Maybe you’re passionate about a specific cause. Or maybe you want to leave a lasting legacy in your community. 🦸
No matter what your motivation is, nonprofit organizations are a great way to transform your vision for a better world into a reality…but this process can also require you to navigate some less exciting things, like paying startup costs and filing forms. 📂
In this article, we’ll break down the nitty-gritty of how to start a new nonprofit.
What is a nonprofit?
Let’s start with the basics. A nonprofit is also called a not-for-profit. It’s a type of charitable organization that does not give its extra funds to owners or shareholders. Instead, it uses donations and other sources of funding to support the community or carry out its mission. 🌍
Nonprofits are tax-exempt organizations, meaning they don't have to pay certain taxes such as income tax or property tax. This allows them to focus their resources on their purpose and impact rather than generating profit.
Different types of nonprofits
When you’re creating your new nonprofit there are a few things to consider. A big one is the type of nonprofit organization you’ll file as under the Internal Revenue Code. There are three different types of organizations: 5013c, 501c4, 501c7. ⚖️
501c3: Public Charities and Private Foundations 🏛️
A 501c3 organization is a public charity or private foundation that is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. They are the most common type of nonprofit and typically receive tax-exempt status from the IRS.
Public charities are organizations that serve a broad public interest and can receive donations from the general public. Private foundations, on the other hand, typically have fewer sources of funding and often rely on a single source such as an individual, family, or corporation.
Tax Deductibility: Donations made to 501(c)(3) organizations are typically tax-deductible for the donors.
Restrictions: These organizations are subject to strict rules regarding political activities and lobbying. They must primarily engage in activities that further their exempt purposes.
Examples: American Red Cross, Doctors Without Borders, United Way
501c4: Social Welfare Organizations 🌎
501(c)(4) organizations, also known as social welfare organizations, are tax-exempt entities that serve a specific community or group. These organizations can engage in political activities and lobbying efforts, unlike 501(c)(3) charities.
Tax Deductibility: Donations made to 501(c)(4) organizations are not typically tax-deductible for the donors.
Restrictions: While these organizations can engage in some political activities and lobbying efforts, they must primarily focus on promoting social welfare and improving the community.
Examples: National Rifle Association (NRA), Planned Parenthood Action Fund, Sierra Club
501c7: Social and Recreational Clubs ⛳
501(c)(7) organizations, also known as social and recreational clubs, are tax-exempt entities that provide leisure and recreational activities for their members. These clubs can range from country clubs to hobby-based groups.
Tax Deductibility: Donations made to 501(c)(7) organizations are not typically tax-deductible for the donors.
Restrictions: These organizations must primarily serve their members and cannot engage in any political activities or lobbying efforts.
Examples: Rotary Club, Veterans of Foreign Wars (VFW), American Legion
It’s always a good idea to consult with a professional before choosing which type of organization your nonprofit will file as. 🧑💼
How to start a nonprofit in 10 steps
Starting a nonprofit can be a rewarding way to make a positive impact on your community or the world. However, the process can be overwhelming, especially if you are new to the world of nonprofits. But we’re here to help!
In this section, we’ll break down the steps you need to take to start a nonprofit, step-by-step. Let’s dive in.
🔍 Step 1: Do your research
The first step in starting your nonprofit is to do your research. Identify the needs of the community you want to serve and the gaps that currently exist. Once identified, analyze potential competitors in the field.
Conduct a market assessment to understand the demand for your organization’s services. This information will help you to determine if there is a need for your organization in the community, who your target audience is, and how to be most effective in addressing their need(s). 📚
🗺️ Step 2: Write a mission statement
Develop a mission statement that clearly outlines the purpose of your nonprofit. This should succinctly state what your organization does, for whom, and in what way(s) you aim to accomplish your goals.
Ensure your mission statement is specific, relevant, and inspiring. Include a vision statement that describes your desired future state and organizational values that guide your operations. 📜 And of course, don’t forget to decide on your nonprofit’s name!
🥅 Step 3: Define your goals
Your organization's goals need to be SMART (Specific, Measurable, Achievable, Relevant, Time-bound). Specifically define what you want to achieve, how you will know when you’ve achieved it, if it is possible, relevant to your mission and vision, and when you plan to meet your goal. 📝
💼 Step 4: Create a business plan
Next, outline your nonprofit's mission, goals, target audience, programs, fundraising strategies, and budget in a comprehensive business plan. This nonprofit startup plan should include things like…
An executive summary
A description of your organization's services
An analysis of the industry
Your target market
Marketing and financial plans
Projected income and expenses (AKA, a nonprofit budget)
👥 Step 5: Build your nonprofit team
Nonprofits are usually governed by a board of directors. They are responsible for keeping an eye on the organization's activities and ensuring it stays true to its mission. Board members also have decision-making power.
Your nonprofit board members should have a variety of skills and expertise. Determine the minimum and maximum number of board members needed for effective governance. Seek out individuals who have a passion for the mission, relevant experience, and of course, time to attend board meetings.
You'll also want to choose an executive director. You could take on this role as the nonprofit's founder, or select someone else to manage the day-to-day operations.
⚖️ Step 6: Create bylaws and a conflict of interest policy
Develop bylaws that outline the internal rules and structure of your organization. Establish a conflict of interest policy to manage potential conflicts among board members and key staff. Ensure your policies and procedures are transparent and make them available to staff, volunteers, and the public. 📝
🏛️ Step 7: Do your paperwork
Select a legal structure (e.g., a nonprofit corporation) for your organization and formalize it with the IRS and the federal government. In addition, you may need to file articles of incorporation with your state government.
Depending on your organization's location and activities, you will also need to register for licenses and permits to operate—like business licenses, charitable solicitation licenses, and fundraising permits. 📑
💰 Step 8: Apply for tax-exempt status
Nonprofits are usually exempted from paying taxes. Once you’ve registered your organization with the government, you can file for tax-exempt status with the Internal Revenue Service (IRS) by completing Form 1023 or a simpler version, IRS Form 1023-EZ. 📜
Once your federal tax exemption is approved, you’ll receive a determination letter from the IRS. Then, you’ll need to apply for your Federal Employer Identification Number (EIN). You’ll use this number when filing your taxes and opening a nonprofit bank account.
📝 Step 9: Start fundraising
It’s time to raise money for your organization. This can be done through individual donations, grants, and fundraising events. Develop a fundraising plan that aligns with your business plan and budget. Ensure you track all incoming funds so you can keep accurate records.
🤝 Step 10: Build a support system
Building a support system is crucial for anyone starting a new organization. Seek volunteers, tap into local community networks, and attend events to connect with others who share your mission. You may also seek funding by applying for grants, hosting events, sponsorships, and donations.
Starting a nonprofit can be challenging and fulfilling work. Remember to stay committed to your mission, cultivate a passion for the cause, and surround yourself with a supportive team. Your hard work can make a positive change in people's lives! 🌟
Should you start a nonprofit?
Successful nonprofit leaders share many characteristics with small business owners. When you think about it, they have a lot of things in common: they both have to compensate staff members, manage financial records, and file income taxes.
But you don't have to be a business expert or an entrepreneur to start a nonprofit. As long as you're passionate about a cause, committed, and willing to learn new skills, you have the potential to be a great nonprofit leader. ❤️
Better nonprofit banking with Relay
Relay is an online business banking and money management platform that offers no-fee business checking and savings accounts. We've already talked about staying on top of those nonprofit financial statements and budgeting, but we know nonprofit financial management doesn't stop there. 🧾
Here's why nonprofits love using Relay to stay on top of their cash flow, spending, and saving:
✅ Open 20 individual checking accounts: Organize income, expenses, and cash reserves with multiple checking accounts. You can create individual accounts to set aside grants, budget for day-to-day operating expenses, and beyond.
✅ No account fees or minimum balances: With no monthly fees, overdraft fees, or minimum balance requirements, Relay helps nonprofits avoid unnecessary costs.
✅ Automated savings: Relay helps you add more breathing room to your budget with automatic savings. Plus, you’ll earn 1-3% APY1 on every dollar.
✅ Entirely online banking: Open checking and savings accounts, issue debit cards, and send and receive payments completely online—no in-person branch visits required.
✅ 50 virtual or physical debit cards: Create new debit cards for specific projects and expenses, and get instant access to virtual debit cards for online and mobile payments.
✅ Your security is our top priority: Feel safe knowing your money is protected by FDIC insurance. Plus, all debit cards are covered by the Visa® Zero Liability Protection Policy.
✅ Built for teams: Relay lets you set debit card spending limits and receive detailed data for all team spending. You can also invite your accountant, assistant, and other team members to Relay with secure, role-based logins.
✅ Streamlined bookkeeping: Relay allows you to sync detailed banking data directly into QuickBooks Online or Xero, making bookkeeping a breeze.
To get started with Relay for nonprofits, sign up here. 😎
FAQs about starting a nonprofit
Do nonprofit founders get paid? 🤔
Nonprofit leaders can get paid for their work, but the key is to make sure that the compensation is reasonable, justifiable, and in compliance with all laws. Ultimately, the board of directors plays a big role in determining and approving compensation for nonprofit leaders, including their founders.
How do I open a nonprofit bank account?
To open a nonprofit bank account, you will need to provide your organization’s legal documents (such as the formation papers), identification for authorized signers, and any other required documentation from the bank. Additionally, some banks may require proof of your tax-exempt status or an EIN. With Relay, you can apply entirely online in just a few minutes!
