Written by: Julie Morris
Starting a nonprofit organization is a noble cause. Whether you want to launch a charitable organization, a social advocacy group, or a private foundation, 501(c) status can help you achieve your goals. However, organizing a nonprofit corporation is a lot to manage when you’re a Small Small Business. That’s why we’ve put together this handy how-to guide with everything you need to know about starting a nonprofit organization.
What is a nonprofit organization?
A nonprofit organization is a type of business. Unlike other businesses, nonprofits aren’t focused on making money. Instead, they serve a greater cause.
Types of nonprofits
Most people are familiar with 501(c)(3) nonprofits, the most common type of nonprofit organization. In fact, many people conflate 501(c)(3) organizations with nonprofits in general. However, a variety of 501(c) designations exist. The most common include:
- 501(c)(3): Charitable, religious, educational, scientific, and literary organizations, and private foundations.
- 501(c)(4): Civic leagues, social welfare organizations, and local employee associations.
- 501(c)(5): Labor, agricultural, and horticultural organizations.
- 501(c)(6): Trade and professional associations.
- 501(c)(7): Social and recreational clubs.
- 501(c)(8) and 501(c)(10): Fraternal societies.
These aren’t the only types of nonprofit organizations. Learn about less-common 501(c) designations if your organization doesn’t fit into one of these categories.
How to apply for 501(c)(3) status
After identifying the 501(c) status that best fits your organization, you’re ready to apply. Without 501(c) status, a nonprofit corporation is treated like any other business for federal tax purposes.
Most nonprofits apply for 501(c)(3) tax-exempt status. To apply for 501(c)(3) status, an organization must:
- Establish a nonprofit corporation by filing Articles of Incorporation with the state.
- Apply for an Employer Identification Number (EIN).
- File Form 1023 with the IRS. Smaller organizations may file Form 1023-EZ instead.
- Pay filing fees.
- Apply for tax exemption at the state level if required by your state.
- Draft nonprofit bylaws.
- Appoint a Board of Directors and hold the first meeting.
Receiving 501(c)(3) status is a time-consuming process. The IRS takes 3-6 months on average to process Form 1023. Smaller organizations that apply for tax-exempt status using Form 1023-EZ may have a determination letter from the IRS in as little as 2-4 weeks.
Compliance for nonprofits
Nonprofits must comply with annual filing, governance, and licensing requirements in order to maintain 501(c)(3) status. This includes compliance requirements such as:
- Appointing a registered agent.
- Adhering to the organization’s bylaws and conducting regular board meetings.
- Avoiding conflicts of interest and establishing a conflict of interest policy.
- Properly classifying and paying employees. An easy timesheet tool helps smaller organizations calculate gross pay in accordance with overtime laws.
- Filing annual reports including IRS Form 990 and state corporate, financial, and tax-exemption filings.
- Documenting unrelated income and filing IRS Form 990-T when UBI exceeds $1,000.
- Maintaining charitable solicitation registration as required by your state.
- Keeping complete and accurate records, including financial statements, organizational documents, and annual filings.
Building a nonprofit board of directors
Now you know how to keep your nonprofit compliant with state and federal laws. However, there’s a lot more that goes into managing a high-performing nonprofit. To achieve your organization’s goals, you need a team that’s up to the challenge.
The most effective boards are big enough to include diverse perspectives, yet not so large that they get bogged down by indecision. Fill board seats strategically by recruiting board members who are familiar with different aspects of nonprofit management. For example, a board may include members with skills in fundraising and financial management along with members who have a stake in the organization’s mission. Consider whether board members will serve as volunteers or be compensated for their time.
When you want to make an impact, starting a nonprofit seems like an easy choice. However, it takes more than a mission to run a successful nonprofit organization. If you’re confident that a nonprofit corporation is the right choice for your goals, let these resources get your nonprofit up and running and keep your 501(c)(3) organization compliant.
About the author:
Julie Morris is a life and career coach who is passionate about inspiring and helping people live their best lives. She’s living this passion by the use of her site: http://juliemorris.org. She spent years in an unfulfilling career in finance before deciding to help people in other ways.