How to start a nonprofit organization in 2021 – otherwise known as a 501(c)(3) organization.
So, a nonprofit organization is a business entity in which your goal is not to be profitable…
…but to make money to expand on a social clause like feeding the homeless or helping victims of harsh circumstances.
But we can’t ignore that it has some incredible tax benefits for its members and managers.
For example, 501(c)(3) organizations are completely tax-exempt, which allows them to use more money towards their desired social causes.
So you win in both ways, you save on taxes and you support your favorite social cause.
So in this post, we’re going to show you exactly how to start a nonprofit organization in 2021, step-by-step.
Benefits of a Nonprofit Organization
Well, if your goal is to support a clause long-term, you are going to need an organization because it gets a list of great benefits.
1. Your ability to receive funding from many grants is significantly increased.
This is because once people see that you are established as a 501(c)(3) then two things happen.
a. Their level of trust in your organization goes up because setting up a nonprofit organization is not easy.
b. When people give you money or they give you grants, they can write them off as a charitable donation on their tax return.
So it becomes a win-win for everyone!
For example, Google gives ad grants up to around $10,000 for nonprofits to advertise their causes on Google.
2. You get limited liability protection.
This is the same type of protection you get when you own an LLC.
For instance, limited liability protection usually means if your nonprofit were to get sued then your personal assets are protected against any claim about your nonprofit.
3. Your ability to hire.
There are thousands of people who just want to do good and are willing to work for free. Or, just discount their own rates to help support a cause they believe in.
And that ability to raise “time” is sometimes even stronger than the ability to raise money.
4. You have tax exemption status.
Of course, from our tax planning perspective, the biggest benefit is having tax exemption status once you incorporate your 501(c)(3)
This basically means the corporation or the 501(c)(3) nonprofit organization does not have to pay taxes.
5 Steps on How to Start a Nonprofit Organization in 2021
Step 1: Ask yourself the 6 big questions: Who? What? When? Where? Why? How?
Who will be involved?
Because when you incorporate your nonprofit organization, depending on the state, you may be required to have a certain number of directors.
For example, in Georgia, your nonprofit must include at least 3 directors not related to each other.
On the other hand, if you are starting a nonprofit organization in California then you need at least 3 directors not related to each other, a president, a secretary, and a treasurer or CFO.
So in Georgia, you need 3 people, and in California, you need 6 people.
But the main point here is you need to make sure you actually have enough people required to start your nonprofit.
The #1 mistake we see people making is thinking because they have a nonprofit, that money is just going to fall from the sky and they are going to be able to do anything they want.
Raising money is hard. Running an organization is hard.
So you need to think carefully about your business plan, what’s your budget, what’s your mission, and why should someone donate to you as opposed to someone else.
These are big things to consider.
We know, most people say, “We want to get started right now!” But getting your nonprofit incorporated the right way takes some time.
You’re going to have to work with your state and get your articles of incorporation, and you’re going to want to apply for tax exemption status.
All this can take a few weeks to a few months to finalize. So make sure you’re considering that in the timeline.
- Where? Why?
We’re just going to assume that you know where you want to establish yourself and why you are doing it.
But of course, if you haven’t, then stop and think about it before getting incorporated.
This goes back to having a great business plan.
But just think hard about how you want things to go because again, running a nonprofit is hard.
It takes a lot of time and if you’re not prepared to manage it, then you’d better have a plan about how it can be managed.
Step 2: Choose a name for your nonprofit organization
Now, chances are if you are reading this post, then you are already excited about starting a nonprofit and likely have a name in mind.
So just 2 quick tips for naming your nonprofit organization.
- Choose a name that identifies with your cause.
For example, when you hear the name “American Cancer Society” it’s pretty clear what their nonprofit is all about.
So make sure that whatever name you go with, people can easily identify what your organization stands for.
- Once you have a potential name, make sure it’s not taken.
So you’ll want to do a name search using your state’s tools such as going to your state’s secretary of state website.
Or, running a name search with some federal tools. You can also run a domain search to see if there are any websites with the same name.
Step 3: Get incorporated
So getting your nonprofit incorporated is very similar to getting any business incorporated even if you were doing an LLC.
Check out this post next to learn more on how to incorporate a business.
Now regulations vary greatly, from state to state, so these steps shouldn’t be taken as a substitute for competent legal counsel, and please do your own research.
So when you’re filing for your article of incorporation (also called Certificate of Incorporation in some states), you’re going to want to do the following.
- Registered agent
So your registered agent can be you or someone else you appoint, it can even be an outside party like a legal team.
The registered agent is mainly responsible for sending and receiving legal documents.
And, you’re going to put in their address and contact information when you’re filing for your articles of incorporation.
- Select officers and directors
So as we mentioned earlier, some states may require you to have a certain amount of officers and directors.
And while you’re filing your nonprofit, you will need to list those officers and directors as well.
So it’s important that you have their full names and contact information.
- Provide a Certificate of Disclosure
So this is a document that basically confirms there has been no failure on the part of the nonprofit or any of its directors/officers to disclose all the important information.
This includes reports, forms, statements, and other documents filed by the nonprofit.
- Provide Proof of a Corporate name
This is pretty self-explanatory and usually something that is easily done, especially if you are filing your nonprofit online.
- Pay Filing Fees
Pretty straightforward again, of course, filing fees vary depending on the state you live in.
But in order to get your articles of incorporation, you’re likely going to have to pay something to have it filed.
In addition to these 5 things, it may benefit you to include bylaws or an operating agreement for which the nonprofit organization will be managed.
Check out this post if you want to learn how to create an LLC operating agreement.
You may also want to prepare and adopt other policies such as conflicts of interest or compensation policies.
Once you have completed your articles of incorporation, after a few weeks you should be approved and you’re ready to move on to the next step.
Step 4: File for Federal Tax-Exempt Status 501(c)(3)
This is a big one and probably one of the most important aspects of learning how to start a nonprofit organization.
So when you’re ready to file for federal tax-exempt status for your nonprofit, there are several forms that you can choose from.
Each form has a different fee associated with using them, but please do not choose what form you will use based on the filing fees.
Just because one form is cheaper than another, does not mean it’s the right fit for you. So again, do your research or seek out legal counsel for deciding which form to choose.
One of the most popular ways to apply for tax-exempt status is to use Form 1023-EZ.
This is for small organizations with gross receipts of $50,000 or less, and assets of $250,000 or less.
As you grow beyond those financial thresholds, you may need to reapply using the regular form 1023.
Another important side note is that whoever is filing these forms must have a registered account with the IRS.
You are also going to want to file form SS-4 so that you can get a federal Employer Identification Number (EIN)…
…which is required for banking, hiring, and paying staff and other nonprofit identification measures.
Let us be clear – not every application is accepted.
The IRS will review, make sure you meet the requirements, and possibly correspond with you,
The process of receiving a determination letter from the IRS may take anywhere from a few weeks to several months.
And right now, as of July 2021, we are seeing a lot of delays coming from the IRS.
And sometimes, after weeks of waiting, you still may need to submit additional information to the IRS for them to officially make a ruling on your application.
Now once you do hear back from the IRS determining that you have obtained 501(c)(3) status then congratulations, your nonprofit is set up!
But there is still one more thing you’re going to want to take.
Step 5: State Filings, Compliance & Ongoing Reporting
One of our favorite questions is from Stephen Covey when he says “think with the end in mind.”
So of course, we don’t want to just leave you with how to start a nonprofit organization, but also let you know how to maintain your nonprofit in the months that follow.
Many states and local governments will require you to complete additional fillings to receive recognition as a tax-exempt entity.
Remember, in the last step, we applied for federal exempt status, so now you need to let the state know.
The good news here is that, usually, when the federal recognizes you as tax-exempt, the state will follow suit.
But you still have to go through some additional filings and fees for local compliance such as:
- Registering before starting any fundraising
- Registering before engaging in any lobbying
- Securing permits and licenses for things such as goods or services provided (like food), types of clients served (like serving children), or hosting an event in a certain area.
You may also wish to register for additional tax exemption from the status so you can avoid paying property taxes or sales taxes.
In addition, to keep your nonprofit in a healthy position, you will need to do about 4 key things.
- You need to set up your internal processes such as how you will hire staff, and how you manage money through your in-house or cloud accounting systems.
- You need to keep track of your regular activities such as the board meetings you have with key officers and directors.
- You need to report taxes withheld, every quarter which includes federal, state, and possibly local taxes.
- You need to report annually, so you will file a Form 990, file a tax return, and renew your nonprofit by paying renewal fees.
Bonus Tip: Ask yourself: Do you need a nonprofit organization?
This is because you may not need it depending on what your goals are.
Before you start with these steps on how to start a nonprofit organization, ask yourself these questions first.
Are you just trying to help one person out? Or are you trying to put on an event to raise awareness?
Is it just to get a one-time tax write-off? If the answer to any of these questions is yes, then you should reconsider if you need to incorporate a nonprofit
Because, for example, you can put an event to help out a group of people, support a cause, and still get a personal tax deduction for doing so.
However, if your goal is more long-term then having an actual nonprofit organization is a great option for you.
Now, those are the steps on how to start a nonprofit organization!
Once you’ve successfully started a nonprofit organization and need help with managing your books, accounting, or taxes, then don’t hesitate to contact us!
We would love to help you out.