How to Set Up Your Nonprofit — a Step-by-Step Guide

#1

Do Your Research

Before you move forward with establishing your nonprofit, it’s critical that you understand the landscape of your particular niche. More specifically, you will want to ask yourself the following questions.

Does My Nonprofit Help Solve a Problem No Other Organization Can?

Answering this question will surely involve research and competitive analysis. In the end, you want to be able to confidently answer this question with a firm, “yes.” Why? Because it’s important to be sure that you are not going to be competing for a limited pool of donors. This competition will not only be a financial burden, but it will diminish the stability and growth potential of your organization.

It’s also important that your nonprofit's mission be memorable and fundable. If your nonprofit does not serve a clearly defined niche, it’s harder to target donors who are passionate about your unique mission. The more difficult it is to secure donors, the more challenges your organization will face. Without a targeted donor pool or a secured financial partner, it’s going to be difficult for your organization to thrive.

Do I Know Where Funding Will Come From?

If you don't have an outline of how to secure and maintain funding, then maybe your charitable spirit would be better put to use supporting other nonprofits. Remember, nearly half of nonprofits fail due to scalability, which means making sure you will be able to continually secure donations is critical. Simply put, If your nonprofit is going to be successful, it will need a steady stream of viable donors.

One way to learn more about funding sources and potential donors, especially in your specific location or niche, is to study how similar and successful nonprofits are operating. You can learn more about how individual nonprofits operate on GuideStar. Understanding another nonprofit's revenue stream can help you understand how your own might work. GuideStar allows you to view any year a nonprofit has been in business to see how they operated to achieve their success.

#2

Build Your Board

When selecting your board of directors, you should pick individuals who offer a variety of skills and resources that complement each other and your mission.

It's important to note that at least three of your board members must not be related to each other by blood or marriage. And, while there are no hard and fast rules on what each of your board members should bring to your 501(c)(3), it's a good idea to recruit board members who possess the following qualities:

• Has an expansive network of donors and is comfortable with soliciting donations
• Possesses a clear understanding of your region's tax laws and other business and legal matters
• Acutely understands the needs within your community and can build lasting relationships between the nonprofit and the community

Although you probably already have an idea of who you’d choose to serve on your board, keep in mind your top picks may not be available or interested. If you haven't identified or connected with any potential board members, Board Member Connect is an excellent resource for finding qualified board members.

Even if your board members will be unpaid, that doesn't mean that you should be nonchalant in your interview process. Having passionate, capable board members at the helm will be critical to the success of your nonprofit, and you should be thoughtful in your selection.

Consider asking potential board members the following questions:

• What excites you about this organization?
  • Each board member should have a genuine passion for your mission. If nothing about your organization excites or inspires them, consider another candidate.
• Can you talk about what experience you have fundraising for causes?
  • While not every board member needs to be a solicitor, having a wider pool of donations ensures the health of your nonprofit.
• What skills do you possess that you feel could advance our mission?
  • There isn't any one correct answer to this question, but someone noting how their technical or interpersonal skills could contribute to advancing the organization’s reach would be one great example.
• Do you have any relevant professional experiences or network connections to this position?
  • If a prospective donor has collaborated with professionals in your nonprofit space, or worked in that space themselves, this can be a great advantage.
• What qualities do you think a board member should possess?
  • This answer will tell you what your interviewee values and what they will probably bring to the table.

#3

Incorporate Your Nonprofit

Once you’ve done your research and secured your board of directors, it’s time to incorporate your nonprofit. Incorporating your nonprofit at the state level has multiple benefits, like tax breaks, additional legal protections, and making it easier to secure federal tax-exempt status.

Although it costs money to incorporate your nonprofit, it’s a worthwhile investment because it protects the organization against liabilities. You can view each state's prices for incorporating a nonprofit on the Nonprofit Hub website, which also features a variety of other state-specific resources and guides.

Overall the process is fairly similar across all states and involves the following steps:

Choose A Name

Your business's name should allude to the work you do, be memorable and short! Do a quick Google search to double-check if anyone else has your potential name or if something more popular would overshadow your nonprofit. Once you've chosen your name, register it to ensure no one else can grab it!

File Your Articles of Incorporation

What's required varies from state to state, so consult the National Association of State Charity Officials (NASCO) to comply with the laws. You will need to register wherever you plan on collecting donations or not.

File for an Employer ID Number (EIN)

You will need an EIN if you plan on having employees or a bank account for your organization. Before applying for your EIN, you need to designate a responsible party.

This person would be the designated person to manage the business, funds, and assets. Once you’ve chosen the responsible party, you can apply for your EIN with the IRS by phone, mail, or online.

#4

Create Your Nonprofit's Bylaws

Think of your bylaws, the governing rules of your nonprofit, as the constitution for your organization. Ultimately, it's up to you and the board members to determine what is included in your bylaws. They will be unique to your organization, but make sure they aren't too granular. If unsure what your bylaws should outline, use the bullet points below as a starting point, or check out this bylaws template for inspiration.

A Bylaws Document Should Outline:

• The roles of board members, officers, other employees, and volunteers
• How your board operates
• How you will distribute funds and resources to recipients
• Procedures for holding meetings and electing directors
• How your organization will handle conflicts of interest or bad actors

#5

File for Federal & State Tax-Exempt Status

Now that you have bylaws in place and have incorporated your nonprofit, it’s time to file for federal and state tax-exempt status.

Filing for Federal Exemption

Perhaps the most critical step of this entire process is filing for tax-exempt status. You're going to file for tax-exempt status for a couple of reasons. First, you won't have to pay taxes to the Internal Revenue Service (IRS). Second, your donors can claim tax deductions for their donations to your nonprofit once you’ve secured federal tax-exempt status.

Twenty-nine organizations are eligible for tax exemption under section 501(c) of the Internal Revenue Code. The organization type that your nonprofit most likely falls under is a 501(c)(3) or under the charitable organizations umbrella.

Once you have identified the appropriate 501(c) for your nonprofit, you can file for your nonprofit's tax-exempt status with Form 1023 or Form 1023-EZ. Make sure all of your supporting evidence is correct and formatted correctly, as it can take the IRS 3 to 12 months to decide on your nonprofit's tax-exempt status.

If you want to bypass that wait time, a 1023-EZ form typically takes the IRS between 2 to 6 weeks to process. However, the criteria to be eligible for this form is specific. Only entities with a gross income of under $50,000 and less than $250,000 in assets are eligible to apply.

State Exemption & Registering to Fundraise

Some states automatically grant you tax-exempt status once the IRS approves you. Check with your state's specific tax laws to see if you need to file a tax exemption for your state, and any other states where your nonprofit will be operating.

After receiving your state's tax-exemption letter, you will likely need to file a charitable solicitation form. This is so you and members of your nonprofit can organize fundraising events and solicit donations through phone calls, email, and grant application submissions. Failure to file for your state's charitable form could put your nonprofit in a ton of legal trouble and jeopardize the existence of your nonprofit.