How to Start a 501c3 Nonprofit Organization

How to Start a 501c3 Nonprofit Organization

Have you always wanted to leave the world a better place than you found it by starting a nonprofit? Here’s a simple, straightforward guide on how to successfully establish a 501c3 nonprofit corporation.

Steps

  1. Understand what a nonprofit is: an organization whose primary objective is to support some issue or matter of private interest or public concern (such as the arts, charities, education, politics, religion, research, or some other endeavor) for non-commercial purposes. There are different kinds of nonprofits, one of them being a 501c3, which is exempt from income and property tax, able to receive tax-deductible charitable contributions.
  1. Formulate a mission statement. As a
    non-profit organization, you exist to accomplish your mission, which
    should be crafted based upon your purpose, services and values. The
    mission statement is a concise expression that covers in one or two
    sentences who the organization is, what it does, for whom and where. It
    should also be compelling, as it will be used in all published
    materials, funding requests and public relations. It should also
    portray how your organization is distinct from others. (See Tips for a
    sample mission statement.)
  2. Form a Board of Directors.
    Forming a board requires careful thought and extensive recruitment
    efforts. Each state has regulations that determine the minimum size of
    the board, typically three, but the optimum number of people who sit on
    the board should be determined by the needs of the organization. Based
    on what your organization would like to accomplish, you should decide
    what special skills and qualities you will require of the individuals
    on your board. Identify qualified individuals who are supportive of
    your mission and are willing to give of their talents and time (see
    Tips for more information).
  3. File Articles of Incorporation.
    Articles of Incorporation are official statements of creation of an
    organization filed with the appropriate state agency. They are
    important to protect both board and staff from legal liabilities
    incurred by the organization, making the corporation the holder of
    debts and liabilities, not the individuals and officers who work for
    the organization. The specific requirements governing how to
    incorporate are determined by each state. You can obtain the
    information you need to proceed with this step from your state Attorney
    General’s office or your state Secretary’s office.
  4. Draft
    bylaws. Bylaws are simply the "rules" of how the organization operates.
    Although Bylaws are not required to file for 501(c)(3) status, they
    will help you in governing your organization. Bylaws should be drafted
    with the help of an attorney and approved by the board early in the
    organization’s development.
  5. Develop a budget. Creating a
    budget is often one of the most challenging tasks when creating a
    nonprofit organization. A budget is the expression, in financial terms,
    of the plan of operation designed to achieve the objectives of an
    organization. New organizations may start the budgeting process by
    looking at potential income – figuring out how much money they have to
    spend.
  6. Develop a record-keeping system. Legally, you must
    save all Board documents including minutes and financial statements. It
    is necessary to preserve your important corporate documents, including
    board meeting minutes, bylaws, Articles of Incorporation, financial
    reports, and other official records. You should contact your
    appropriate state agency for more information on what records you are
    required to keep in the official files.
  7. Develop an
    accounting system. If your board does not include someone with a
    financial or accounting background, it is best to work with an
    accountant familiar with non-profit organizations. Nonprofits are
    accountable to the public, their funders, and, in some instances,
    government granting bodies, and it is vital to establish a system of
    controls (checks and balances) when establishing the organization’s
    accounting practices. Responsible financial management requires the
    establishment of an accounting system that meets both current and
    anticipated needs.
  8. File for 501(C)(3) status. To apply for
    recognition of tax-exempt, public charity status, obtain Form 1023
    (application) and Publication 557 (detailed instructions) from the
    local IRS office. The filing fee depends upon the size of the
    organization’s budget. The application is an important legal document,
    so it is advisable to seek the assistance of an experienced attorney
    when preparing it. Both of these documents can be downloaded from IRS
    web site listed below.
  9. Apply for a federal employer
    identification number. Regardless of whether or not you have employees,
    nonprofits are required to obtain a federal Employer Identification
    Number (EIN) — also referred to as the federal ID number. Available
    from the IRS, this number is used to identify the organization when tax
    documents are filed and is used not unlike an individual’s Social
    Security number. If you received your number prior to incorporation,
    you will need to apply for a new number under the corporate name. Ask
    for Form SS-4 when applying for your EIN.
  10. File for state and
    local tax exemption. In accordance with state, county, and municipal
    law, you may apply for exemption from income, sales, and property
    taxes. Contact your state Department of Revenue, your county or
    municipal Department of Revenue, local Departments of Revenue, and
    county or municipal clerk’s offices.
  11. Fulfill charitable
    solicitation law requirements. If your organization’s plans include
    fundraising, be aware that many states and few local jurisdictions
    regulate organizations that solicit funds within that state, county, or
    city. Usually compliance involves obtaining a permit or license and
    then filing an annual report and financial statement. Contact the state
    Attorney General’s office, the state Department of Commerce, state and
    local Departments of Revenue and county or municipal clerk’s offices to
    get more information.
  12. Apply for a nonprofit mailing permit.
    The federal government provides further subsidies for nonprofits with
    reduced postage rates on bulk mailings. While first-class postage rates
    for nonprofits remain the same as those for the for-profit sector,
    second- and third-class rates are substantially less when nonprofits
    mail to a large number of members or constituencies. For more
    information on eligibility, contact the U.S. Postal Service and ask for
    Publication 417, Nonprofit Standard Mail Eligibility (also available at
    the link below).

 

Tips

  • Sample mission
    statement: "The National Mental Health Association is dedicated to
    promoting mental health, preventing mental disorders and achieving
    victory over mental illnesses through advocacy, education, research and
    service; The National Consumer Supporter Technical Assistance Center’s
    purpose is to strengthen consumer organizations by providing technical
    assistance in the forms of research, informational materials, and
    financial aid. The mission of Texas Mental Health Consumers is to
    organize, encourage, and educate mental health consumers in Texas. TMHC
    supports and promotes the mental health recovery process through peer
    directed and operated services, advocacy, economic development, and
    participation in public mental health policy design."
  • What
    to look for in a board member: Look for individuals whose values
    reflect your statement of purpose. Although it is recommended that the
    majority of your board be consumers, include the community at large,
    not just the mental health community. Consider the religious community,
    local service clubs, legal professionals, and colleges and universities
    as sources for prospective a Board of Directors. Do not overload people
    who already serve on many committees – seek a balance between old and
    new leadership.
  • The organization needs to open a bank
    account and ascertain whether to use the accrual or cash method of
    accounting. The difference between the two types of accounting is when
    revenues and expenses are recorded. In cash basis accounting, revenues
    are recorded when cash is actually received and expenses are recorded
    when they are actually paid (no matter when they were actually
    invoiced). In accrual basis accounting, income is reported in the
    fiscal period it is earned, regardless of when it is received, and
    expenses are deducted in the fiscal period they are incurred, whether
    they are paid or not.
  • Hire an attorney to help you with your
    Certificate of Incorporation and the By-Laws. Hire an accountant,
    particularly one who has experience with 501c3 nonprofit corporations,
    to help you file the state and federal exemption forms. It will save
    you time and money in the long run.

Warnings

  • Do not use an Incorporation service or
    Paralegal document processing service to start your nonprofit. They
    often only provide part of your documentation needed for full Tax
    Exempt Corporation status.
  • It is important to file your 1023
    within 15 months of the date when your organization was established, or
    when your Articles of Incorporation were filed. Although the IRS
    automatically provides a 12-month extension, missing the deadline may
    result in your organization not receiving recognition as a private
    foundation.

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