Starting a nonprofit can be an exciting and fulfilling process, but it can also be dauntingly complex. Do you need to trademark your name or logo? How do you register as a corporation? And what if your non-profit is denied tax exemption?
There are different types of nonprofit corporations, each with its own advantages and disadvantages. When it comes to the application process, even a minor error can be a costly mistake. Not to mention, every nonprofit has unique goals and needs. To ensure that your application meets your organization’s needs and that you abide by all state and federal laws, it’s a good idea to work with an experienced lawyer.
Pick a cause
Nonprofits, by their most basic definition, are tax-exempt institutions in service of a social cause. There are many, many causes available to you, from the arts to the environment, education, and religion. The IRS and the National Center for Charitable Statistics (NCCS) began classifying nonprofits using the National Taxonomy of Exempt Entities (NTEE) system in the 1980s, and have broken down the “Major Groups” into 10 categories:
- Arts, Culture, and Humanities
- Environment and Animals
- Human Services
- International, Foreign Affairs
- Public, Societal Benefit
- Religion Related
- Mutual/Membership Benefit
- Unknown, Unclassified
Once you have decided what cause your non-profit will serve, consider what role your organization must take on to achieve it. If your goal is to advance child literacy, you might mobilize a volunteer reading buddy system, or create free afterschool programming. If you want to combat advertising influence in media, you might launch a reader-funded newsroom. Whichever cause you choose, it’s a good idea to locate other similar organizations in your area, and network with their founders and directors.
Pick a name
In addition to choosing a name that fits with your organization’s mission, it must be available (that is, not in use by another corporation in your state) and comply with your state’s corporate naming rules. In New York, for example, the usage of the word “museum” is restricted and requires the consent of the commissioner of education. Terms like “board of trade” or “redevelopment” are prohibited. You’ll also need to select a corporate designator, such as “incorporated,” that will come after the full name. The designator can be abbreviated.
Build your business plan
Like any company, startup, or small business, a successful nonprofit will have to organize its finances and build a business plan early on. Consider the market you’re in and the service you’re offering. Along with grants and charitable donations, could you bolster your funds with a membership program or by selling merchandise? Could you host ticketed events or panels?
Carolyn Schott, a nonprofit/charities attorney with Sherrard Roe Voigt & Harbison says a nonprofit’s business plan shouldn’t look too different from a for-profit’s.
“It should have all the elements, including a strategic view of what the market demands that the nonprofit will serve, what the line of services or programming the nonprofit is going to provide, and how it will attract the required market to be successful as a nonprofit,” Schott says. “It will need, not only customers from the standpoint of receiving the services or the benefit but also donors and volunteers who are interested in the success of the nonprofit.”
Choose your board of directors
Now that you’ve decided on a cause and familiarized yourself with others doing similar work, it’s time to appoint your board of directors. These folks will make important policy and financial decisions for your non-profit, so choose wisely. Your chosen directors can be people you know well, or with whom you’ve worked in the past. You should select individuals that you trust, and who you know to be hardworking, honest, and interested in your cause. If someone you ask declines, ask if they know of other good candidates.
“You want to identify individuals with two characteristics: a passion for the particular nonprofit’s benefit or goal, and the time to dedicate to thinking strategically on behalf of the nonprofit,” Schott says. “In some ways, the nonprofit board of directors is more important than a private for-profit business’s board of directors, from the standpoint that a nonprofit is dealing with the money or funds or assets of the public trust. Being a nonprofit director is a serious role. You want the individuals that you choose to be committed to that serious role, and not interested in just in having something to support their resume or some other relationship building goal.”
Some states require non-profits to have just one director while others require three. Review the laws in your state, or consult with a nonprofit attorney to be sure your governance structure will be approved by the IRS.
File the articles of incorporation
Your non-profit’s articles of incorporation establish the legal existence of your corporation in your state. The articles of incorporation also identify its main characteristics, such as name and address, corporate purpose, and stock information. These forms are filed with the Secretary of State’s office, and—once approved—your corporation officially becomes a legal business entity in your state. It is a good idea to consult with an experienced business attorney before initiating this important part of the process.
Apply to the IRS for a federal tax exemption
The Application for Recognition of Exemption is a complex document. However, it has become significantly less daunting since the arrival of the shorter 1023 EZ form in 2014. Fortunately, most states do not require non-profits to complete a separate application for state tax exemption. If you are unsure of your state’s rules regarding tax-exempt status, an experienced business attorney can help you navigate the process, and ensure that you complete the form correctly, the first time.
Hold your first board meeting
At this meeting, you will create and draft the bylaws that will govern meeting procedures, from electing officers to establishing rules for future board meetings. You’ll also want to ensure that someone “takes minutes.” Minutes are an official record of a board meeting and must be taken at every meeting. Follow your organization’s bylaws for taking and storing minutes. It is a good idea to have an attorney present at this initial meeting.
Forming a non-profit can be challenging, but an experienced lawyer can ensure that you do everything right the first time. And keep your eye on the prize—as soon as the legal and administrative tasks are out of the way, you can focus on making the world a better place.