Before you get into the nitty-gritty of strategic planning, there are a few things you need to know—namely, how to start a 501c3 nonprofit.
The process of how to start a 501c3 nonprofit organization can seem daunting, but we're here to help. In this article, we'll walk you through the ten steps you need to take to get your nonprofit up and running. We'll cover everything from incorporating your organization to applying for tax-exempt status with the IRS. Let's get started.
What is a 501c3 Nonprofit?
A 501c3 nonprofit is a type of tax-exempt organization defined by the IRS. The main difference between a 501c3 nonprofit and for-profit organization is that a 501c3 nonprofit must be organized and operated for the public good, while a for-profit organization is organized and operated to generate profit for its owners.
A 501c3 nonprofit is mission focused, meaning that it must have a primary purpose that benefits the public, rather than private individuals or shareholders. Additionally, 501c3 nonprofits are prohibited from engaging in political campaigning or lobbying.
To be eligible for 501c3 status, your organization must be organized and operated for one or more of the following exempt purposes:
Testing for Public Safety
Fostering National or International Amateur Sports Competition
Prevention of Cruelty to Animals and/or Children
If your organization meets these requirements, you can apply for 501c3 status. Once approved, your nonprofit will be exempt from paying federal corporate income taxes. Additionally, donors to your organization may be able to deduct their donations from their own taxes.
10 Steps to Starting a 501c3 Nonprofit
You may be wondering, "how long does it take to start a 501c3 nonprofit?". In general, the process takes 4-6 months to complete, but the answer really depends on how prepared you are and how quickly you can move through the ten steps below.
Step 1: Decide on the Cause You Want to Support
The first step in how to start a 501c3 nonprofit is deciding on the cause you want to support. What issue or population do you want your nonprofit to focus on? This is an important decision, as it will shape the rest of your nonprofit's journey.
It is important to be as specific as possible when deciding on your nonprofit's cause. For example, "supporting the arts" is too vague—you need to decide if you want to focus on visual arts, performing arts, etc. Once you have a specific focus in mind, you can move on to the next step. It’s also important to note that once your nonprofit has been established for some time, it is possible to expand your focus to include other areas.
Step 2: Choose a Category for Your Nonprofit
Next, you'll need to choose a category for your nonprofit. The IRS offers several different categories of 501c3 nonprofits, each with its own set of requirements. The three primary types of 501c3 organizations are public charities, private operating foundations, and private foundations.
Public Charities: Public charities are nonprofits that focus on relief for the poor, the distressed, or the underprivileged. To be classified as a charitable organization, your nonprofit must prove that it provides a public benefit. Public charities must maintain a governing body that is representative of the public at large. This means that the individuals must be independent and unrelated to one another.
Hospitals, schools, universities, and medical research organizations are generally classified as public charities.
Private Operating Foundation: A private operating foundation is a type of public charity that focuses its resources on a single purpose. Private operating foundations are similar to public charities, but they are usually created and funded by a single individual or family. In general, the majority of the organization's income goes toward actively conducting its exempt activities.
Museums and zoos are typically classified as private operating foundations, as well as some libraries and research facilities.
Private Foundation: A private foundation is a type of nonprofit that is typically created and funded by a single individual or family. At the same time, it is a private organization and therefore requires a board of directors or trustees to maintain its tax-exempt status.
Additionally, private foundations are sometimes known as private non-operating foundations. Generally, the majority of a non-operating foundation's funds go toward financially supporting the organization’s work with few or no public programs.
Step 3: Pick a Name for Your 501c3 Nonprofit
Once you've chosen a category for your nonprofit, it's time to pick a name. When choosing a name for your organization, keep the following in mind:
The name should be sufficiently unique so as not to cause confusion with another organization
The name should reflect the purpose of the organization
Once you've chosen a name, you'll need to check to see if it's available. You can do this by searching for the name on the IRS website or by checking with your state's Secretary of State office.
Step 4: Define Mission, Vision, and Values for your Nonprofit
After you've chosen a name, you'll need to define your nonprofit's mission, vision, and values.
A mission statement is a short, clear statement that defines what your nonprofit does. It should be no more than a few sentences long. A strong mission statement will be specific, achievable, and relevant. Essentially, a mission statement will describe the organizational objectives and how they will be obtained.
A vision statement is a longer statement that describes your nonprofit's long-term goals. It should be aspirational and inspire others to support your cause. While a mission statement discusses the organization’s objectives, the vision statement discusses the organization's aspirations and what it ultimately hopes to accomplish.
Values are the guiding principles of your nonprofit. They should shape how you make decisions and carry out your mission. Values are considered the organization's guiding principles for how business will be conducted.
Some common values include:
Defining your nonprofit's mission, vision, and values is important because they will guide everything you do. Your mission statement should be the foundation upon which all decisions are made and answer the question of why your nonprofit exists.
Similarly, your vision statement should inspire others to support your cause and help you achieve your long-term goals. Lastly, your values should shape how you make decisions and carry out your mission. They should serve as a map for your nonprofits journey. By defining these things, you'll ensure that your nonprofit is focused and purposeful in all it does.
Step 5: Prepare Your Nonprofit Bylaws
After you've defined your nonprofit's mission, vision, and values, you'll need to prepare your nonprofit bylaws as part of the next step of how to start a 501c3 nonprofit. Bylaws are the governing documents of your organization. They set forth the rules and regulations for how your nonprofit will be run.
Your bylaws should include the following:
Governance structure: You must decide if your nonprofit is board or member-driven. If the organization is board-driven, then the board of directors makes major decisions. If the organization is member-driven, then the members make major decisions.
Control provisions: In the world of nonprofits, no one person "owns' the organization. However, it is important for "checks and balances" to take place. For example, if an Executive Director needs to be removed, what members or stakeholders will have that authority and how will it be done?
Conflict of interest policy: You'll want to include a conflict of interest policy in your bylaws. This policy should state how you expect members, officers, and directors to handle any potential conflicts of interest.
Voting procedures: Voting procedures should be set forth in your bylaws. This will ensure that everyone understands how decisions are made within the organization.
Amendments: You'll also want to include procedures for how your bylaws can be amended in the future.
Director's terms: The terms of your directors should also be set forth in the bylaws. This will ensure that everyone is on the same page with how often board members are elected and how long they serve.
Officers: The roles and responsibilities of your officers should be set forth in the bylaws. This includes the President, Vice-President, Treasurer, and Secretary.
Committees: If you have committees within your organization, their functions should be detailed in the bylaws.
Other important topics: Additionally, you may want to address other topics in your bylaws, such as membership dues, how often board meetings will be held, etc.
Items that should be avoided in the bylaws include:
Information that will change frequently.
Detailed provisions of the organization's activities.
You can find templates for bylaws online, or you can hire an attorney to help you prepare them.
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Step 6: Assemble a Team and Form a Board of Directors
After you've prepared your bylaws, it's time to assemble a team. Choose individuals who share your passion for the cause and who have the skills and knowledge necessary to help you achieve your goals.
Once you've assembled a team, you'll need to form a board of directors. The board of directors is responsible for guiding the direction of the organization. They make decisions about how to further the mission, and they oversee the financial stability of the nonprofit.
The board of directors should be composed of individuals who are representative of the population you serve. Additionally, try to recruit a board of directors with a diverse set of skills. This might include marketing, accounting, legal, and fundraising expertise. This will ensure that your board is equipped to handle the various aspects of running a nonprofit.
Step 7: Incorporate Your 501c3 Nonprofit
After you've assembled a team and formed a board of directors, you'll need to incorporate your nonprofit. Incorporation protects you and your team from liability. It also makes your nonprofit eligible for certain benefits, such as tax-exempt status.
To incorporate your nonprofit, you'll need to file articles of incorporation with your state. You can find the forms you need on the website of your state's Secretary of State office.
Step 8: File for 501c3 Tax Exemption
After you've incorporated your nonprofit, the next step in how to start a 501c3 nonprofit is filing for a 501c3 tax exemption. 501c3 status exempts your organization from paying federal taxes. It also allows donors to deduct their donations from their taxes.
To apply for 501c3 status, you'll need to file Form 1023 with the IRS. Form 1023 is a lengthy form that requires you to provide detailed information about your nonprofit. You'll need to include your articles of incorporation, the organization's bylaws, and your conflict of interest policy.
You can find instructions for how to fill out Form 1023 on the IRS website.
Step 9: Prepare for Annual Reporting
After you've received 501c3 status, you'll need to prepare for annual reporting. Each year, you'll need to file Form 990 with the IRS. Form 990 is an informational return that provides the IRS with information about your nonprofit's finances. You can find instructions for how to fill out Form 990 on the IRS website.
In addition to complying with federal regulations, you'll also need to comply with state and local regulations. Each state has its own rules and regulations for nonprofits. You'll need to check with your state's attorney general's office to find out what rules apply to you.
You may also need to file annual reports with your local government. Check with your city or county clerk's office to find out what reporting requirements apply to you.
After you've incorporated your nonprofit and received 501c3 status, you'll need to maintain compliance with all applicable laws and regulations. You'll need to file Form 990 each year, and you'll need to comply with state and local regulations.
You should also have a system in place for tracking donations and expenses. This will help you maintain compliance with the IRS, and it will help you keep your nonprofit organized.
It's also a good idea to have a lawyer review your documents on a regular basis. This will help you ensure that you're in compliance with all applicable laws.
Step 10: Apply for Grants.
After you've incorporated your nonprofit and received 501c3 status, you can start applying for grants. Grants are a great way to raise money for your nonprofit. You can use grant money to fund programs, pay staff, or cover operating expenses.
There are many different types of grants available. You can find federal grants, state grants, and private foundation grants. And one of the best ways you can find grant opportunities is through grant management software like Instrumentl. Not only will you discover great new funders, but you will get intelligently matched with the ones that are likely to be a fit for you.
When you're applying for grants, it's important to read the guidelines carefully. Each grant has its own eligibility requirements and application process. You'll need to make sure that you meet all of the requirements before you apply.
It's also important to remember that grants are competitive. You'll need to write a strong proposal in order to win funding. Make sure to allow you and your development team enough time to write a high-quality proposal.
Applying for grants can be a long and complicated process, but it's worth it if you're able to secure funding for your nonprofit.
Wrapping Up: How to Start a 501c3 Nonprofit in 10 Steps
Learning how to start a 501c3 nonprofit organization can seem like a daunting task, but it's actually not as difficult as it might seem. By following the steps outlined in this article, you can start your own nonprofit in no time.
Incorporating your nonprofit and filing for 501c3 status are the two most important steps. Once you've done that, you'll need to comply with annual reporting requirements and maintain compliance with all applicable laws and regulations.
Remember: you should always have a system in place for tracking donations and expenses.
Additionally, applying for grants is a great way to raise money for your nonprofit. There are many different types of grants available, so be sure to read the guidelines carefully before you apply.