How to start a nonprofit in 2024

Starting a nonprofit organization offers a way to satisfy your entrepreneurial spirit and support your community at the same time. To form a nonprofit, you’ll need to understand what the process entails. While these businesses are created and operated much like a traditional corporation, there can be a significant difference in tax liabilities. 

As such, along with all the standard legal guidelines, you must follow the proper procedure if you wish to obtain tax-exempt, or 501(c)(3), status. Here’s what you should know to get your new venture up and running.

What is a nonprofit?

Nonprofits are business organizations that don’t operate with the goal of making a profit. Instead, they focus on contributing to a specific social cause or fulfilling a need within a community or the world. Any financial gains received, whether through donations, grants or sales, are invested back into the company for further growth rather than being distributed to shareholders and investors. 

Pros and cons of nonprofits

As with any business model, there are both advantages and disadvantages of nonprofits to consider:

Pros

The primary benefits of running a nonprofit are: 

• Tax exemption: Many nonprofits are exempt from federal and state taxation. This can allow the business to save quite a bit on corporate income taxes as well as sales, property and other local government taxes that for-profit organizations are obligated to pay. 
• Personal liability protection: When a nonprofit is incorporated, founders are considered a separate entity from the business. As such, if the organization is sued or defaults on a debt, a founder’s personal assets won’t be at risk. 
• Grant and donation eligibility: A number of grant programs exist specifically for nonprofits. These provide funds that don’t have to be paid back like a loan. Additionally, people are often incentivized to make nonprofit donations since it gives them an opportunity to help a good cause and get a tax deduction. Having access to these financial resources can go a long way toward furthering an organization’s contributions to society. 

Cons

Nonprofits also have their challenges. Some of these include: 

• Inability to profit: While the founders of a nonprofit can pay themselves a reasonable salary for the work they do with the organization, they’re unable to take actual profits out of the business. This limits how much money can be made for personal gain. 
• Activity restrictions: To maintain tax-exempt status, nonprofits must comply with federal tax laws regarding the nature of their business practices. This means an organization’s activities must be restricted to those that directly align with its mission and many must avoid political activity. Operating outside of these guidelines would make profits taxable.
• Extensive reporting requirements: Nonprofits are subject to heavy government regulation. As such, these organizations are required to keep highly detailed records, including financial documents, bylaws and charitable registration permits. It’s also necessary to file the proper paperwork with state and federal agencies each year.

7 steps to start a nonprofit organization

1. Conduct market research and needs assessment

Proper due diligence is essential for building a successful nonprofit. Before your organization is up and running, you must determine if there is an unmet need in the community that it can address. 

Obtaining financial assistance and making an actual impact will be more difficult if you’re replicating services that already exist without adding any extra value. To conduct a needs assessment, you may: 

• Gather demographic information for your area from the U.S. Census Bureau. 
• Talk to locals in your community to learn what problems they consistently encounter. 
• Use a locator tool to find out which organizations exist nearby. 
• Interview people from comparable nonprofits to make sure your business model and mission aren’t too similar. 

It’s also important to do a market analysis so you can put together a solid plan for targeting potential supporters. By collecting data such as age, income and occupation, you’ll be able to better identify and engage with donors who may be interested in contributing to your cause. 

2. Choose a business structure

Just as with for-profit businesses, choosing a legal structure for your nonprofit is an important decision. This will affect various aspects of the organization, including taxes, financing and personal liability. 

Here’s an overview of the most common types of structures used for nonprofits:

• Corporation: Most nonprofit organizations are structured as corporations. These entities are eligible to file for tax-exempt status, may apply for grant funding and are provided protection from personal liability. However, they must operate in compliance with strict state regulations when it comes to electing board members, drafting bylaws, holding meetings and recording minutes.
• Limited liability company (LLC): Though LLCs offer personal asset protection like corporations, they don’t have the same formal requirements regarding meetings, minutes or the organizational structure of management. Despite being nonprofit, LLCs may have to present a lawful or business purpose for the company, depending on state law, and securing tax exemption can be more challenging. In this case, a carefully crafted operating agreement can help an LLC nonprofit serve its purpose well while adhering to federal 501(c)3 guidelines. 
• Unincorporated association: An unincorporated nonprofit association has a looser structure than both corporations and LLCs, as they don’t require any legal paperwork. These are formed when two or more people join together for the mutual purpose of benefiting the public as long as no profits are being made. They’re simple and inexpensive to establish, but members can be held liable for debts and legal proceedings since there’s no recognized separation between them and the company.

If you need help setting up a nonprofit LLC, review our best LLC services guide to find the provider that will best suit your needs.

3. Incorporate your business

Filing for incorporation allows your nonprofit to be operated as a separate business entity from its founders. This will eliminate your personal liability and may provide tax benefits, as well as increase funding opportunities. 

The incorporation process differs from state to state, but you can find information about the paperwork and fees you’ll need to submit at your state’s secretary of state office or on their website. The basic steps involve: 

• Registering your nonprofit’s name. 
• Filing the articles of incorporation paperwork and paying the filing fee. 
• Publishing your articles of incorporation in a local newspaper (in certain states).

Once incorporated, your business can and should open a bank account and get insurance. 

4. Get an employer identification number (EIN)

Every business entity, including nonprofits, must obtain an employer identification number whether or not it has employees. This number is unique to each organization and serves as a tax identifier for the IRS. It also serves in completing basic business tasks, such as opening a business bank account and applying for funding. 

You can obtain an EIN for free on the IRS website between 7 a.m. and 10 p.m. EST Monday through Friday. The form takes about fifteen minutes to fill out, after which you will automatically receive your EIN on the form’s submission confirmation page. 

5. Apply for federal and state tax exemptions

Larger nonprofit organizations may apply for tax exemption using IRS Form 1023. It’s recommended that this be done within 27 months of filing for incorporation to ensure the status is retroactive to the date of the business’s formation. 

Smaller nonprofits might be eligible to use IRS Form 1023-EZ, which is a streamlined application that can be submitted online. To qualify, a nonprofit must have less than $50,000 in annual receipts and no more than $250,000 in assets. Once the proper form has been filed, the IRS could request additional information, grant status or deny the exemption. 

Some states require a separate filing for state tax exemption. If necessary, you’ll have to send in a copy of your decision letter showing you were granted tax-exempt status from the IRS and follow any other instructions outlined by your state tax agency.

6. Raise funds

Raising funds for your organization can be completed through a number of avenues, such as applying for grants and seeking donations. However, in most states, you must first register to solicit charitable donations. 

Register for fundraising

In the majority of states, nonprofits have to register for charitable solicitation in their state before engaging in any type of fundraising event or soliciting residents for contributions. The registration requirements vary by location, so it’s important to refer to the specific government agency in your state that’s in charge of regulating fundraising laws. 

Annual or bi-annual registration renewal may also be required. If your organization will fundraise in multiple states, you must register in each one.

Apply for grants

A wide range of government grants are accessible to nonprofit organizations. To secure funding through these opportunities, you must determine eligibility based on your organization’s location, mission and audience. When you’re ready to apply, gather the requested documents and meet all other application requirements before submitting for review. 

Grants may also be awarded by foundations, big corporations and locally-owned businesses that wish to support nonprofits that have a similar mission to their own.

Seek donations

Nonprofit donations may come from individual donors or corporate sponsors. Individual donations can be made online, through direct mail or in person at an event. Some donors choose to make a one-time contribution, while others will set up monthly or recurring payments. 

Corporate sponsorships are donations usually made by bigger companies in support of the nonprofit’s mission. To ensure a corporate sponsorship doesn’t inadvertently lead to tax liabilities for a nonprofit organization, the benefit to the charity can’t be outweighed by the benefit to the donor. 

7. Manage compliance

Even after your nonprofit is up and running and has received tax exemption recognition, you’ll need to make sure you’re in compliance with all federal and state regulations to maintain its status. It’s important to keep detailed records of board meetings, incoming funds and expenses. 

Your business should also operate in accordance with its bylaws at all times. Additionally, the IRS requires organizations to file Form 990 on a yearly basis if they have an annual revenue over $50,000 or form 990-EZ if it’s below $50,000.

What does it mean to have 501(c)(3) status?

When your organization is under the 501(c)(3) status, the U.S. government recognizes it as tax-exempt, so you more than likely won’t have to pay any federal income or unemployment taxes. For example, if your nonprofit generates $100,000 in donations and revenue, you won’t be liable for taxes on that amount.

Additionally, this status allows your donors to claim tax deductions for their contributions to your organization. For instance, a $500 donation to your 501(c)(3) nonprofit allows donors to reduce their taxable income by $500 when they file their income tax return.

You can also get grants from foundations and government agencies, which are essential for your nonprofit’s finances. 

Legal protection will also be included. If you face lawsuits or disputes, your assets are usually safe from certain legal problems, so your resources can support your mission.

However, all these beneficial implications come with clear responsibilities: 501(c)(3) organizations can’t use their resources for the benefit of specific individuals, including their leaders. Instead, every dollar and piece of property they possess must be directed toward the charitable causes they were established to support.

Maintaining 501(c)(3) status

Here are the maintenance requirements and best practices of your new 501(c)(3): 

• Grow the right board: Nonprofits are managed by individuals who have the experience and knowledge to make unbiased decisions surrounding your nonprofit’s management and mission. By growing your board, you invite more experience, knowledge and resources to further your nonprofit mission. 
• Have and maintain a clear message: An organization needs a clear mission statement that is specific and emphasizes benefiting the public rather than serving private individuals or entities. 
• Inform agencies of any changes: If an organization goes through a significant change — like amending its articles of incorporation — state and federal agencies have to be notified. 
• Keep donation records: An organization must maintain comprehensive records of all donations received. You will also need to send thank-you notes to donors, which is a requirement by the IRS. 
• File form 990 annually: You’ll have an ongoing obligation to submit an annual report, known as form 990, to the IRS. This form informs the IRS and its donors about the company’s financial dealings throughout the year, mission, employees and board of directors. 

Frequently asked questions (FAQs)

Can you start a nonprofit organization with no money?

With a clear business plan in place, it’s possible to start a nonprofit with little to no funds. One way is to apply for community grants. While larger grants may only be available to established organizations that have already proven impactful, there might be smaller grants offered locally to new companies. Every dollar you receive will add up to help get your mission underway.

Another option is to secure fiscal sponsorships. A fiscal sponsor refers to an existing nonprofit organization that collaborates with start-up nonprofits to help them gain access to financial resources. This arrangement allows the sponsored organization to share the other company’s tax-exempt status to obtain donations and take part in fundraising. The National Network of Fiscal Sponsors is a good place to look for potential partners.

Is it expensive to start a nonprofit?

The initial costs involved in starting a nonprofit can vary greatly depending on the state and type of organization. On the state level, you may pay filing fees for business registration, articles of incorporation, charitable registration and additional licenses and permits. 

The fee to file a tax exemption application with the IRS is $600 for Form 1023 or $275 for Form 1023-EZ.

Additional startup expenses you may factor in are office space, insurance, marketing, salaries and service providers that will help you file paperwork if you’re unable to complete it on your own.

Can I start a nonprofit by myself?

Legally, anyone can start a nonprofit on their own. Although, doing so takes a great deal of time and effort. Also, as the organization grows, it’s likely you’ll need help managing all the day-to-day operations.

If you decide to incorporate, you’ll eventually have to put together a board of directors as well. Its members will provide company oversight and assist with major decision-making.

How do nonprofits make money?

Nonprofit organizations may generate revenue through various channels, such as grants, donations, fundraising and selling goods or services. Any money an organization brings in is used to pay for operating expenses, which can include rent, utilities, company supplies and office equipment.

Additionally, it could pay for the salaries of employees and founders as long as the amount is deemed reasonable.

Can an LLC be a nonprofit?

An LLC can be a nonprofit if each of its members are also tax-exempt organizations. This allows for greater flexibility when it comes to structuring company management.

However, states generally require that LLCs have a specified purpose. As such, the organization’s operating agreement must follow state laws and properly stipulate its charitable mission along with a clear business plan.

Do nonprofits pay taxes?

Nonprofit organizations that apply for and are granted tax-exempt status from the IRS will not be responsible for paying federal taxes on any income generated in relation to their charitable purpose. They may also receive an exemption from state taxes. 

However, a 501(c)(3) status will not eliminate the obligation to pay employee payroll taxes, including Social Security, Medicare and unemployment. Also, income that’s made from activities unrelated to the nonprofit’s mission is subject to taxation.

How can I raise money for a nonprofit?

The most traditional methods used to raise money for a nonprofit include applying for grants, throwing fundraising events and asking for donations. Many federal, state and community agencies offer grant funding to help nonprofit organizations meet their goals. The majority have specific eligibility requirements and detailed application instructions that must be followed. 

Fundraising is a state-regulated activity that requires pre-registration in the state where your nonprofit operates. Despite this, it remains an important tool for supporting nonprofit organizations. Auctions, raffles, tournaments and galas are popular types of fundraising events. 

To find individual donors for your nonprofit, start by looking within the organization’s inner circle. Ask board members, volunteers and close friends and family members to start spreading the word about your mission. 

Compile a list of people who have donated to other similar organizations and host special events aimed at getting to know prospective donors. Additionally, you can send out letters and emails requesting donations along with using social media to roll out campaigns.

How do nonprofits work?

Nonprofits rely on funding from various resources to help carry out their mission. These organizations must operate in a manner that benefits the general public and can’t exist for the purpose of generating revenue or increasing share value. 

All profits are reinvested into the company to further its mission. Nonprofits are eligible for federal and state tax exemption, and a board of directors is put into place to provide organizations with financial, legal and administrative guidance.