A Step-By-Step Guide
Asking The Right Questions
If you are an entrepreneur that has goals and aspirations of helping your community, there is a good chance that you are pondering the idea of opening up a nonprofit organization. You may have heard that it can be a daunting task, but the team here at Commerce Puzzle has constructed this article to make the process as easy as possible. Follow this step-by-step guide on how to start a nonprofit organization, and you will be on the way to helping your community in no time.
Before you begin that process of incorporating your nonprofit and intertwining the legal ramifications of owning one into your everyday operations, it is wise to start with research. Ask yourself the following four questions before initiating the filing process, and it will give you and your dream the best chance for growth and sustainability.
1.) Is My Community Indicating A Need For My Organization?
With over 1.6 million registered nonprofit organizations in the United States and funding that is increasingly harder to secure, finding out how bad your community needs your organization is the first step to long term success. Like any other business, nonprofit organizations play by the rules of “supply and demand,” so avoiding market saturation is a key to sustainability. If there are other organizations in your area providing the need that your nonprofit looks to offer, it may be wise to form a collaborative effort with organizations that are already in motion. If you find that you will be addressing a need in your community with little to no competition, you have completed the first step of research and are ready for more.
2.) Do We Have A Plan For Short-term and Long-term Funding?
Nonprofit organizations often provide essential needs to their community that falls into the categories of shelter, food, protection, resources, education, and much more. When providing such valuable assets to those around you, it is easy to fall into the thought process that passion and support will lead to funding. To avoid this pitfall and the often harsh reality that comes with it, your nonprofit needs a foundation built on a solid business plan with clear and concise steps to success. Your business plan should include options for both short-term and long-term funding, providing a structure that will allow you to move forward and operate like a well thought out business. As a bonus, you will also have the option to pull the critical aspects from your business plan and interject them into the federal Form 1023 application for tax-exempt status and into applicable fundraising efforts.
3.) Do I Know The Cost?
Creating a business plan, as suggested in the step above, will answer a lot of the operational questions of the overall cost when it comes to creating and maintaining your nonprofit. In doing so, you should have a drill down on costs for filing, licensing, equipment, location rent, certifications, office supplies, and much more. While this is great for funding, do not forget to measure the cost of time, energy, and effort. Are you creating an operation that will need more human resources than initially anticipated? If so, is it feasible? Focusing on the contributions beyond the numbers will ensure a smooth operation moving forward.
4.) How Will I Best Impact My Community?
After thinking about the answers to the first three questions, this final question is something that you will be thinking about for a long time to come. Beyond incorporating with your state, securing federal tax-exemption status, ironing out your financial plan, and putting your business plan to life, the real journey begins when it is time for action. How will you develop policies that ensure transparent, ethical practices? What is the best process for recruiting, hiring, training, and managing a top of the line staff? What can you do to earn the trust of your donors? Do you have plans in place that will take care of your hard-working volunteers? Answers to these questions will be ever-evolving but will add to the sustainability of your operation and your ability to provide a good impact in your community.
When you have answers to the first three questions above (while working on the fourth), you are now ready to start the journey of registering your nonprofit organization, ensuring that you comply, and turning your idea into a legitimate business. It is important to note that there are over 30 types of not-for-profit organizations, and each holds differing levels of federal tax exemptions. At the same time, many on the list include state-level tax exemptions as well. 501(c)(3) organizations are by far the most common types of nonprofits. With that said, most of us are familiar with businesses such as daycares and credit unions, which fall into the 501(k) and 501(c)(1) categories, respectively. Regardless of which type of nonprofit you register for, there are still the essentials steps to the registration process that will apply to everyone, and we will cover those below:
Step 1.) Drafting Organization Bylaws
Bylaws are one of the most important documents associated with the startup and registration process of nonprofit organizations, and frequently the most intimidating. Due to bylaws being a necessity for achieving federal nonprofit status, new business owners often worry that there is a specific format required by the federal government when drafting them. To reduce confusion, we will convey this clearly; federal tax law in no way requires a particular format or specific language in your bylaws document. Simply put, bylaws are a legal document that details the governing rules of your nonprofit organization, the roles of its members, and they serve as the operating manual that is associated with your nonprofit. If you are shaky on where to start or how to draft your bylaws, follow these steps below, and you can be confident that you are covering all that is important.
A.) Your nonprofits leadership team drafts the bylaws. The leadership team will be your board of directors.
B.) Include a formal, clear, and compelling mission statement.
C.) Define all leadership and staff roles.
D.) Include and define committee structures.
E.) Include and define membership program information.
F.) Include and define donation and solicitation protocols.
G.) Include and define governing policies (compensation, resolving conflicts, bylaw amendment procedures).
H.) Include and define the protocols surrounding reporting and handling finances.
Follow the steps above, and your bylaw section will be comprehensive, easy to follow, and easy to implement as your business continues to grow!
Step 2.) Articles Of Incorporation & EIN Number
After you have drafted your company bylaws, the next step is to incorporate your business, transforming your idea into a legally operating entity. In the research process, you may have heard of the requirement to charter your corporation before applying for tax exemption status; this step is how you complete that task. To achieve this step, head to your state’s business filing agency, have a payment method ready, fill out the requested information, and file the documents. Do not be intimidated, as this is the same process that every business must go through to register with local and state governments. You will need:
A.) The organization’s legal name
B.) The organization’s official location
C.) The addresses and names of all board members of initial trustees
D.) Each board member to sign the articles of incorporation.
When the documentation is filled out, double-checked for accuracy, and signed by each board member, submit it to the secretary of state, and you have completed the steps needed to incorporate your nonprofit organization, officially! To finish things off, head to the IRS website and apply for an EIN (employer identification number), the process is free, fast, and easy! You will need an EIN to open a bank account, so be sure to complete this step before moving forward.
Step 3.) Secure First Round Of Grants
At this point in the process, you have drafted your bylaws, your team is set, your business plan is complete, you are registered with the state, you have your EIN, and now it is time to start business operations! As mentioned above, funding is going to be one of the most critical parts of your nonprofits’ ability to start and sustain, and securing grants is the best way to get ahead quickly. Make no mistake about it; nonprofit grant writing is a challenging task, particularly in the early stages of your organizations’ existence. To begin, start by researching available options for nonprofit grants to see what opportunities are out there for businesses in your field. When you have some options narrowed down, it is time to introduce yourself and your board to the art of grant writing, and following the steps below is a fantastic start for anyone.
A.) Have clear and concise goals.
B.) Research the actual source of the grant that you are writing for.
C.) Hire or build a grant writing team.
D.) Construct a draft of your proposal.
E.) Be prepared to refine, add, or deduct from the draft.
F.) Convey a strong emotional case for support.
G.) Perform a final review and submit the proposal!
When pursuing a grant, picking the right writing team and ensuring a positive relationship can be the difference between a yes or no. Initial funding can be the sink or swim factor for your nonprofit, so do not skip any steps here. Once you have secured your initial funding, you can really begin to help the community around you!
Step 4.) Apply and Receive Tax-Exempt Status
Thus far into your journey to open a nonprofit organization, you have put in a lot of time, decision making, energy, and will power. Now, it is time for your efforts to come together as you look to receive federal tax-exempt status and solidify your position in the community for many years to come. As mentioned above, there are over 30 types of nonprofit organizations, but all will need to follow the same steps that we have listed up until this point. For the sake of what is common, we will concentrate on applying and receiving 501(c)(3) status, as it is the most popular type of nonprofit in the United States. Remember, the federal 501(c)(3) application process is a lengthy one, but do not let this discourage you from getting it done. Here are the steps needed to submit and complete your application:
A.) You must file for tax exemption status within 15 months after incorporating your business. Extensions up to 27 months are possible, but why cut it close.
B.) Determine if you will file Form 1023 ($600) or Form 1023-EZ ($275) by visiting the IRS website and completing the Form 1023-EZ eligibility worksheet.
C.) File Form 1023 or Form 1023-EZ (electronic filing available) according to their required standards.
D.) Research state information for any possible requirements that need to be met.
E.) You should hear back from the IRS in 180 days when filing Form 1023, and 90 days when filing Form 1023-EZ.
When it comes to applying for tax-exemption status, patience is a virtue. If you do not hear back from the IRS is the timeframes mentioned above, you can call the toll-free Customer Account Service number at 877-829-5500 to check on the status of your form. The IRS will be able to take your calls Monday through Friday, 8:00 am – 5:00 pm (local time).
Step 5.) Don't Wait, Get-Started!
After filing the form that applies to your industry, there is no need to wait to hear back from the IRS to begin making a positive impact in your community. We recommend that you start taking donations, building relationships, marketing, throwing events, and impacting your community in any way that you can. As long as you are following tax laws and not representing yourself to donors, grantors, and the community as a tax-exempt entity, you are legally allowed to collect money and begin charitable activities as soon as you see fit. Since donors will not be eligible for a charitable income tax deduction until your pending status changes to approved, it may be challenging to secure funding. The good thing is; once tax-exemption is granted, it back dates to the day of the filing. So if your application process takes six months and you receive grants or donations before exemption, once exempt, those grants and donations will be eligible for a tax deduction for those that are funding your company.
You Are Ready
Now that you have all of the information needed to get your nonprofit organization up and running, we encourage you to make it happen! Do not be intimidated by the process or discouraged by the wait time. The IRS recognizes how long the process can take, and they encourage you to push forward with business as usual until your pending application is improved. Here is an excerpt from the IRS website for those with pending applications:
“When the IRS approves a timely filed exemption application, exempt status is recognized back to the date the organization was created. Thus, while an application is pending, the organization can treat itself as exempt from federal income tax under section 501(c)(3). For example, it must file Form 990 (instead of an income tax return) while its application is pending. However, contributors to the organization do not have advance assurance of deductibility because the organization’s exemption is pending. If the organization ultimately qualifies for exemption for the period in which the contribution is made, the contribution will be tax-deductible by the donor. Alternatively, if the organization ultimately does not qualify for exemption, then the contribution will not be tax deductible.”
What more do you need to hear? Get started, get filed, and help the community around you in a way that only you can!