STAGE ONE

If you Google, “How to Start a Nonprofit,” you will get a hundred hits: everything from ebooks, textbooks, and articles, to companies offering to help you file the paperwork required to incorporate one. What’s common about them all is that they typically start there—incorporating the organization. But that is actually the middle of the process (box with red text, column 3 in photo below), and it costs Founders hundreds of hours in time and thousands of dollars trying to do what should have been done BEFORE the incorporation process.

I’m going to share with you How to Start Your Nonprofit the Right Way!

Having over 27 years of grant writing experience, the most common situation I encountered with Founders looking to fund their nonprofits was them setting up their organizations backward. They do the bare minimum to “start” the organization and then think they will be able to start receiving funding. Legally, the organization is eligible, but what most Founders don’t realize is that they won’t qualify. There are several other factors that will prevent them from seriously being considered for funding.

That’s why completing steps 1 & 2 in the chart above is very important. You’re going to have to do it anyway, you might as well do it right the first time, eliminate the double work, and start off right. In short, you will be strategically setting up your nonprofit in a logical order that flows:

1. Develop the Organizational Infrastructure

2. Build Your Powerhouse Board of Directors

3. File State paperwork to Incorporate the Organization

4. Obtain Federal Tax Exempt Status

5. Set Up Customer-Facing Marketing Mechanisms

6. Set Up Accounting Systems

7. Set Up Diversified Funding Streams

8. Set Up Compliance Adherence Systems

If Founders came to me having set up their nonprofits in this order, we would hit the ground running. But because the foundational infrastructures were not in place, I couldn’t in good conscience take their money. I knew they wouldn’t get funded. So, I had to share with them what I am going to share with you—all the things you need to have in place BEFORE you file so that your organization can come out the gate powerfully positioned to receive funding. (And, you’ll make the grant writer so happy!)

Here’s the truth: You can definitely find 3 people to sit on your board, come up with a mission, program, and check that your organization won’t secure more than $150,000 in annual revenue and start an organization. You absolutely can. It’s legal and as I stated, this is how most people start. But you don’t want to just start a nonprofit—you want to start it right.

The very first thing you have to do is verify whether the name you’ve selected for your nonprofit is available.

The name of your nonprofit corporation cannot be the same as, or too similar to, an existing corporation name on record with the Secretary of State. To see if your proposed name is available, you can check the Business Search database on the Secretary of State’s website. This is not an official name availability check. To do that, mail a Name Availability Inquiry Letter to the Secretary of State’s office. You can reserve a name for 60 days by filing a Name Reservation Request Form, which will prevent another corporation from registering the name while you prepare and file your articles. The cost is $10 - $20 depending on your state.

Build a Solid Foundation. Build your infrastructure First.

Spend time developing your organization’s mission, philosophy, and purpose. These are the same things Funders look for when determining a nonprofit’s fit with their funding strategy. Often, these elements are quickly thrown together just to submit the paperwork, without realizing that down the road the words you selected may be the very reason your organization is denied funding.

Albert Einstein said it best, “If you can’t explain it simply, you don’t understand it well enough.” The organization’s mission should be short, concise, and clearly articulate the organization’s purpose.

The most important part of your organization’s foundation is the program description. Funders look at what type of services your organization will deliver, subsequently, the goals and objectives will tell them how you will do them and what impact they will have in the community you serve. Spending time crafting these important sections is essential to the success of your organization. Also, these answers will not only help you start off your organization powerfully, but will help you answer the questions on form 1023 or 1023 EZ when filing your paperwork for your Articles of Incorporation and Tax Exempt Status. So, it’s not wasted; instead, taking time to craft powerful descriptions, measurable goals and objectives, and defining your target audience demographics will help you develop your strategic plan a little later on.

Another foundational necessity is your budget. The Annual budget is the fiscal representation of the organization. It shows funders where your priorities are. It tells program officers what you know about running a nonprofit organization. Yet most Founders seek grants without ever having prepared one. Every funder requests a budget. It’s what you should be using to build your Fund Development Strategy.

Internal guidelines like employee, volunteer, and board job descriptions and manuals help create structure. Often, I’m creating the structure as I write the grant. That’s not cool, because once the grant is funded, you as the grantee have to stick to what I made up. Take time to think about how you want your organization to operate. The tasks, roles, and responsibilities of your staff should be something you define. Yes, even if you’re not at the point where you have a paid staff. Typically, in the start-up phase, your board will be a working board and you should have clear descriptions of the programs, services, and activities they will be performing.

What you don’t want to do is scramble to put something together in order to respond to a grant. Funders want to understand how your organization functions—having this already crafted allows you to thoughtfully create the type of internal processes and flow that you will be happy with implementing. Rushing to “come up with something” before an upcoming submission date is not how you want to create it. If you’re serious and focused, you should be able to develop a solid infrastructure within a week. Spend a day on each section.

The Third, Most Important Step: Build a Powerhouse Board

The legal requirement for establishing a business is a:

1. President

2. Treasurer

3. Secretary  

Most people will fill these positions with random people they know just so they can file the paperwork. This decision is by far The Worst Thing a Founder can do. Here’s why.

The Board of Directors’ role is to provide the nonprofit with guidance, direction, and FUNDING. Seasoned board members will be able to leverage their resources to support the Founder/Executive Director by funding the organization. But Mama Jo, Auntie Em, Cousin Pete, and your college roommate do not have the slightest clue about how to bring in consistent funds—let alone provide the Founder with counsel on how to powerfully position the organization for long-term sustainability.

Nonprofit organizations CANNOT sustain themselves with grants alone. It is impossible. Especially in the startup phase because the organization is not competitive. Having a board of directors who can help raise funds is essential, and crucial for the first 1-2 years while the nonprofit is establishing a track record (impact).

Who sits on your board may also affect your ability to get funded. Funders ask you for your board roster because they are looking to see who is “guiding” your organization. They are looking to see if their background aligns with your program description. And they’re looking to see if they are in a position to bring in revenue and resources.

The reality is that Funders are not looking to fund sinking ships. They are looking for a return on their investment. If your board members are seasoned, then they are used to raising money to help support the organization. To a Funder, that means their investment will go a long way. The board will be fundraising as opposed to a novice board that has no clue what they should be doing.

The IRS has defined the fiduciary duties of the board of directors, therefore Funders will be looking to see who your governing body is. Take the time now to build a powerful governing board. It’s going to save you so much time and energy and alleviate the frustration many Founders eventually experience “carrying” the organization (usually with their personal funds). Start off strong by building a solid board that understands and is capable of bringing in resources from the start.

A good number to start with is Five (you always want an odd number of board members to break a tie during a vote). Recruiting a powerful board may take time, but it will definitely pay off in the long run. Check out my toolkit for How to Recruit a Powerhouse Board for the step-by-step process for recruiting seasoned board members who will help bring in funds for your nonprofit. The costs associated with recruiting board members depend on your approach (i.e., the cost of lunch for the initial meeting).

There are two very important items you will need to create for this section.

1. The first is a personalized board invitation. You will use this to vet your potential candidates. The personal invitation lets your candidates know that they are being selected, and not just anyone can join your governing body. Setting the tone is important. That’s why the personal invitation outlines all the expectations you have of your board prior to extending an invitation for them to join the board: Give/Get (how much they are expected to give in dues and get in resources); the number of events (with a calendar listing the dates) you expect them to attend; the board meeting calendar (and the number of board meetings you allow them to miss). You share the budget so they understand what they are responsible for fundraising. Doing this helps the Founder quickly weed out serious board candidates from the resume padders.

2. Next, you will need to create ByLaws. This document governs the Board of Directors. It covers all aspects of board governance from voting power, term limits, to how to fill vacancies, etc. It is very important that this not be some boilerplate document. This determines how long your board member stays in power. The Executive Director reports to the board (i.e., is hired and fired by the Board of Directors). You want to make sure this document is thoughtfully crafted, as their decisions impact the operations of the organization. You will also need this document in order to file for tax-exempt status with the IRS.

If you are serious and focused, you can build a solid board in 30-90 days.

Step Four: NOW IT’S TIME TO FILE!

As you can see, starting your nonprofit the right way doesn’t add an enormous amount of time on the front end. But starting the process at the incorporation phase without developing your infrastructure first adds an additional 6-12 months on the backend depending on how much time you can spend on developing the infrastructure. For some Founders, running the organization, delivering programs, and fundraising—they have to squeeze in time to make these changes. That’s why I highly recommend spending the 1-2 months in the front end setting up the organization right.

Establishing a business entity

Starting a nonprofit organization is a two-step process. The first step is to form a business entity. This is what is called your Articles of Incorporation. Think of it as a birth certificate. This is what state your organization was “born” or established. The Articles indicate that your organization is a legal business incorporated in your respective state. This form states what type of business entity you will function as.

To form a nonprofit in your state, first, you need to form a nonprofit corporation under your state law.

1. Choose the initial directors for your corporation

2. Choose a name for your nonprofit corporation

3. Prepare and file your nonprofit articles of incorporation

You create your nonprofit entity by filing articles of incorporation for a nonprofit with the Secretary of State.

Your articles of incorporation must include basic information such as:

• The name of your nonprofit

• The following statement:

"This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law for (public or charitable [insert one or both]) purposes."

• The name and street address in your state of the corporation's initial agent for service (the contact person for the organization) of the process

• The initial street address of the corporation

• The initial mailing address of the corporation, if different from the initial street address

The Secretary of State has a nonprofit articles of incorporation form on its website for 501(c)(3) Nonprofit Public Benefit Corporations. Use this form to create your charitable or public purpose 501(c)(3) nonprofit corporation. Complete and file your articles following the instructions provided. You can create your own articles or use the fillable articles form on the website. Whether you create your own articles or use the fillable version, you will need to file your articles with the Secretary of State by mail with the appropriate filing fee. There is no online filing option for California—check your state filing options.

To receive tax-exempt status from the IRS and the state you incorporate in, you'll need to have certain specific language in your articles, including:

• A statement of purpose that meets IRS requirements

• Statements that your non-profit will not engage in prohibited political or legislative activity

• A dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution

The articles form on the Secretary of State’s website contain the tax-exempt language required by the IRS and your state. For more information on IRS requirements for tax exemption, including sample language, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website. Make sure you include the required tax-exempt language in the articles you create.

Prepare bylaws for your nonprofit corporation

Before you file your articles of incorporation, you’ll need to have bylaws that comply with your state’s law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in your state. Your bylaws do not need to be filed with the state—they are your internal operating manual.

Hold a meeting of your board of directors

Your first board meeting is usually referred to as the organizational meeting of the board. The board should take actions such as:

• Approving the bylaws

• Electing directors (if not named in your articles)

• Appointing officers

• Setting an accounting period and tax year, and

• Approving initial transactions of the corporation, such as the opening of a corporate bank account.

After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board.

Set up a corporate records binder

You should set up a corporate records binder for your nonprofit to hold important documents such as articles of incorporation, bylaws, and minutes of meetings. For more information, as well as minutes forms, consent forms, and other resolutions, see my collection of nonprofit templates.

Obtain Your Federal and State Tax Exemptions

After you have created your nonprofit corporation, you can obtain your Federal and State tax exemptions. Here are the steps you must take to obtain your tax-exempt status:

1. File your Form 1023 Federal tax exemption application

To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that is filed online. Only smaller nonprofits--those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000--are eligible to use the streamlined 1023-EZ application.

See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.

2. Obtain your State tax exemptions

Once you have your federal tax exemption, you can obtain your state tax exemption. This may include exemptions from income, property, sales, and other state taxes. The website for the state’s tax agency, the Franchise Tax Board, will have the form you need to file to obtain your state tax exemption, Submission of Exemption Request.

3. Other state reporting and registration requirements

Depending on your activities and the size of your organization, you may need to register with the state before doing any fundraising activities. The Office of the Attorney General, Registry of Charitable Trusts division, has information and forms about fundraising and registration requirements for nonprofits in your state.

After you receive your official Tax Exemption letter, Set Up your Business Banking

You will need your IRS-approved tax exemption letter to open a business bank account for your nonprofit. Do not use your personal bank account to deposit any funds secured for the nonprofit. All of your transactions moving forward need to be separate from your personal accounts. Remember, this is a public charity, not your own business. Become familiar with the term and practices of Generally Accepted Accounting Practices (GAAP). They are what the IRS expects you to use in operating your nonprofit organization.

Now is a great time to set up a tracking and monitoring system for the funds going in and out for tax purposes. Quickbooks is a great and simple way to manage your organization’s expenditures.

To make online donations, payments, and transactions simple for donors, consider getting a PayPal business account.

Now is also a great time to set up an HR/Payroll system.

Once you have your banking system set up, it’s time to develop your customer (funder)-facing marketing collateral.

You want to establish a professional public face as soon as possible.

• Website

• Physical Address

• Email

• Telephone Number

• Business Cards

• Letterhead

• Brochure

• Email Marketing (email newsletter)

• Social Media (FB, IG)

Now you are ready to start developing your Fund Development Plan!

Use your budget to help determine your fundraising goals for the year. Back into the expense by determining which line items take priority and create a fund development plan to address raising funds to cover each expense.

File your  990s every year. Failure to file the organization’s 990 Tax returns is the number one reason why nonprofit organizations lose their tax-exempt status. But that won’t be you!

After incorporating in your state and setting up your nonprofit’s 501(c)(3) status with the IRS, the biggest regulatory concern that you’ll have is maintaining ongoing compliance with the law. The regulatory filings required for both state and federal entities are used to determine whether your nonprofit has followed the necessary rules to qualify as a charity and to maintain your tax-exempt status. A key point to remember about compliance is that good recordkeeping will be the foundation of your success in this area.

Federal Compliance

Every year, all 501(c)(3) organizations are required to file some version of IRS Form 990 with the Internal Revenue Service. Small public charities, those with under $50,000 in gross revenue, can file a brief, electronic return called Form 990-N.  

For all others, a much more detailed return is required (Form 990-EZ, 990, 990-PF, and/or 990-T). This form collects information about the nonprofit’s income and expenses, as well as program accomplishments, board members, and answers to numerous operational and board compliance questions. The form is not simply a statement of numbers similar to a private or for-profit tax return. There are a lot of subjective and narrative details required about the operation of the nonprofit. Failure to file a Form 990 in a timely annual fashion can result in significant penalties (up to $20/day for late filing fees). Failure to file a Form 990 for three consecutive years results in automatic revocation of 501(c)(3) status.

In addition to filing Form 990, a nonprofit that maintains employees is also subject to regulations affecting the workplace. These filings can include payroll and tax reporting on an annual and/or quarterly basis. These filing requirements are essentially similar to what is required in for-profit companies.

State Compliance

Managing state filing requirements, especially for nonprofits operating nationally, can be an onerous process. The vast majority of states require nonprofits to register with the Division of Charities prior to soliciting donations. Nonprofits fundraising in multiple states must also register in each of those states and renew that registration on an annual basis. Similarly, nonprofits whose corporate headquarters are in one state, but will have an ongoing physical presence in another, must usually register as a foreign entity in the other state by requesting a Certificate of Authority. There is considerable variability between states with regard to each state’s nonprofit requirements, so record-keeping with regard to activities in each state is of utmost importance.

In addition to compliance filings, nonprofits are also required to file business operations documents related to state-specific workplace rules. You must file a corporate annual report for your state of incorporation, plus each state in which your nonprofit has a Certificate of Authority. You may be responsible for employment tax, workers’ compensation, and unemployment tax to state regulators. At the state level, employment-related regulations often differ from the requirements of for-profit companies.

One final reason why having seasoned board members is crucial to your nonprofit’s success

A nonprofit’s board of directors is legally responsible for ensuring that the nonprofit’s federal and state compliance records are up to date. Whether prepared by a professional or an employee, the important thing is for the records to be detailed and accurate. Usually, the board member responsible for keeping track of this activity is the Treasurer, but the entire governance team is ultimately accountable. All of the information necessary for Form 990 and other compliance filings should be available if your organization has made detailed record-keeping an operational priority.

And there you have it! Everything you need to know about starting a nonprofit the right way!

Want this laid out in a step-by-step guide? Get all of this in a Free “How to Start Your Nonprofit the Right Way! In 90-Days, or Less” calendar.