Running A Business

How to Start a Nonprofit Organization

Nov 20, 2023 • 10+ min read
Volunteers working for a non profit small business
Table of Contents

      So you want to start a nonprofit. While this is a noble pursuit, it’s hardly an easy one. You’ll need to approach it with the same focus and determination as any other entrepreneur.

      “Starting any new business is difficult,” says a nonprofit startup report from Forbes. “You need to find investors, drum up interest, get your name out there, and have a strong vision of what your business will be and aim to achieve. In some ways, starting a nonprofit is the same as starting any other business, and in other ways, it is a lot different.”

      This guide will walk you through many of the crucial steps required to getting a nonprofit organization up and running. If you already have small business experience, you’ll find plenty of overlap that will help you move through the steps faster.

      What is a nonprofit?

      A nonprofit organization is a business entity that has been granted tax-exempt status by the Internal Revenue Service (IRS) because it furthers a social cause and provides a public benefit. Unlike for-profit businesses, nonprofits are not established to generate income for their owners. Instead, all earnings are reinvested back into the organizations to propel their mission and cause. Nonprofits can be involved in an array of areas, such as education, scientific research, health services, environmental conservation, arts and culture, and more. But the common thread among all nonprofits is their commitment to public service.

      Common types of nonprofits

      There are numerous kinds of nonprofit organizations recognized by the IRS, each with its specific purpose and tax benefits. Here are three of the most common types:

      • 501(c)(3) – These are the most popular types of nonprofit organizations, comprised of religious, educational, charitable, scientific, and literary groups. They are exempt from federal income tax, and donations to these organizations are tax-deductible to the donor.
      • 501(c)(4) – This category includes civic leagues, social welfare organizations, and local associations of employees. They primarily promote social welfare. Contributions to these organizations are not tax-deductible.
      • 501(c)(7) – These nonprofits are recreational organizations. Think social and hobby clubs, like your local garden club or a community sports league. While they are exempt from paying income tax, the contributions to these organizations are not tax-deductible.

      Is a nonprofit right for me?

      Before starting a nonprofit, it’s important to evaluate whether this route aligns well with your personal and professional objectives. A nonprofit isn’t about personal gain—the primary goal is to make a difference in a cause you are passionate about. Are you inspired to make a significant societal impact? Do you have a vision that extends beyond a profit margin?

      Remember, running a nonprofit demands a considerable amount of effort, time, and responsibility. You’ll be bound by legal obligations, and you will be accountable to the public and your board of directors. Financial transparency is the norm and there will be compliance requirements you must meet.

      Also, consider whether you have or can develop the funding streams for a nonprofit. These might come from public and private grants, individual donations, or fundraising events. It’s not the same as running a for-profit business where you sell products or services.

      It’s worth speaking to individuals who already run nonprofits, attending related seminars, or even volunteering at a nonprofit to gain insight into what running such an organization entails. If the call to public service rings louder than anything else, and you’re willing to navigate the challenges, then starting a nonprofit could be the right move for you.

      How to start a nonprofit in 8 steps.

      Starting a nonprofit requires careful planning, commitment, and a thorough understanding of any legal, financial, and operational aspects. Remember, starting a nonprofit is not a sprint, but a marathon. It requires perseverance, and above all, a passion for the cause you are championing. With the right planning and execution, you can make a significant impact on the community you serve. Below are essential steps to follow:

      1. Identify a need and a solution.

      First off, what will your nonprofit offer to the community? You must identify an unmet need and then formulate how you could uniquely provide a solution. If this sounds familiar, it’s because it hews closely to a few of the key questions that entrepreneurs ask before they start a small business:

      • Is there market demand for my services?
      • Do I offer a distinct benefit to customers?

      In some cases, your market analysis will reveal multiple nonprofits in your city doing the same thing you intend to pursue. At that point, you need to either consider joining up with an existing organization or refining your approach, so that you can provide a distinct service.

      2. Build a foundation.

      Building a solid foundation is crucial for the longevity and success of your nonprofit. This involves some essential steps, such as creating a values statement, writing a mission statement, choosing your nonprofit’s name, and selecting a board of directors.

      Write a values statement.

      A values statement is a clear and concise declaration of your organization’s fundamental beliefs, guiding principles, and behavioral expectations. It serves as your organization’s moral compass, providing an ethical framework for decision-making and actions. Consider what principles you want at the core of your organization, whether that’s honesty, integrity, inclusivity, or something else that speaks to the heart of your cause.

      Write a mission statement.

      Your mission statement is a concise explanation of your nonprofit’s goals and the audience it serves. It should clearly answer three questions: 

      1. What does your organization do? 
      2. Who does your organization help? 
      3. What difference does your organization aim to make? 

      Developing a succinct, compelling mission statement is vital, as it communicates your organization’s purpose to potential volunteers, donors, and beneficiaries.

      Choose your nonprofit’s name.

      To begin branding your nonprofit as you progress through subsequent steps, you should choose a name for your organization. You’ll find it’s much easier to attract volunteers and secure funding when there’s an official name attached to your organization.

      Your organization’s name is often the first point of contact with the public and should reflect the mission and vision of your nonprofit. It should be memorable, meaningful, and easy to pronounce and spell. Check the availability of your chosen name with the U.S. Patent and Trademark Office (USPTO) to avoid copyright infringement and consider its internet searchability for your online presence.

      Check in with your most trusted friends or family members to get their thoughts on the name. Getting an outside perspective is essential because they might notice quirks or issues with the name that would never occur to you.

      Select a board of directors.

      Your board of directors will play a significant role in guiding your nonprofit towards achieving its mission. Select individuals who are passionate about your cause and can contribute valuable skills, resources, and time. Diversity in your board is beneficial as it brings a range of perspectives and improves the decision-making process. Your board should be composed of individuals who can support fundraising efforts, provide strategic direction, and uphold the ethical standards of your organization.

      3. Craft your business plan.

      All successful nonprofits are founded on solid business plans. Without this inherent structure, your ideas will flounder, and your progress will stall. Start by writing an executive summary, which is essentially your elevator pitch. In just a few sentences, articulate what you’re doing and how it will meet a critical need.

      Build upon the executive summary by adding supporting details about the services you’ll offer. You should also include financial projections, market analysis, organization and management, marketing strategies, and funding plans.

      As part of your research, you’ll need to identify how much money your organization will require in the first and subsequent years. Typical costs include:

      • Office space
      • Utilities
      • Internet
      • Office furniture
      • Computers
      • Copiers
      • Incorporation fees
      • 501(c)(3) fees
      • Website
      • Employees
      • Insurance
      • Signage
      • Licenses
      • Permits
      • Professional fees

      Of course, knowing how much money you need is only half the battle. You must then figure out how you will cover these costs and fund your nonprofit. There are grants available from sources such as grants.gov, but the competition is fierce, and approvals can be hard to come by. For this reason, you should never assume you’ll be able to cover all of your expenses with grants alone.

      Your ultimate goal will be to attract supporters from your community and beyond who will donate to your cause. But in the early days, you’ll need to get funding from more concrete sources.

      “To the degree possible, a new nonprofit should have a secure source of funding for operations for a minimum of three to five years, or until you can build a strong donor base,” says nonprofit expert Rachel Zelon. “When creating your business/nonprofit plan, this is an absolutely critical factor. You can have the best board and the best programs, but without secure funding, it will be extremely challenging to grow the organization.”

      Start by putting as much of your own money into the organization as possible. This necessary step shows lenders that you’re invested in your nonprofit and have skin in the game. You can also consider asking family members and friends for loans, though this can be a delicate situation. Rather than ambush relatives at Thanksgiving dinner, find ways to have respectful conversations with individuals who might be financially able to provide support.

      “The reality is nobody likes being asked to part with their money,” says a borrowing guide from U.S. News. “And when you make an arrangement to borrow cash from a friend or family member, you put yourself at risk of creating a strain in your relationship if expectations aren’t met, your repayment plan is vague, or you fail to make a payment on time. But as challenging as it can be to ask someone like a parent or pal for money, it can be an even greater struggle to pay him or her back, depending on your financial situation.”

      To avoid these types of familial disasters, never attempt to borrow money unless you can offer a repayment plan. It’s not enough to simply nod and say, “Don’t worry, I’ll get this back to you.” Lay out a timeline and then stick to it.

      Next, look at alternate sources of funding. Loans can be tricky for nonprofits because lenders may have doubts about your ability to repay any money they might provide you. This uncertainty isn’t a personal indictment against you, but rather an assessment of the tenuous nature of most nonprofit organizations.

      Fortunately, there could still be some good financing products available to you. The best approach is to research the options and then find a lender that is willing to partner with you. While your funding options will depend on your unique circumstances, possible options include:

      1. Business term loans
      2. Short term loans
      3. Commercial mortgages
      4. Business lines of credit
      5. Business credit cards

      Locking down your funding will be essential to progressing and getting your nonprofit off the ground. Always include milestones in your plan so the goals are trackable. You want it to be clear and actionable, so that you can measure your progress against it at any point.

      You might have heard at one time or another that business plans can be treated informally. Some entrepreneurs just scrawl out some general notes on a piece of paper and call it a day. The problem with this approach is that it won’t be detailed and organized enough to follow with precision. Also, you’ll be up a creek without a paddle when lenders and other outside parties request to see your plan as part of a formal review.

      4. Build your network.

      You’ll never hear the words “sole proprietor” and “nonprofit” in the same breath. The main reason for this is that it takes a team to get anything of value done in the nonprofit space. The earlier you start reaching out to your contacts and finding like-minded people who are willing to help, the better shape you’ll be in. Tto survive as a nonprofit, you will probably need board members. And from a practical standpoint, you simply won’t have enough time and energy to single-handedly carry out all the functions of your organization. Volunteers, corporate supporters, and nonprofit partners are a must.

      “Growing your professional network doesn’t just mean quantity—quality can be just as important (if not more),” says Forbes contributor Dana Brownlee. “Instead of focusing only on doubling your number of contacts, also consider how you can deepen the connections you already have. Don’t wait until you need something to reach out to an important connection you’ve recently made. Instead, intentionally reach out to a colleague or new connection when you don’t need anything.”

      By proactively reaching out to grow your network, you’ll be in a prime position once you begin your branding and marketing efforts. People will be more receptive, and you’ll be able to connect with those who share your vision.

      5. Add the structure to your plan.

      With funding and your team in place, you’re ready to get your organization officially organized. This process starts with incorporating your nonprofit. The exact regulations will depend on what state you’re based in, so reach out to your state’s association of nonprofits to get the details.

      Here are some of the steps you will likely be required to complete in the incorporation process. Remember, this is only a general outline, and the specifics vary based on your location.

      • Select your organization’s name
      • Assemble a board of directors
      • Structure your organization as either a trust, association, or corporation
      • File all necessary paperwork
      • Apply for your tax-exempt status
      • Finish by applying for any licenses or permits needed

      There are ample resources available to help you navigate the incorporation and tax-exempt filing. Start with these helpful tutorials from the IRS. You should also want to read Publication 557, which covers all the details you’ll need to know before filing with the IRS.

      You will also need to obtain an Employee Identification Number (EIN) for your organization. To learn how this is done, simply check out the application page created by the IRS.

      Finally, your organization will need a bank account. The simplest approach is to open a business account with the same bank where your private accounts are held. Because they’ll already have all your information, the application should be a breeze.

      Another option is to research different banks and find one that offers a sign-up incentive for new accounts. This bonus can be a great way to score extra cash for doing something that you needed to do anyway.

      6. Establish your presence.

      Think about where you’ll base your organization’s operations. There are times when you might be able to use a home office, which is obviously the most cost-effective way to go. If you opt for this route, be sure to do your research beforehand. Every area has zoning ordinances that will impact how you set everything up.

      Many nonprofits eschew the home-based route because they require the space and infrastructure of a separate office. This is definitely a more involved process. After scouting out a proper location, you will need to handle lots of details and paperwork.

      Beyond the physical location of your nonprofit, you should also think about positioning your business online. You’ll need to buy a domain associated with your name. Best practices are to choose a domain name that is concise, easy to type, easy to pronounce, and memorable, and doesn’t include hyphens or other symbols.

      After purchasing the domain, sign up for autopayments to eliminate the risk of missing payments. You want this to be your sole domain for the life of your nonprofit.

      To complement your web presence, open social accounts for your organization. You may not have plans right now to use Facebook, Twitter, Instagram, LinkedIn, and YouTube, but you should still create the accounts now. This way, you’ll control the name and can sit on the accounts until you decide to activate them at a later date.

      7. Hire staff members.

      In the initial stages, your nonprofit might rely heavily on volunteers. However, as you grow and your operations expand, you will need to start thinking about hiring staff members. The workforce forms the backbone of a nonprofit organization, so it’s crucial to hire the right individuals who share your vision and are committed to your cause.

      Start by identifying your staffing needs. What roles need to be filled? Do you need an operations head, a fundraising coordinator, an accountant, or a program manager? Once you’ve determined the roles, create detailed job descriptions for each position.

      When hiring staff members, prioritize those with experience in the nonprofit sector. Passion for the cause is important, but practical experience and knowledge of the industry are equally vital. Conduct thorough interviews, request and check references, and ensure your chosen candidates align with your organization’s mission and values.

      Also consider the legal aspects of hiring. Familiarize yourself with employment laws, benefits, and payroll taxes. It might be helpful to consult with a human resources professional or employment lawyer to ensure you’re in compliance with all regulations.

      Remember, hiring the right people can greatly propel your organization’s progress, so take the time to make thoughtful hiring decisions.

      8. Automate, automate, automate.

      The life of a small business owner is always busy, but the situation can be even more intense for those running nonprofits. Plan on having more daily duties than you could ever handle, which is why it’s so important to pass some on to digital tools.

      “There are so many free tools available for you,” says nonprofit expert Philip Manzano. “And depending on where your organization is in their growth, there are some great paid options as well. Time literally is money in this sector, so anything that helps you save time is a wise investment. Efficiency tools and nonprofit management software can make your job much easier.”

      Here are some recommended tools that can take tasks off your plate, reduce errors, and consolidate your efforts into one handy place.

      • RescueTime – Use this app to track your time online, set goals, and manage your efforts throughout the day. If you struggle to stay focused, this could be just the ticket.
      • TripIt – If your organization will require frequent travel, consider a tool like TripIt. You’ll find it’s easy to manage travel arrangements and keep in touch while traveling.
      • Quip – This workflow solution helps you set goals and hit milestones. Most importantly, it brings your team together in a way that improves collaboration.
      • 17hats – Data security is a major issue in today’s world, so the protection you get from project management app 17hats provides peace of mind. It works as a hub for everything from invoices to contracts.
      • Marketo – There are so many different marketing channels to keep track of, which is why tools like Marketo are so helpful. Your life becomes easier when your digital, email, social, and mobile marketing are all housed in a single place.
      • Deluxe – If you have employees, you’ll need to handle a set of regular duties related to payroll. This tool automates these tasks so you have more time to focus on other priorities. Best of all, the software saves you money by helping reduce errors.
      • QuickBooks – Let this tool take care of your expense reports so you don’t need to stress about them. QuickBooks will also help you track mileage and keep your organization’s information more secure.
      • Mailchimp – Gone are the days where you need to sit at a desk, endlessly clicking “send” on your emails. Mailchimp launches your communications automatically and offers a suite of tracking tools to make sure you’re getting the most from your efforts.
      • Hootsuite – Don’t let social media consume your day. Hootsuite is a one-stop shop for all your channels, allowing you to automate posts and keep track of their performance.
      • Slack – Keeping in touch with your team is essential if you want to reach your goals and grow as an organization. This popular app makes it easier than ever while also adding project management tools.
      • Square – For sales and donations, it’s important to have a good point-of-sale solution in place. Square is one of the most user-friendly. Just plug the card reader into your tablet or phone and you’re ready for action, with the software sending a receipt straight to the customer after the transaction.

      Putting it all into place.

      As this guide illustrates, there are many steps to setting up your organization. The thing to remember is that you don’t need to shoulder the full burden. Delegate tasks to your team and give them the opportunity to contribute in meaningful ways. You can also count on your digital tools to save time and money.

      Collaboration is key in the nonprofit world. Working together with your team, you can build the kind of momentum that will help your organization thrive in its first year and beyond.

      FAQs

      Yes, you can earn a salary from a nonprofit. Nonprofits need full-time staff just like any other business. The key difference is that in a nonprofit, the profits are reinvested back into the organization’s mission rather than being distributed to shareholders or owners. As an employee, you’re paid for your work, just like you would be in a for-profit organization. 

      However, it’s essential to ensure that salaries are reasonable and not excessively high as it could raise ethical and legal issues. Remember, the primary goal of a nonprofit is to serve the community, not to generate wealth for individuals.

        

      Absolutely, the founder of a nonprofit can draw a salary for the work they do. Just like any other position within the organization, if the founder performs operational tasks or serves in a specific role such as the CEO or Executive Director, they are entitled to fair compensation. However, it’s important to be transparent about this fact. The salary must be reasonable and not excessive, and should be in line with what other nonprofits of similar size and type pay for similar roles. 

      This ensures that most of the funds are being directed towards realizing the nonprofit’s mission. It’s also worth noting that the process for determining and approving the founder’s salary should be clear, fair, and documented to avoid any conflict of interest.

       

      Starting a nonprofit can vary in timeline based on several factors, including the complexity of your organization, the state you’re incorporating in, and how quickly the IRS processes your application for tax-exempt status. Overall, the process from concept to fully operational nonprofit can take anywhere from six months to a year or more. 

      It’s important to remember that planning and setting up a nonprofit should be a thoughtful process, not a race. Taking the time to plan and organize effectively can set your nonprofit up for a successful future in the long term.

      Theoretically, yes, it is possible to start a nonprofit organization without money or with very minimal funds. However, it’s important to be pragmatic about the costs involved in establishing and running a nonprofit. There are unavoidable expenses, such as filing fees for incorporation and tax-exempt status, costs for website creation and hosting, and potential expenses related to events or fundraising activities. Not to mention, if you plan to have staff, there will be salaries to consider. 

      While you can rely heavily on volunteers and in-kind donations in the initial stages, as your organization grows, so will its operational costs. Therefore, it’s strongly recommended to have a clear financial plan and some seed funding when starting a nonprofit.

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      About the author
      Grant Olsen

      Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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