “assets” (some states require you to list your homes and cars, while others allow only personal property on the list).

Step 5: Legal incorporation of your new nonprofit organization

The legal incorporation process varies from state to state–in some instances, it can be done online for a minimal cost (usually $25-$50), but in other instances, you must file articles of incorporation with your local courthouse and pay several hundred dollars. It is important that you find out what the exact requirements of your state are before moving forward so that there will be no negative consequences later on down the line. Some states also require a large amount of paperwork such as Tax filing status and charitable registration with the state cation numbers, an employer ID number if the nonprofit has employees, etc.

For all 501(c)(3) organizations, annual taxes are due every year on the anniversary of their date of creation. These can be filed online through electronic media such as forms 1041, Form 990, or Form 1065. The IRS also requires that you register your organization using its own internal information system known as “e-tax.” This step requires that you input certain details about your nonprofit including names of officers and addresses of the organization’s offices.

Step 6: Create a program for your new nonprofit organization

The next step involves creating a program that is meant to be carried out by employees/volunteers of the company in order to accomplish its goals. This will be presented as the “program service” portion on Form 990 (profit) and Form 1023 (non-profit). The IRS also requires that you inform them if any types of fundraising activities are going to take place–this includes any events where money is exchanged for goods or services, auctions, thrift stores, etc. If this is a public charity then any income generated from such fundraisers must go towards directly funding programs–if it is a private foundation then all income must go towards paying for administrative costs–this includes employee wages and any other bills the organization has.

Step 7: Obtain your federal tax-exempt status

This final step requires that you submit an application to the IRS (they also accept hard copies of forms 990, 1023, or 1024) in order to obtain “public charity” or “private foundation” status. This may take several months so be patient–you will need a determination letter from them before moving forward and applying for state membership as well. If this is a public charity then the annual filing requirements are much easier than what they are for private foundations (that require extensive record-keeping). It is important that you keep detailed financial records if you intend on filing as a public charity–if you do not have a large operating budget then your organization’s tax status can be changed to that of a private foundation by filing as such and following the corresponding requirements instead.

Step 8: Apply for membership with charities/nonprofits in your state

Every state has its own unique laws concerning nonprofits, which means that they all have their own set of procedures for an organization to attain membership/certification within their boundaries. Some organizations will require only that you file (and pay) annual taxes every year, while others may require an audited statement of income and expenditure reports. It is advised that you contact the governing body in your state before attempting to follow anyone specific step outlined above–this way there will always be someone on hand to help you if something goes wrong. If the state does not have any form of membership/certification program then it is advised that you contact your local chamber of commerce (or a similar organization) in order to find out what are the necessary steps that need to be taken in order for a new business or nonprofit to be considered “established” within its boundaries.

Step 9: Carry out your organization’s mission

This final step involves carrying out the activities outlined in step 7 through implementation–this means getting employees, volunteers, and other people involved with this company. Always make sure that people who work directly with at-risk communities are properly trained and have had their backgrounds checked beforehand–even small mistakes can result in serious consequences should there be a breach of confidentiality.

Step 10: Educate your employees/partners/volunteers

It is important that everyone involved within this nonprofit organization is properly educated about the mission, goals, and objectives of everything carried out by this group. If you are partnering with at-risk communities then it is vital that they understand how their involvement will benefit them–this could mean implementing classes and other learning opportunities to teach them how to start their own businesses or otherwise improve their station in life so that they do not become dependent upon public assistance later on. Remember–at the end of the day what matters most is results! While having a nice office building and fancy equipment may look impressive it does little good if nothing comes from these things (in order to offer exact statistics from past projects click here ). Above all else remember that this is a business– not everyone involved in it will have the same goals or objectives as you do and you cannot hold them responsible for what they do outside of this organization’s scope of work.

Step 11: Keep your nonprofit updated

It is important that there are always safeguards in place to prevent something going wrong within your organization, such as abuse of funds, fraud, embezzlement, etc., which means that every so often you need to hire an attorney to review your bylaws and other records (such as board meeting minutes) on file with this company. This also includes filing the proper paperwork at regular intervals (depending upon how frequently you meet) with the state/local government’s bureau responsible for overseeing the operations of any non-profit or charitable organization within its boundaries.

Have a question about how to start a nonprofit? Have you started your own nonprofit, and have some tips to offer? Let us know at the Leverette Consulting Group. Do you need web design help check out our partners for assistance.

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