Maybe it’s supporting students while they reach their full potential. Helping a community in need. Caring for neglected animals. Housing the homeless. Raising money for a local sports team. Whatever it is, we’ve all got a cause we care about. The hard part is figuring out how to help. The reality is, you’ll do more good (and raise more money) if you start your own nonprofit organization (NPO)—like Y’all did in Indiana. But, how do you start a non profit in the US? What is a nonprofit organization? Is it different that a NGO? What does a 501(c)(3) have to do with it? How much does it cost? Where do you start?
Phew. Let’s start by exhaling and going over a few definitions.
What’s the difference between a nonprofit, a charity, a NGO, and a foundation?
The nonprofit world takes a little getting used to. But, once the basic are understood, the rest kind of all just falls into place. And, when in doubt, help isn’t all that far away. So, before we go any further let’s look at a few definitions that most people use interchangeably—but they aren’t necessarily the same thing. An organization can be a nonprofit, a charity, a NGO or a foundation—or all of them. We know, confusing. So, let’s start with some definitions.
A nonprofit organization is:
“Nonprofits are organizations whose missions are to serve the public good.”1
The simplest definition of a nonprofit is an organisation that is not driven by profit or personal gain.2 That means that all the money they raise needs to be invested in overhead (the costs of running a nonprofit such as day-to-day expenses, salaries, new projects, etc.) or their mission.
“Think of nonprofits as organizations working towards a cause, such as reducing hunger in a community or protecting endangered species in a region.”3
Nonprofits can be community-based organizations such as local sports teams or venues, chambers of commerce or even volunteer fire departments as well as breakfast clubs, animal shelters, and second hand clothing stores. The only rule: profits need to be reinvested into the nonprofit or into the cause.
A charity is:
The difference between a nonprofit and a charity isn’t super obvious. All charities are technically nonprofits, but not all nonprofits are charities. (We know. It’s confusing.) The main difference is that charities have to help those in need and the must operate free of political affiliation.2
The IRS has a few other criteria to help them define what a charity is:
- Funds need to be directed to a specific cause.
- They must have a mission focused on an officially charitable objective.
- The need to benefit the public and provide a positive impact.
- And, the can not be associated to any political parties, etc.
A NGO is:
An NGO is a non-governmental organization. A lot like nonprofits and charities, NGOs are tricky to define. But, an NGO can be loosely defined as a nonprofit organization independent of the government. (Although they can still accept government funding.) If this is all sounds unfamiliar, don’t worry, NGO isn’t a widely used term in the United States.1
NGO tend to work in the environmental, social, advocacy and human rights sectors to promote social or political change. This means they are usually more international and can help develop societies, improve communities, and promote citizen participation.1
A foundation is:
Foundations are also technically nonprofits and are created to support other nonprofits and charities, mostly by awarding grants. According to Candid, there are “two foundation types: private foundations and grant-making public charities.”1,3
A private foundation’s endowment (initial sum of money that the foundation is funded by) comes from a family, an individual, or a corporation.
A public foundation (or grant-making public charity) gets its money from a variety of sources, both private and public.
What does a 501(c)(3) have to do with starting a nonprofit?
Nonprofits, charities and foundations all have one thing in common: they can all qualify to be tax exempt by the IRS. Most nonprofit organizations in the US have been granted 501(c)(3) status, and it exempts nonprofits from paying federal income tax and allows donors to deduct donations from their income.3,4
A nonprofit must register with the Internal Revenue Service (IRS) in order to become tax-exempt. Being a 501(c)(3) organization allows you to be the recipient of most foundation and corporate grants.
There are a few other types of tax-exempt 501(c) organizations—501(c)(1) – 501(c)(29)—we’re sticking to 501(c)(3) status in this article.
501(c)(3) status doesn’t just give nonprofits benefits at the federally level, most states allow nonprofits with 501(c)(3) status to be exempt from state income, sales, and property taxes.5
To qualify for 501(c)(3) status, a nonprofit must be supporting one or more of the following:
- Testing for Public Safety
- Fostering of national or international amateur sports, and
- Prevention of cruelty to animals and children
Nonprofits have to file Form 990 with the IRS each year.
How much does it cost to start a nonprofit organization in the US?
The cost of starting a nonprofit in the US depends on a lot of variables: Which state your nonprofit is based in, will you be paying a lawyer to apply for you, does your nonprofit qualify for the 1023-EZ? But, on average it will probably cost somewhere between $1000 and $2000 to actually get your nonprofit recognized as an official nonprofit.6
- Incorporating with your state: $50-$400
- File form 1023 with the IRS: $275-$600
- Legal fees: $0-$5000 (We know, this isn’t very helpful, but there are pro-bono or low-bono firms (like Charitable Allies) out there that want to help.
How to start a nonprofit organization with no money:
Well, it’s hard to start a nonprofit organization with no money… We thought this would be a good place for our TL;DR on how to start a nonprofit in the United States.
How to start a nonprofit: the prep. work.
Starting a nonprofit: differentiate yourself.
Before starting a nonprofit, ask yourself what the purpose of your organization will be and what population you will serve. There are probably other nonprofit organizations working in your field, so doing a little research can help differentiate your organization and, once you’re up and running, make fundraising a lot easier. These similar organizations will also probably be willing to help you out with advice, resources, etc.
Try to identify a specific challenge you feel is unaddressed or a new solution that hasn’t been tried before. This will help your organization stand out.
For example, there is probably at least one organization combating food insecurity in your area. Creating another food bank or soup kitchen could be a challenge if there are already established organizations providing this service. However, your organization can still stand out in terms of the solution it offers. Perhaps your organization will be the first to work with local farmers to provide free meals and combat food waste. Maybe you will focus specifically on people with limited means of transportation and focus on delivering meals rather than collecting food. While the problems we face are clear, the solutions often are not. Don’t be afraid to try something new or innovative to assist in your mission.
Starting a nonprofit: recruit a board of directors.
Next, start to compile a list of potential board members. Many states require a list of directors to incorporate. Regardless of whether or not your state requires you to list a board of directors, it’s still a good idea to put together a list of people who have connections to the community/cause you want to serve. Think: President, Vice President, Secretary and Treasurer.
Starting a nonprofit: write some bylaws.
Next up: write a set of bylaws for your nonprofit organization. 501(c)(3) tax exempt organizations in the US are required to have governing bylaws and report changes to these laws in order to ensure continued compliance with both IRS regulations and the organization’s mission.
How to start a non-profit: name your non-profit organization.
There are over 1.5 million nonprofit organizations in the United States—which makes naming yours no easy task.
Each state has its own specific rules about naming a nonprofit. Make sure to double check the regulations in your state before investing too much time into the naming process. You should select a name that conveys your mission, sounds unique and, optimally, also has an available URL.
How to start a non-profit: incorporate your nonprofit organization.
You’ve defined your mission, contacted directors, drafted bylaws and, most importantly, chosen a name. Now comes the fun part—incorporating.
You need to file articles of incorporation with your state’s corporate filing office before your nonprofit applies for 501(c)(3) status. Each state has their own process and regulations. (Texas and California are a little more involved.)7
How to start a non-profit: get a federal tax ID number (EIN).
A federal employer identification number (EIN) allows your nonprofit organization to hire and pay employees, open business bank accounts, apply for 501(c)(3) status and allows the IRS to track your organization’s activity.
How to start a non-profit: file for tax-exempt status—AKA how to make your nonprofit a 501(c)(3).
After you’ve incorporated your organization and gotten an EIN, you can apply for tax-exempt status from the IRS. Depending on the size of your organization, you will do this by filling out either form 1023 or 1023-EZ.8
Form 1023 applies to larger organizations and requires more information, while 1023-EZ is a condensed form for smaller organizations. To qualify for the EZ form, your organization must have less than a quarter-million dollars in assets and less than fifty-thousand dollars in gross annual receipts.9,10
In both cases the IRS requires you to read the instruction form and fill out the worksheet at the end of the instructions.
When filing for tax-exempt status, the IRS requires the following information:11,12
- Employer identification number (EIN).
- Organizing documents (such as your articles of incorporation)
- A statement of your organization’s purpose—scientific, religious, educational etc.
- A current copy of your organizations bylaws (if you have them)
- A description of your organization’s activities.
- Financial data (such as a balance sheet of expenses and revenues) OR, if you’re new, a proposed budget for 2 full accounting periods and a current statement of assets and liabilities.
You’ll also need a pay.gov account to file your 1023-EZ form.
How long does it take to start a nonprofit?
Applying for your articles of incorporation can take anywhere from 24 hours to 3 months.
It can take up to 6 months to hear back from the IRS.
So, it’s important to make sure all your documents are in order. We recommend having your applications at least looked over by a pro-bono or low-bono organization such as Charitable Allies.
You’ve been approved—now what?
Congratulations! You now have a fully incorporated and tax exempt nonprofit organization.
Although you don’t have to renew your 501(c)(3) status, you will need to demonstrate your organization’s compliance with government regulations and commitment to its mission.
Most of the time, this means filing Form 990 with the IRS. Form 990 shows your activity, key staff and board members, and the finances of your organization.
Similar to any for-profit corporation, keeping detailed records of salaries, receipts, expenses, and assets is essential both for personal and public records. Oh, and be sure to check the financial reporting requirements for your state as they vary across the country.