How to Start a Nonprofit

Helping people start nonprofit organizations is one of the most important things we do at Foundation Group.  In fact, we have helped over 12,000 organizations get started since 1995.  The following is really more of an overview than an exhaustive examination.

charity-collage

Why Do You Want to Start a Nonprofit?

Before we get into the “how” of establishing a 501(c)(3) – or other nonprofit – let’s first look at the “why”.  We get a lot of interesting answers when we ask prospective clients that question, ranging from totally clueless to totally clued-in.  Most are somewhere in between.  Whether it is an after-school tutoring program, a food bank or a church, the answer usually involves people wanting to provide a service or program to other people who need it.

What Types of Organizations Can Be a 501(c)(3)?

Not all ideas qualify for 501(c)(3) status.  The IRS requires nonprofits to be organized for the following purposes to qualify:  religious, educational, charitable (benevolence), scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children.  Even if a proposed organization’s program matches one of the above categories, that alone is not enough.  Neither the activities nor the assets of the organization can “inure” to the benefit of insiders.  In other words, organizational leaders cannot unfairly direct the resources of the charity to their own benefit.

What Are the Technical Requirements?

This is the “how”.  Starting a 501(c)(3) usually involves a two-step process:  1) incorporating a nonprofit organization and, 2) applying to the IRS for recognition of tax-exemption.  While it is possible to skip the incorporation process, that is not advisable.  Let’s look at these steps a little more closely:

1) Incorporation.  Forming a corporation involves the creation a legal entity.  While for-profit corporations are owned by their shareholders, nonprofit corporations do not have owners.  Both types are typically governed by a board of directors.  Corporations are created at the state-level by filing a formation document, usually called Articles of Incorporation.

2) IRS tax-exemption.  Once the corporation is formed, obtaining 501(c)(3) status involves the preparation and filing of IRS Form 1023, an exhaustive document that can range from 20 to more than 100 pages of documentation.  Going through the IRS 501(c)(3) process is best described as a cross between preparing a detailed business plan and enduring an IRS audit.  It is not an easy process, nor one that should be entered into lightly.  It takes most organizations between 6-12 months to be approved (assuming they qualify).  And though it may sound self-serving to say so, this is not typically a do-it-yourself process.  It’s best left to a professional.

We’ll explore the concept of fiscal sponsorships or fiscal agencies in an upcoming post, but let’s just say that you may wish to avoid them.  These setups are frequently pushed by recruiters who get paid referral fees for signing people up and are typically not favored by the IRS.  The theory is that you can establish a 501(c)(3) “project” under the fiscal sponsor that allows you to get all the benefit of a 501(c)(3), but shortcut the administrative headaches of setting up a real organization.  The reality is not that simple.  If you want to start a 501(c)(3) organization, consider starting a real one.

Are There Other Things That Must Be Done?

As we sometimes jokingly say, “There’s always something else.”  Sales tax exemption, property tax exemption, and charitable solicitation permits are among the things that many organizations need to explore once they achieve 501(c)(3) status.  From an ongoing compliance standpoint, the annual filing of IRS Form 990 is an inescapable reality.

A Final Word

If it sounds like there is a lot to starting a nonprofit, there is!  But, nonprofits represent an indispensible element of our nation’s social fabric.  There are things that nonprofits can accomplish that no company or government agency can come close to.  And in this age of recession, layoffs and slashed social services budgets, nonprofits are needed now more than ever.  It has been our distinct pleasure for the last 15+ years to serve those who serve others.  We look forward to doing so for many years to come.

Tags:

About Greg McRay

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

22 Responses to “How to Start a Nonprofit”

  1. Greg June 10, 2009 1:53 pm
    #

    I guess this may sound self serving, but lets say I have an Idea for a non-profit. How do I protect the idea from simply being stolen by someone else. At the end of the day, we will want to be effective in our goals, but will still need to provide a living for those employed by the organization.

    Thanks.
    Greg

    • Greg McRay, EA June 10, 2009 2:45 pm
      #

      Ideas are difficult to protect, whether you talking about a nonprofit or for-profit. Design specifics can be patented and intellectual property can be copyrighted. But something that consists of an idea is really too vague and non-specific to claim rights to. If this is a real concern to you, consider having those working with your organization sign a confidentiality agreement. There is little else you can do.

    • Mongzeung Mpom June 7, 2011 11:40 am
      #

      Dear Greg
      IRS 501(c) (3) is it also applicable to Indian Non- Profit organisation?

      Mongzeung Mpom

      • Greg McRay, EA July 13, 2011 6:57 pm
        #

        If you mean an India-based charity, then the answer would be no.

  2. David January 22, 2010 1:48 pm
    #

    Greg:

    A small group of us are setting up a 501(c)(3) here in Colorado. The board has spent a lot of time hammering things out and we think we’re ready to file our IRS 1023 form, but we have one roadblock. One officer (and board member) has done most of the preliminary work and she alone is expected to be employed full-time with the non-profit’s business. She will be paid modestly for this. As we get going, there will be a “ramping-up” period when revenues are minimal but growing. Do you have suggestions regarding the structuring of her salary during this period? For instance, would it be an OK idea to set it at say $25,000 per year, but as a percentage of revenues to begin with, while revenues are minimal? She would be OK with this, but she does need to be paid even while we’re just getting going. Thank you for any help you can offer us.

    David

    • Greg McRay, EA January 22, 2010 1:56 pm
      #

      Hi, David. Percentage of revenue arrangements are what the IRS calls “nonlinear” compensation. They aren’t too keen on it. I do not recommend using a percentage of revenue method unless it is used to cap her salary. In other words, she could be assigned a salary of $25,000 or some percentage of revenue, whichever is less. Keep in mind that any percentage you choose is arbitrary at best. If you go this route, plan well.

  3. Chris Frederick March 19, 2010 11:10 am
    #

    Hi Greg,

    If I have a non-profit legalized in another country is there a way to expedite the legal process here in the U.S. in order to become a U.S. 501c3?

    Thank you,
    Chris Frederick

    • Greg McRay, EA March 23, 2010 9:39 pm
      #

      Hi, Chris. There are only two scenarios that the IRS will consider for expedited processing: 1) a new organization formed to deal with a current disaster and 2) a documented pending grant that will sunset without approval. Even if you met one of these conditions, the IRS can still refuse the expedite request. As it is, the IRS is currently taking about 4-8 months to review most 501(c)(3) applications.

  4. Tim August 6, 2010 9:31 am
    #

    Hi Greg,
    Thank you for all this information.. I have spent hours just reading everything you have written. I am waiting for the decision to get my 501c3 status. I have worked countless hours and spent into the over 3000 thus far just to get to this point. It seems to me, a lot of people think “oh I will “just open” a non-profit org” it simply isn’t that easy. I am lucky as I can devote my entire life to this as I have no “responsibilities” other than this.
    My question to you is: I am starting up a scholarship program in my mothers memory, what type of things can I do to get donations coming in. For some reason I am at a road block on this. I live in TN so we cannot do Bingo games (illegal) We cannot do raffels (illegal) and we cannot hold big events (unless we are established for 5 years) so it leaves you with what-ever you can come up with.. I was just wondering what your suggestion was.
    Thanks, Tim

    • Greg McRay, EA August 9, 2010 2:33 pm
      #

      Hi, Tim. Good to hear from you.

      One thing that is immediately apparent from your question is that you are falling into the “events” trap. Very easy to do, but usually the wrong track to be on. Check out this recent article from our blog, Get More Out of Your Fundraising Efforts. Then, go read everything our friend, Sandy Rees, has written on her blog, Get Fully Funded. That will help you with your dilemma immensely.

  5. Janine September 30, 2010 10:20 am
    #

    Hey Greg,

    Just want to know if it is possible for a nonprofit to be organized under ‘Religious’ AND ‘Charitable’? And are nonprofits the only businesses that are their own entity? Can for profit businesses be the same? I am in the “idea” phase of this whole thing and I am trying to get all the facts and get organized before I actually start the process. Who would you recommend me getting help from? (lawyer, accountant etc.?) Thank you!

    • Greg McRay, EA October 1, 2010 11:08 am
      #

      This is a self-serving answer, no doubt, but you need to call and speak with one of our sales consultants. The questions you are asking are way too broad to answer in this forum, but our reps can certainly help you understand this better.

  6. Paul E. Sevin April 16, 2011 8:24 pm
    #

    Greg,
    I founded an organization in which I present flags to families of service men and women in the military. This is usually done at the church they attend, or other venue which they deem appropriate. Currently, I am paying all expenses for these events myself. I’m OK with that and my hopes are to have people donate to this cause as it progresses. One thing that would be a great benifit is if I could deduct the event costs that I currenntly pay for. Would setting up my organization as a 501-C foundation help me with this issue?

    • Greg McRay, EA April 20, 2011 8:30 am
      #

      Setting up a charity would certainly allow you to deduct whatever you are putting into it, but there are other considerations…not the least of which is whether your tax benefit would be greater than the overhead involved in running an organization. I love the idea and can certainly envision others wanting to donate to such work. Keep in mind that if you choose to set up a nonprofit, you will definitely need to have more of a contribution base than just your own.

      If you decide to set one up or need more info, call us.

  7. Carmen December 29, 2011 6:39 am
    #

    Hello,
    I am in the beginning stages of trying to set up a non-profit organization. My question is: Do I have to wait for the 501c3 to be approved before I can begin getting donations and grants to get started?

    • Greg McRay January 10, 2012 6:40 pm
      #

      No, you don’t have to wait. But you do have to tell your prospective donors that you don’t yet have 501c3 status and that their gifts are not tax deductible. The good news is that those early gifts may end up deductible because 501c3 status is retroactive to incorporation in most cases.

  8. Stephen January 17, 2012 4:27 pm
    #

    Hi Greg,
    Here’s an unusual one for you. We are trying to save costs by paying an employee a small base salary, but in addition we would like to give him something else to supplement. Currently we have some tasks that we bill by the hour for clients and are considering paying him hourly for working with clients on just these special projects. Would that be considered non-linear? His compensation would be a set hourly rate, not a “percentage of revenue” of these projects.

    • Greg McRay January 17, 2012 10:18 pm
      #

      Sounds fine to me. It is wage-based work as opposed to salary. It definitely isn’t non-linear.

  9. Nancy May 14, 2012 5:04 pm
    #

    Greg,

    Is there anyway I can offer a tax donation for donated used clothes without having to incorporate into a 501(c)(3)?

    • Greg McRay June 11, 2012 10:18 pm
      #

      Unfortunately, no. That is, unless you can get an existing charity to take responsibility for your project and that charity can issue the tax deductible receipt.

  10. Eric Joseph May 15, 2012 10:09 am
    #

    I have quick question. I am setting up a foundation called “The Holla Foundation” which main pupose is to pursue justice and mercy for the black male. We will be educating colleges, companies, churches and community leaders on what how to understand and empower black boys and black men. We will be raising funds across the country to fund #1 our Holla If You Hear Me Tour and #2 to fund organization we feel our doing the best the job at meeting needs of black boys and black men. I want to set-up a non-profit 501(c)3, not sure how I should do it as a foundation. There is a religious component to it, but that’s not all it is. Please advise?

    • Greg McRay June 11, 2012 10:16 pm
      #

      Foundation is a term that gets thrown around a lot in the nonprofit world. What you are describing is a public charity, not a true foundation. That being said, there is nothing that prevents you from using term in your organization’s name.