Do you envision working for a noble cause but don’t know where to start and don’t have enough financial resources to back your goals? Reading this article would give you a vivid idea to tread your way for starting up your organization.
Starting an organization takes a lot of money, intensive planning, and a dedicated team that would be able to project your idea into reality. But if you have to plan a nonprofit organization with little or almost no money with no profit, you will need a comprehensive guide to tread your way through the process.
It is crucial to set the vision for your organization because that is going to set the foundation for the rest of your organization’s structure and work. Because you have to put up the plan to your donors who should be convinced enough to give you money to run the organization.
Also, you have to public the expenses, and outcomes of the organization to the audience who would need the assurance that their money is being spent on the right cause. All of it cannot occur without a comprehensive plan and strategy to project. You have to be careful in hiring people who would be dedicated to loving the cause as you do because dedication is the driving force for working for a nonprofit cause.
In order to make a start, you should know how to start a nonprofit organization so that you don’t miss any authentic step on your way and would be able to project your idea in the best possible manner.
What is a nonprofit organization?
A nonprofit organization is a business that is exempted from all kinds of taxes by the Internal Revenue Service (IRS) because it extends a social cause and provides a public service to the people of a country. Donations to these organizations are tax-deductible, to individuals and businesses that make them, and the organization itself does not pay any tax on the received donations or any money earned through the fundraising activities.
The nonprofit organization is also called a non-business entity, not-for-profit organization, and nonprofit institution. It is a legal entity, organized and operated for a collective, public, or social benefit, in contrast with an entity that is there to generate profit for the owners and the workers. A nonprofit is subject to non-distribution, which means any revenues that exceed the expenses of the organization must be committed to the larger purpose of the institution, and not taken by the private parties.
There is a variety of nonprofit organizations such as political organizations, business associations, schools, social clubs, churches, and consumer cooperatives. Nonprofits seek approval from the government for tax exemption or may qualify to receive tax deductibles.
Unlike business organizations or profit organizations, which have to prove their credibility by the amount of revenue they generate on that basis they entrench their position, nonprofit organizations, on the other hand, have to be reliable and maintain accountability, honesty, trustworthiness, and openness to every person who has invested their time, money, and faith into the organization.
Nonprofit organizations are accountable to the founders, donors, program recipients, volunteers, and public community. Because they don’t have internal revenue to run the cycle of the organization, they seek to finance their operations through donations; public confidence is the factor in the amount of money that a nonprofit organization is able to raise. The more the institutions focus on their mission, the more they will gain public confidence, which underpins the foundations and will bring more money for the organization.
According to National Centre for Charitable Statistics (NCCS), there are 1.5 million nonprofit organizations are registered in the United States, including private foundations, public charities, and other nonprofit organizations. Since 2014, the private charitable contributions have consecutively made an increment every year at an estimated $410.0 billion till 2017. Out of this contribution, religious organizations received 30.9%, education organizations received 14.3%, and human service organizations received 12.1%.
The mechanism for raising money
Nonprofit organizations do not generate internal revenue as they don’t sell any goods or services to gain profit, but they need money to fulfill their purpose of existence. So, they take different ways to gain money to run the daily workings of the organization. This includes income from donations, individual donors and foundations, government fundings, programs, sponsorship from corporations, services, merchandise sales, and investments.
Each NPO is unique in how they generate money, or which income source is best for them. Within an increasing number in the last decade, the organizations have adopted competitive advantages to create revenue for themselves to remain financially stable. Donations from private individuals and organizations cannot be static and keep changing each year, and government grants may also diminish at times. Given these changes from year to year, the nonprofits have diversified their channels of donations and income to increase their funding. For example, many nonprofits who have long been relied on government grants have started fundraising efforts to appeal to individual donors.
Nonprofit vs. not-for-profit
Although the terms nonprofit and not-for-profit may seem similar, they do not mean one and the same thing. Both are organizations that do not generate revenue/make a profit but need money to sustain their mission. The income both organizations receive is used differently. Nonprofits return the exceeding amount of money to the organization to further the cause of the institution, while not-for-profit use their excess money to pay their workers.
Another difference between nonprofit and not-for-profit organizations is their mode of membership. Nonprofits have volunteers and workers who do not receive any money from the organization’s fundraising efforts and work in faith for the noble cause of the organization. They may earn the salary for their work which is independent of the money that the organization has fundraised. Not-for-profit organizations, on the other hand, have the opportunity to benefit from the organization’s fundraising efforts.
In the United States, both nonprofit and not-for-profit organizations are tax-exempted under IRS publication 557. But despite that, both organizations face different tax code requirements. A nonprofit is tax-exempted under 501 (c)(3) requirements if it is either a charitable, religious, or educational-based organization that does not influence the state and federal legislation. Not-for-profit, on the other hand, is tax-exempt under 501 (c)(7) requirements if it is an organization for recreation, pleasure, and another nonprofit purpose.
Nonprofits are either member-serving or community-serving. NOPs which are member-serving create a benefit for the members of the organization and can include sports clubs, credit unions, and advocacy groups, but they are not limited to only these groups. Community-serving nonprofit organizations focus on providing services to the communities either locally or globally. They deliver aid and development programs, education, medical research, and health services. It is possible for a nonprofit to be both member-serving and community-serving at the same time.
Management of the nonprofit organization
A common misconception about nonprofit organizations is that they are completely run by volunteers whereas, in fact, most organizations have a professional staff that works for the company, possibly using the services of the volunteers who perform the nonprofit services under the direction of the paid staff. The organization has to strike a balance between the salaries paid to staff against money paid to provide services to the NPO’s beneficiaries. Because this balance is not taken care of, organizations may face scrutiny.
Another popular belief is that nonprofits don’t make a profit at all. Although the primary goal of the organization is not to maximize the profits, as they have to operate as a fiscally responsible organization, they must manage their income and expenses to remain a financially stable entity. They have the responsibility to focus on being financially responsible professionals, replacing self-interest and profit motive with mission motive.
Although NPOs are managed differently from profit-generating businesses, they have felt substantial pressure to act more businesslike. To cater to public and private business growth in the public service industry, nonprofits have molded their business management and mission, shifting their typical agenda to more sustainability and growth.
Setting effective missions is the key to the successful management of the organization. They have to take care of three important elements for effective missions:
One way of managing a sustainable organization is by strengthening its relationship with the donor groups. For that, NPOs require donor marketing strategy which many of the organizations lack.
Types of a nonprofit organization
There are over 1.6 million registered nonprofit organizations in the United States which are usually tax-exempt and work for the welfare of society. This includes a variety of organizations providing goods and services to the people, such as universities, hospitals, churches, national charities, and foundations.
A nonprofit must serve the public in some way and has to showcase its financial and operating information open so that the donors have a good idea of where and how their money is utilized. In order to get the tax-exemption status, the organizations have to request 501 (c)(3) status from the Internal Revenue Service (IRS). Once they are registered by the agency and start running, they have to abide by the rules and maintain compliance with the appropriate state agency that regulates the charitable organizations.
Based on their delivery of the service, there are majorly 27 different types of nonprofit organizations. Each designation has its own articulated rules for eligibility, lobbying, employment, electioneering, tax-deductible contributions.
IRS provides details of these organizations, which is briefly mentioned below:
These are the nonprofit organizations that are set up by an Act of Congress, such as federal credit unions. Since these organizations are organized by Congress, there is no application and don’t file a request for tax return. They are granted permission in case the contributions are made for the greater good of the public.
These nonprofit organizations are created to hold titles for exempt organizations. Those who are interested must apply for this status with IRS form 1024. They have to file taxes on an annual basis with Forms 990 and 990EZ.
501 (c)(3); charitable organizations
An overwhelming number of nonprofit organizations fall in the category of 503 (c)(3), which includes religious, charities, educational, scientific, and literary organizations. Donations made to these organizations are tax-deductible.
Public charities are the largest type of 503 (c)(3) with nearly 1 million in the country. Some examples include museums, art groups, food banks, low-income housing organizations, colleges, and animal welfare organizations. Charities are usually funded as donations, membership dues, or government grants. All income to these organizations is tax-exempted.
The following five types of organizations come under 503 (c)(3):
- Private foundations
- 509 (a)(1)
- 509 (a)(2)
- 509 (a)(3)
- 509 (a)(4)
501 (c)(4); Civic league, social welfare organization, or local employee association
Civic leagues, local employee associations, and social welfare organizations come under the category of 501 (c)(4). The agenda of this type of organization is to support the members who may have fallen on hard times and the general welfare of the members of the organizations. They face few restrictions when it comes to involving in political activities such as lobbying. Organizations can apply for this designation with form 1024 and file annual returns with forms 990 and 990EZ.
Agriculture, labor, and horticulture organizations fall under this category. The agenda of this type of organization is to provide education improvement of the quality of the working conditions such as quality and efficiency. They are granted permission from the IRS to engage in political activity such as lobbying, and they receive funding from donations and member dues.
501 (c)(6); Trade or professional association
Some examples of this type of NOPs are chambers of commerce, business leagues, and real estate boards. They work on improving business conditions for the members, and for fulfilling their tasks, they are also granted permission to engage in political activities. Typically, they are funded by member dues and offer and organize services and programs for member education.
There are approximately 600,000 501 (c)(6) organizations. Some of the well-known examples of this type are the American Farm Bureau, the International Association of Meeting Planners, and the National Writers Union. NOPs, who are seeking this designation will file a request through form 1024 to IRS.
501 (c)(7); social and recreational club
The 501 (c)(7) organizations are exempt from federal income tax and work for recreation, pleasure, and socialization. They plan and organize events and activities that lead to goodness for the people, such as hobby groups, country clubs, and sports leagues.
To get this designation for your nonprofit organization, you must apply for form 1024, while tax returns are filed with Forms 990 and 990EZ.
501 (c)(8); fraternal societies
The aim of these organizations is to provide services to the people such as payment of life, accident, sickness, or other benefits to the member and further development of the people beneficiaries. These organizations include lineage clubs, service clubs, or secret societies.
In order to qualify for these designations, the NOPs are required to have parent and subordinate organizations. Besides, they must provide some sort of insurance to the members. Some well-known examples of the 501 (c)(8) in the country are Knights of Colombus and the Shrines.
501 (c)(9); employee beneficiary association
Nonprofit organizations of 501 (c)(9) are volunteer employees’ beneficiary associations. They arrange payments to the members and their families in times of sickness, accident, and other misfortunate and unexpected events.
Membership is reserved for the employees with a common employer or membership in the same union. NOPs can file an application for this designation through 1024 file to the IRS and tax return through file 990 and 990EZ.
501 (c)(10); domestic fraternal societies and associations
While 501 (c)(8) fraternal organizations work to benefit the members, 501 (c)(10) are the fraternal organizations that take member dues to help those outside of the organizations. Organizational members don’t get benefits from the institution.
501 (c)(11); teacher’s retirement fund association
501 (c)(11) nonprofit organizations manage the teachers’ retirement fund and help the teachers’ community. According to IRS rulings, the organization must be locally organized and funded through membership dues, tax proceeds, and investment income. The majority of the members must be teachers but it is not firmly restricted as members can be non-instructional school employees.
501 (c)(13); cemetery companies
These nonprofit organizations are created for the sole purpose of providing burial services. The polt owners of the organization are the members and the organization provides services of the disposal of the human bodies by burial and cremation.
501 (c)(14); state-chartered credit union and mutual reserve fund
501 (c)(14) are state-chartered credit unions and mutual reserve funds with the aim to provide financial services to the members and the community, typically at discounted rates. They get their income from government grants and business activities. Each state’s law differs to create this type of organization and there is no requirement for the application form but these organizations must file Form 990 and 990EZ on the annual basis.
501 (c)(15); mutual insurance companies association
These nonprofit organizations extend insurance to the members at cost for property damage, burial, and funeral. Typically, these organizations are formed at the local level.
501 (c)(16); cooperative organizations to finance crop operations
Typically, these organizations are created by a group of farmers to work together to pool maximum resources for agriculture operations. Some examples of those operations include farm equipment, livestock, crop cultivation, shipping, and marketing.
501 (c)(17); supplemental unemployment benefits trust
These organizations exist to provide support and financial assistance to individuals who are permanently or temporarily unemployed. The member of this organization is employees and employers, who support the individuals in an objective manner.
501 (c)(18); employee-funded pension trust
This type of organization is created to benefit the members by establishing retirement plans. This type of plan was originally established by the unions to allow employees to fund their pension benefits. Money held for the plan can only be used to payout pension benefits to participating employees.
501 (c)(19); veterans organizations
These types of organizations are considered eligible in case 75% or more members of the organization are active or past members of the armed forces. The purpose of the organization is to provide benefits for the United States Armed Forces members. Most of the organizations are funded through donations.
The IRS tax exemption status applies to the “qualified group legal services plan”. But this status was eliminated in June 1992. Prior to that, this type of organization was providing legal services to the members. Following the 1992 ruling, the organizations have able to request a status change to 501 (c)(9) voluntary employee benefits associations.
501 (c)(21); black lung benefits trust
These nonprofit organizations have been created to pay claims that arise from the Federal Black Lung Benefits Act of 1969. These trusts are created by coal mine operators, and the workers in coal mines who get sick due to black lung disease are eligible for the benefits.
501 (c)(22); withdrawal liability payment fund
These nonprofit organizations help the employers who are withdrawing from multiemployer pension funds by providing funds to meet liabilities. The purpose of the organization is to help the employees to fulfill their pension obligation and get funding from the employers.
501 (c)(26); state-sponsored organizations providing health coverage for high-risk individuals
For those who cannot get insurance from any other means, these organizations come to their help in high-risk situations. These are created at the state level and members are usually the patients with health risks or preexisting conditions. Examples of states with such high-risk insurance pools are North Carolina, Indiana, and Louisiana.
501 (c)(27); state-sponsored workers’ compensation reinsurance organization
These organizations are state-sponsored and provide insurance for workers’ compensation programs. Organizations that provide workers’ compensation are required to be a member of these organizations and pay dues. They acquire their income from government grants and member dues.
501 (d); religious and apostolic association
501 (d) are religion-based groups that share a common treasury. The defining feature of the organization is to pool all members’ income and pay tax. There are no political restrictions on these types of organizations.
501 (e); cooperative hospital service organizations
These are typically service organizations that look to support sick patients and their families. 501 (e) organizations provide cooperative services to two or more hospitals while getting economic resources from donations.
How to start a nonprofit organization?
After having a detailed understanding of what a nonprofit organization is, how it works, and what are different types of these organizations are, if you plan to create your own organization, you should pay heed to the following steps to launch a successful nonprofit organization.
As every successful institution has a tremendous start-up strategy, you also need to work hard on formulating a great strategy that will not only help you to start an organization but will support you to sustain and thrive in the future.
Here is a step-to-step guide for you to formulate an effective strategy for starting a nonprofit organization:
Have a vision, have a business plan
Having a robust idea is crucial for your business. Without a vision and plan, you can’t figure out other steps properly. Formulate a plan that attracts the helpers and donors and thoroughly explains the vision and purpose of your organization. This way, you will be able to exempt the taxes.
You should formulate a vision statement and mission statement. Your vision statement will explain why you are starting an organization while the mission statement will lay out how you are going to manifest your vision in a concrete manner.
Research how much money you need
You will only be able to engage in any actual fundraising as a tax-exemption organization in case you have a business presence and nonprofit status. This cannot be the case that you pay a small amount of fee to the government and speed up the process. Your attorney can help you walk through the process but you have to pay a $1,000 fee to the state and federal government.
This process can take months and you may have to pay the fees to an attorney. You can raise this amount from the stakeholders if you keep your records high.
Make a list of potential donors
You should start with your family members and friends and make a list of people you know who may contribute to your cause with tax-deductible contributions. After that, you can ask small local clubs such as faith groups, women groups, and others. These organizations may ask you to make a presentation to promote your cause.
Local banks also provide some dollars to the charities, and some advocacy groups such as National Urban League also give some money so you can contact them. You can also contact local businesses that may be interested in giving money and providing help especially if it is in the neighborhood and infected by the organization.
While you are dealing with this number of people, you should never stop talking about your vision to as many people as you can because you never know who is ready to contribute to a positive cause.
Create a board of directors
At the top of the organizational structure is as an Executive Director and a Board of Director who would be responsible for at least the following task for the positive impact on the organization:
- Give the organization credibility in the community
- Act as an advisory board during board meetings and beyond
- Create contacts for fundraising and finding funders
- Act as a fundraising vehicle to raise funds itself
You can develop “a board giving plan” where each member of the board will contribute an amount on a monthly or annual basis to the organization via bylaws. If the board membership is suitable, the organization can gain start-up capital that will help pay the regulatory fees.
You should consult an attorney who can help you figure out the basic business plan which would be compatible with the current market. He would help make you understand if you should or should not incorporate a decision that may also hinge on whether you obtain a fiscal sponsor. You may not want to incorporate, but for nonprofit organizations, it is usually the safest way to proceed.
The incorporation process will be handled by the lawyer who will write down your articles of incorporation and file the proper paperwork. This will allow you to open a bank account where your first expense should be your business filing fees.
Register with state and federal governments
At the state level, you have to register your business/new nonprofit organization with the state’s secretary of state. This will include the designation of someone as a nonprofit’s agent.
On the federal level, however, before you file for your 501 (c)(3), you have to file a Form 1023 or Form 1023EZ with the Internal Revenue Service. This way you will register your organization with the IRS as a nonprofit.
Create a public presence
You have to make a prominent public presence and have to have a distinctive public face to attract donors, helpers, and associates as well as to locate the people who you wish to serve. This way you will direct the potential donors to your organization.
You have to follow an effective strategy that will make people know that your organization exists and that their donations will be tax-exempt before you can begin any programming.
Let’s suppose that you are on your own, at the very least you need to take a few dollars and register your name, incorporate, apply for your tax-exempt status, put up a website, establish a social media presence and have a storefront or meeting space.
For some activities, you may have to pay some fee. But even if you don’t want to take out that amount of fee from your pocket, you can raise that money from somewhere else. Your stakeholders may also prove to be helpful in this regard.
In case you plan to start an organization and you are short of budget or you don’t have enough money, you can use fiscal sponsorship to finance your organization. Fiscal sponsorship is an already existing 501(c)(3) cooperation that takes a new organization “under its wing” while the new business is taking a new startup.
There is no restriction that the organization should be in a formal state, but it can be in any state but the organizations that are new and lack financial assistance or have little or no money to initiate their businesses are given priority. The relationship between the sponsored and sponsor is that the former is borrowing the latter’s tax-exempt status.
The agreement that would be used by your attorney would provide back-office functions, advice, meeting space, and any budgetary functions up to and including fundraising or even loans. There is no specific requirement on the size, type, and length of time of the business on the sponsored end, while it works perfectly for short-term projects.
Although getting fiscal sponsorship is a great step given that you don’t have any money and you want to start a nonprofit organization, you need to realize one thing that the sponsor is taking a risk by utilizing its tax-exempt status in the place of your organization, and handles all the money, so you need to have a visionary idea and workable strategy to achieve your goals. Your successful business plan and reasonable strategy would attract more sponsors in the future.
Lastly, you should look for a local organization with the skill, structure, and history to accomplish this, while an excellent place to look for the fiscal sponsor at the National Network of Fiscal Sponsors. But even with that, you should have a backup plan, a mission, and administration, and other parts of the nonprofit startup so that you don’t have to rely on only one source of income.
Acquiring community grants can be a complex phenomenon that requires real professional help. But you can look for the smaller community-based grants which are easier to apply and receive. Many big chain stores have small community grants such as Wal-Mart. You can ask the big box store if they have a community grant program that you can avail of.
A list of local community grants sources is available on Grants.gov and a comprehensive list of private grants on Candid.
Fundraising is a crucial part of the list of steps you would formulate and take for your business plan. After making a good physical presence in your community, you can turn to online fundraising. Many people initiate from GoFundMe for charity startups, if your nonprofit aims to work on charity, you can start from here. You can visit their place to see their requirements so that you would have an idea of what online fundraising takes.
GoFundMe Charity (a separate organization) can also help you with getting your nonprofit off the ground. Other fundraising platforms such as Give Lively, Classy, and MightyCause, Double the Donation can be an option for you to get your organization connected with donors.
You can organize an event like a charity ball or fundraising concert where you can charge the attendees or ask them for donations by explaining your cause.
Connect with other nonprofit organizations
As like-minded people help you a lot in advising you to do the right things, like-minded nonprofits can also be a great help for you as they will give you advice about the market and nature of work which being a starter can be really beneficial for you in the future.
You can find them in your community, but can also search for them online. The National Council of Nonprofits can be a great help in this regard.
Get the right legal help
Even you are having a good business plan and a workable strategy to follow for your startup with less or no money, you need to consult a lawyer who knows the ins and outs of starting a nonprofit because he would better know the legal complexities that you would have to deal with once you go with your plan.
A nonprofit organization is one that is not driven by profit but a noble cause to work for the community and help them sort out their problems. NOPs are often used for cooperatives, trusts, charity, advocacy, religious, and environmental groups.
These organizations are tax-exempt and do not work to earn any profit for themselves. That’s why most of the workers are volunteers but not all of them as the organization has to hire a professional team to run the administration tasks of the institution who are being paid.
Their financial income sources are based on donations, government grants, and community funds while they have owners for surplus profits to go to as any surplus after all the expenses go to further the cause of the organization. They have government support and community backing which strengthen their position for doing good things for the people in need.