October 31, 2014

8 Essential Steps to Starting a Non-Profit Organization

8 Essential Steps to Starting a Non-Profit OrganizationDid you know that there are over 1.5 million non-profits in operation in the U.S. which accounts for a staggering 8.11% of all wages paid in the U.S. (Source: National Center for Charitable Statistics).

If you are passionate about a cause and can find a like-minded group of people to help you share the significant responsibilities of operating a non-profit, then the philanthropic and entrepreneurial rewards can be significant – if you know what you are doing.

Starting a non-profit is very similar to starting a for-profit business – and requires a solid understanding of business planning, tax law, marketing, financing options and leadership.

Here is a basic checklist for how to start a non-profit organization (NPO), while ensuring you pay attention to important legal and regulatory processes:

1. Define Your Mission

To ensure that everyone is singing off the same hymn sheet, it’s critical that you define your mission statement, (i.e. the purpose of your non-profit and the need it addresses) early on in the start-up phase. At the same time, realize that it will evolve over time as other stakeholders take shape and provide input – so keep your mission statement reasonably high level for now.

2. Research Your Niche

Business planning involves understanding the marketplace, the market opportunity, and so on.   It’s much the same for planning a non-profit.  Connecticut Non-Profits (PDF) offers some useful examples of questions you should be asking yourself to help identify your niche and whether there is a market need. You can also research the existing non-profit landscape at Guide Star.

3. Write a Business Plan

A business plan is essential for procuring non-profit funding from donors and the government, and can also help you recruit volunteers and board members. The Free Management Library (an online library for non-profits) is a great resource and walks you through the process of writing a business plan.

4.  Set up a Board

While your board will likely grow and change over time, during the start-up phase it’s a good idea to start-out by selecting a board with individual members that serve a functional need. Select members who are interested in your mission; can dedicate time as well as useful and applicable expertise; have previous Board expertise; and have no conflict of interest with you or your staff.

The status of your board is also closely linked to the legal structure of the non-profit. Some states require that at least one or more directors are appointed to make major decisions in the corporation. Other states require that you appoint directors before filing your articles of incorporation. (Check individual state requirements with NASCO.)

5. Incorporate Your Non-Profit and Register it with Legal Entities

Becoming a non-profit corporation requires some paperwork, but for many groups the benefits of non-profit status – such as 501(c)(3) tax-exempt status – outweigh the complications. Incorporating a non-profit is similar to creating a regular corporation except that you have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division.

Refer to this guide from Business.gov which explains the process of Forming a Non Profit 501(c)(3) Corporation;  how to apply for non-profit federal and state tax exemptions; how to create corporate bylaws; and register for the necessary licenses and permits.

6. Incorporation Options for Hybrid Business/Non-Profits

A relatively new form of incorporation that is gaining in popularity is the L3C (low-profit limited liability company).  This hybrid legal structure combines the legal advantages of the LLC, with the financial benefits of a non-profit. The goal of the formal entity is to make it easier for businesses with a social mission to receive investments, including loans and grants, from charitable foundations. L3C entities are, as yet, only recognized in five states. Read more about L3C businesses in this article from CNNMoney.com: For L3C companies, profit isn’t the point.

7. Start Fundraising

Now that your NPO is officially established you’ll need to pay attention to its bread and butter – fundraising. To succeed in fundraising, you’ll need to diversify your fundraising efforts to strike a balance between episodic and ongoing activities. This will ensure multiple streams of income for the medium and long term. To achieve this you need a long term plan.

Read Going Beyond the Shot Gun Approach – 5 Tips for Optimizing Your Non-Profit’s Fundraising Efforts for insight into important strategic steps including telling your story, targeting your marketing efforts, developing a fundraising campaign plan, leveraging social media, and using the resources of other NPOs to help fund your efforts . For more information on how to find sources of ongoing and episodic funds, check out this article from Business.gov: Tips for Finding the Right Blend of Funds for your Non-Profit.

8. Leverage Governments Grants and Other Resources for Non-Profits

Non-profit entrepreneurs are eligible for certain benefits including grants, government surplus, and tax exemptions. Take a look at Business.gov’s Non-Profit Organization Start-up Guide. The site includes links to programs and services that help non-profits find resources available to them from the federal government including grants and financial assistance, tax information, government sales and surplus, and more.

Remember! There are Alternatives to Starting an Non-Profit

If this all sounds a little more than you wanted to take on, consider volunteering your services to a non-profit that has a similar mission or is not yet established in your locality and is looking to extend its reach.

Alternatively other non-profits might be willing to act as your fiscal sponsor, which means you will be able to seek grants and solicit tax-deductible donations under your sponsor’s tax exempt status.  Read more on finding a fiscal sponsor in this guide from the Foundation Center.

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3 Reactions

  1. How exactly will they define an L3C company? Seems like a very hard target to hit because you’ll inevitably have people who fall just on one side of a cutoff and aren’t happy about it.

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