Every year, tens of thousands of kids graduate from Denver’s public schools unable to read at grade level, while countless low-income adults would qualify for jobs if they could fill out an application. Sarah Martinez, who grew up in Denver’s impoverished Latino community, knows this all too well. For years, she has thought about doing something to change that— but making good intentions into a real nonprofit has always seemed a bit overwhelming.
So you want to start a nonprofit? The legal requirements, tax laws, and governance structure can be confusing enough, but most people don’t realize that the steps to form and set up a nonprofit are far more involved than you might think. Thousands of people every year start out to form a nonprofit only to realize the involved steps involved.
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Define Your Mission and Assess the Need
Every successful non-profit organization starts with a clear purpose, a clear explanation of what you will do, and perhaps more importantly, why someone should start a new organization to do that work that hasn’t already been done. Before you spend money and time drafting articles of incorporation or filing for federal tax-exempt status, you should research organizations already operating in your neighborhood or town. You will be surprised to learn that there are more successful, non-profit organizations operating than you may have initially thought.
There are already organizations addressing most of the problems of society. Many causes have a significant, established presence of non-profits, so instead of starting a new non-profit to address your cause, you might consider volunteering for groups that are already working on the problem. Or, you might focus on how your approach is distinct from the groups already operating in that space.
Nonprofits must serve a charitable, religious, educational, scientific, or other purpose that the Internal Revenue Service determines to be qualifying. Your mission statement is the guiding mission for your organization and conveys its focus. A meaningful yet flexible mission statement serves as a guide, yet allows for your organization’s evolution. You should use your mission statement to inform your bylaws and other organizational documents, your incorporation documents, annual reports to members and supporters, and in grant proposals as well as other organizational materials.
For my platform statement, I went with: “improving adult literacy through personalized tutoring and workforce development programs.” I tried to keep it clear, concise, and focused on what I actually want to improve (i.e. adult literacy), whereas some of the other statements seemed to want
Recruit the Board of Directors for your co-op! Depending on the state where you are filing for incorporation, typically 3 directors sign the articles of incorporation, and they also serve as the officers of the legal entity (e.g. President, Secretary, Treasurer). They will be responsible for running the co-op, making decisions, and possibly putting up some start-up capital. You want to recruit people who are passionate about the mission of your co-op, and who bring a variety of skills and perspectives to the Board.
Navigate the Incorporation Process
Creating your nonprofit incorporates your nonprofit as a legal entity which means your nonprofit exists in a legal sense separate from you. This means your nonprofit can be legally responsible but in a way that protects you and your assets. An incorporated nonprofit can sign contracts, purchase or lease property and even apply for and receive grants. Most states require you to file articles of incorporation with your secretary of state when you start a nonprofit as an incorporated business.
Articles and bylaws should set out the charitable purposes of your organization and what happens to its assets in the event that the organization ceases to exist. Many founding members underestimate the importance of including precise language in the articles to achieve this purpose. While seemingly minor, the language used to carry out this purpose can lead to significant delays later on in the process of obtaining tax-exempt status.
Bylaws are the rules of your organization that outline things such as the frequency of board meetings, how major decisions are made and the roles of organizational officers. They act as an owner’s manual to help govern your nonprofit. But poorly written bylaws can create a host of governance issues that last for years.
Obtain Federal Tax-exempt Status
When you submit Form 1023 or Form 1023-EZ to the IRS, you are asking for recognition of your 501(c)(3) status. This is required for donors to consider your organization tax-deductible and for your organization to receive federal income tax exemption.
The application will require a three year projection of financial information showing a healthy growth of revenues and expenses to support the organization’s validity to the IRS. A clear and concise description of the programs proposed by the organization, as well as a description of how the effects of the programs will be measured must be outlined. Exempt function activities must predominate over private benefit activities.
IRS examiners focus on whether or not individuals are over profits from the applying organization. Historically this has been most problematic with founder controlled organizations and those with close family members.
Please allow 2-3 months for application processing. Many organizations start up and solicit and accept donations while pending application for tax exempt status, which can pose significant risk should the IRS ultimately deny exemption. All contributions made during the pending period would be non-deductible.
Many online organizations offer streamlined processes that guide users through the process of forming a nonprofit. Some organizations provide legal documents to help individuals form a nonprofit organization.
Build Your Operational Foundation
So legal recognition is one thing. But being able to run programs & services, to set up financial systems & procedures, to build positive relationships with supporters and stakeholders who are going to help fund your work for the long haul – that is another ball game.
Set up a bank account using your federal tax ID number. Set up accounting records from the very first dollar. A small nonprofit may feel like it is not yet ready for financial transparency to donors and regulators, but it is still important from the start.
Administrative offices, business services such as insurance, and support functions like staffing are part of what is often called administration for many organizations. However, for a nonprofit organization, administrative functions are secondary to fundraising and program administration, the two fundamental purposes for which a nonprofit is chartered. Your IRS application will have outlined the purposes for which you were organized as an exempt organization and the agency is serious about having you fulfill those commitments.
Sarah is a volunteer at our literacy nonprofit. She spent a few months developing a robust bureaucratic structure for three tutoring centers. In the first month alone, she served over 200 adult tutors and students. Obviously, she got the bureaucratic structure right the first time, and it has enabled her to grow to the scale she has over the years.