Before starting a nonprofit organization, you should understand that the 501(c)(3) designation is just that: a tax designation. It’s not a business model.
Why is that important? To be successful, you must understand that you’re starting a business. Getting into that mindset will help set you up for success.
Here are the tactical steps you must take to starting a nonprofit.
1. Name your organization.
To ensure the name is not taken, check your state’s list of existing nonprofits. You can also double-check with the Department of Commerce to ensure a business hasn’t already trademarked the name you want to use. At this time, you should also establish business contact information including location (can be a residential home) and email address.
2. Recruit incorporators and an initial director.
You must have your founding Board of Directors and officers selected prior to filing your Articles of Formation or Articles of Incorporation with the state. Keep in mind that each state has different requirements; you must check with the Secretary of State for your state’s specific requirements. You’ll want to identify three, unrelated individuals to meet IRS requirements.
3. Appoint a Registered Agent.
The appointed Registered Agent must be physically located in the state and maintain an office that is open during regular business hours. The corporation cannot act as its own registered agent so don’t enter the corporate name as the name of the registered agent.
4. Prepare and file Articles of Incorporation.
Check with your Secretary of State for your state’s requirements.
5. Obtain an Employer Identification Number (EIN).
To do this, complete IRS Form SS-4. This form can be completed by mail, phone, fax, or online. The cost is $0.
The turnaround is immediate online or by phone. By fax, it can take four business days and four to five weeks by mail. You should know that the IRS website is only available during certain hours.
Before you close your session, print your EIN. For additional guidance, see IRS Pub 1635: Understanding Your EIN.
6. Establish initial governing documents and policies.
You’ll need to create Bylaws and Conflict of Interest documents and policies because both are needed for your IRS application.
7. Hold an organizational meeting of the Board of Directors.
The initial organizational meeting of your Board of Directors will be incredibly productive. At this meeting, you’ll approve the bylaws, adopt the conflict-of-interest policy, elect directors, appoint officers, and approve resolutions such as opening the organization’s bank account. Important decisions are being made so be sure to record them in the meeting minutes.
8. Apply to be recognized as a 501(c)(3) organization.
In order to do this, you must complete the following forms: IRS Form 1023, IRS Form 1023-EZ, or IRS Form 1024. The agency fees are $275 for organizations filing Form 1023-EZ and $600 for organizations filing Form 1023. The turnaround time for 1023-EZ on average is less than one month and three to six months for the 1023.
You can download this checklist with links here.
What should you do while you wait to hear from the IRS?
Here are a few things you can do while waiting to hear back from the IRS about the documents you’ve submitted for starting a nonprofit.
Lay the groundwork for success.
- Develop a vision and mission statement.
- Establish your nonprofit’s values and the organizational approach to your work.
- Establish your organization’s branding (establish target audience, logo, brand colors, and messaging).
- Create a website and establish other social media pages.
- Develop a comprehensive communication strategy to include use of social media and online communications.
- Develop a strategic plan, which should include staffing, activities, budget, and a fundraising plan.
- Establish an annual budget for your nonprofit based on operating expenses, including salaries.
- Develop a fundraising plan that includes fundraising goals and fundraising methods including grants, corporate and individual donations, and in-kind contributions.
- Establish a bookkeeping system to account for cash receipts and cash disbursements, assets, and liabilities.
- Establish financial auditing procedures and internal controls.
- Retain or consult with a bookkeeper to create accounting records and financial reports.
- Determine your fiscal year and type of accounting system (cash vs. accrual).
- Retain or consult with an accountant for annual audit and government filings, including the form 990. Nonprofits with different budget amounts may have different auditing state requirements.
- Establish a bank account and establish check signing procedures.
- Designate which member(s) have the power to sign checks.
- Procure necessary insurance coverage: general liability, property, directors and officers, professional responsibility, sexual abuse, and non-owned auto liability, if applicable.
Get ready to start fundraising.
- Develop a disclosure statement that communicates to donors that information about the nonprofit can be obtained from the state authority or the organization itself.
- Register your nonprofit as a charity that can solicit donations; if you plan to accept donations from other states, fulfill registration requirements for all states where you plan to solicit. Most states require registration before you begin soliciting.
Develop an evaluation and performance model.
- Establish a logic model and identify inputs, outputs, activities, and intended outcomes.
- Develop outcomes-monitoring plans to measure performance.
- Develop a basic structure for collecting ongoing performance data (including client and donor information).
Start staffing and hiring, if applicable.
- Apply for an Employer Identification Number (EIN) in your state.
- Develop job descriptions for staffing needs.
- Determine whether staff performing services will be employees or independent contractors.
- Hire staff and set compensation levels.
- Prepare a Human Resources manual.
- Establish a payroll system.
- Establish a system for preparing and filing Form W-2s for employees and 1099s on behalf of independent contractors.
- Establish a system for maintaining employee records for each employee to include names and social security numbers, W-4 and I-9 forms, and individual payroll information.
- Establish a system to meet mandatory insurance requirements: (1) Workers’ Compensation, (2) Unemployment insurance, (3) Short-term Disability, and (4) Auto Liability (if applicable).
- Procure health benefits for employees.
- Establish a retirement plan for employees.
What are the most common pitfalls new nonprofits encounter?
Here are a few mistakes people make when starting a nonprofit.
1. NOT recruiting and maintaining board members
Many nonprofits select board members based on friendship, partnership, relations, or just because they are a “good old boy or good old gal.” This usually fails to evaluate the future needs of the organization and is commonly known as the Bubba Theory.
Instead, your board should be well balanced and highly diverse and include a dedicated group of individuals.
2. Thinking they can immediately get grants
It takes new nonprofits one to three years to be grant ready. You must have in place certain financial, cultural, and eligibility documents in place before applying for those grants.
3. Not providing board education or setting expectations
Why is board education so important and so challenging? By investing time and resources in board education, you will be able to deepen your board members’ commitment to your organization, strengthen their understanding of the board’s role, and cultivate a culture of ongoing board improvement.
4. Not understanding philanthropy or the fundraising process
Philanthropy, not fundraising, will shift you and your board from feeling negative to feeling positive. Fundraising is about more than the ask. In fact, 60% of fundraising is cultivation or building relationships.
Take these steps and you’ll be that much closer to starting your nonprofit and doing more good in the world!
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