Steps For Starting a Nonprofit Business
Starting a business with a cause offers much satisfaction as you work to make lives better for others. To launch a nonprofit corporation, it requires taking many of the same steps a for-profit corporation or LLC does, but there are differences, too. Nonprofits must comply with some requirements that don’t affect other businesses.
So, where do you begin?
1. Understand what it means to be a nonprofit.
A nonprofit may be created a nonprofit for charitable, educational or certain other purposes—as long as they don’t directly benefit the owner. Nonprofits (if approved by the federal government) operate tax-free, and they can accept donations and apply for grants.
While a nonprofit business can make profits, surpluses must be used toward fulfilling the organization’s objectives—such as buying computer software to run the business more efficiently or investing in resources that deliver value to those that it serves.
2. Choose a legal structure.
Most nonprofits choose to register as a 501(c)(3) corporation. The 501(c)(3) classification includes organizations that have a charitable, educational, religious, scientific, or literary purpose.
Like corporations or LLCs, owners of nonprofit corporations receive personal liability protection because the business is a completely separate legal entity. A nonprofit must make sure it meets all business compliance requirements (such as keeping business licenses current, paying taxes, filing reports, etc.) to maintain that liability protection. Otherwise, owners could put their personal assets at risk.
Another issue some nonprofits face is losing their tax-exempt status as a result of misusing the nonprofit. If an owner commits violations like improperly distributing profits or gaining personally from the business, the organization could lose its 501(c)(3) status and then be taxed as a for-profit business.
3. Write a business plan.
As with any business, it’s critical to have a firm grasp on the organization’s mission, vision, and everything that needs to be addressed to start and run the nonprofit. A detailed business plan helps by serving as a roadmap, and parts of it will be needed to apply for federal tax-exempt status—something critical for future fundraising.
4. Choose a business name.
This step requires a good deal of thought because a nonprofit’s name will represent the brand and be at the forefront of everything it does. A name search with the Secretary of State’s office can show if no other company has already registered a business with the same (or confusingly similar) name. If a nonprofit will be operated nationally, a trademark search can confirm that no other businesses in other states are using the name.
5. Appoint a board of directors.
Because the board will provide oversight of the nonprofit’s activities and be accountable for guiding the organization in fulfilling its mission, directors and officers should be selected carefully. It’s helpful if these individuals collectively have expertise in the various functions of running a nonprofit corporation.
Each state has its own rules regarding how many directors are required, what qualifications they must meet, etc.
6. Draft bylaws.
Bylaws set the ground rules for operating a nonprofit. They include governance of the nonprofit (i.e., whether control lies with the board or owners), board meeting rules, voting procedures, how owner disputes should be handled, and other procedural information.
7. File articles of incorporation.
This document needs to be filed with the Secretary of State in the state where the nonprofit will be operated. Fees vary by state for filing this paperwork. If a nonprofit will have locations in more than one state, it will need to file articles of incorporation in each state in which it will maintain operations.
Some states will also require nonprofits to register to have permission to raise funds.
8. Obtain an Employer Identification Number (EIN).
As a corporation, a nonprofit must have an EIN. It will need it to open a business bank account, hire employees, and complete certain business filings. The process is simple, just request an EIN for free through the IRS’s website.
9. Request 501(c)(3) tax exemption.
To apply for 501(c)(3) tax-exempt status, a nonprofit will need to file form 1023 with the IRS.
10. Apply for required business licenses and permits.
Depending on the type of business activity a nonprofit conducts and where it is located, It may need licenses or permits to operate legally. Do your research to find out what licenses and permits are needed at the federal, state, county or local municipality levels.
All of the details above are meant to give you a sense of what is involved in starting a nonprofit company. Realize, however, they are the tip of the iceberg and not meant as legal advice. Requirements may vary depending on the type of nonprofit organization you will operate and where you will be located. To fully understand everything you need to pay attention to, consult with both legal and tax professionals before moving forward. And as you work through the process of getting your nonprofit off the ground, enlist the help of a SCORE mentor. SCORE volunteers have expertise in all aspects of launching and growing a business, and mentoring is free and unlimited.
Business Accelerators Can Grow Your Business.
Chapter Chair/President, SCORE in Houston
Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 10 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in over 320 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit SCORE at www.score.org.