Starting a Nonprofit: Basic FAQs

What is a nonprofit?

In the U.S., the IRS defines nonprofits as “Organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational or other specified purposes.” In contrast to for-profit organizations, nonprofits rely on donations, usually a combination of individual donations, grants, sponsorships, and corporate donations, to fund their operations and further their charitable missions.

What are the different types of nonprofits?

In addition to charitable organizations, the IRS distinguishes many other types of tax-exempt organizations with the 501(c) designation. Here’s a quick overview of some of the organization types that fall under 501(c):

• 501(c)(3): Charitable organizations, churches and religious organizations, private foundations
• 501(c)(4): Social advocacy or lobbying organizations
• 501(c)(5): Labor, agriculture, and horticulture organizations
• 501(c)(7): Social and recreational clubs

There are many other distinctions in this category—read the full list of other tax-exempt organizations here. However, most individuals looking to start a charitable organization create 501(c)(3) organizations. That’s because donations to these organizations are usually tax-deductible for the donor, making it easier to raise funds.

How much does it cost to start a nonprofit organization?

Starting a nonprofit organization does require some investment up front to cover startup costs. Some of the fees involved include:

• Legal fees
• Accounting costs
• Incorporation fees
• Form 1023 fees to apply for tax exemption
• Office rental/purchase
• Staff salaries
• Other office-related overhead, like equipment and supplies
• Fundraising startup costs, such as fundraising software or event planning costs

These fees can range from several hundred dollars to a few thousand dollars, depending on the type of investments you choose to make.

How long does it take to start a nonprofit?

It can take several months to a full year to complete each step of the startup process, which we’ll cover in the next section.

What questions should you ask before starting a nonprofit?

Starting a nonprofit requires a decent amount of time and energy. Before you start a new organization, it’s worth it to fully think through the problem you’re hoping to address and whether a nonprofit is the right way to solve the issue.

Before taking the steps to start a nonprofit, ask yourself these questions:

• What need or problem will the nonprofit address? Can you clearly articulate the issue you’re hoping to solve? Is it one distinct problem or multiple issues? Nonprofits are most successful when they’re focused on one primary issue because it makes it easier to communicate the organization’s purpose to potential donors. You can always expand your operations later on as your organization and donor base grows.
• Does the community have a strong need for this nonprofit? Are there other nonprofits in the area already focusing on the issue you’ve identified? Make sure that by starting a new nonprofit, you’ll be able to fulfill an unmet need in the community.
• Is there a long-term need for your nonprofit, or could the issue be solved with a smaller-scale fundraising campaign or project? The answer could be “both.” For example, perhaps your idea for creating a nonprofit focused on raising funds for children fighting cancer started with one family’s need for support in a challenging time. However, if your idea isn’t very large in scope, a one-time crowdfunding campaign or peer-to-peer fundraising event could achieve the results you’re hoping for.
• Does the community seem excited about your nonprofit idea? Do you receive enthusiastic responses when you tell family, peers, and community members about your new nonprofit idea? If community members seem confused about the nonprofit’s mission, it could be a sign to go back to the drawing board.
• Where will we turn to for financial support? Consider whether your community has a wide range of potential giving sources willing to help out, including individual donors, corporate sponsors, foundations, and government agencies.
• What potential challenges or risks will the nonprofit face? Challenging economic conditions, finding reliable funding sources, local or federal regulations, and staffing challenges are all potential obstacles your new nonprofit could face on the road to getting up and running. Carefully think through these risks and consider how you plan to mitigate them or whether they’d be too challenging to overcome.

If, after thinking through these questions, you determine a clear justification for a new nonprofit, you’re ready to move forward with the steps of getting your new organization in motion.

How to Start a Nonprofit in 12 Steps

Starting a nonprofit requires a combination of strategic planning, financial investment, and regulatory approval. Follow these steps to start your organization on the right foot.

1. Conduct initial research

Before taking any steps to formally establish your nonprofit, conduct background research into the people and groups who will help you get your new organization off the ground. Look into:

• Your primary audience. Who will make up your main audience of donors, volunteers, corporate partners, foundations, and other supporters that will help keep your nonprofit operating? Conduct background research into your potential audience groups to learn more about who they are, the types of organizations they like to support, and how you can connect with them as you get your new organization up and running.
• State and federal regulations for starting a nonprofit. Look into relevant laws regarding starting a nonprofit in your community. For example, different states have different processes for filing articles of incorporation and the fees required. Many states include regulations requiring new nonprofit organizations to not have the same name already claimed by another organization. Check your state’s secretary of state office website for more information.
• Legal services. The American Bar Association (ABA) recommends that nonprofits seek professional legal services during their formation to avoid common errors like failing to meet IRS incorporation requirements, overlooking applying for tax exemption, or filling out tax exemption forms incorrectly. The ABA strongly recommends that lawyers contribute at least 50 hours of pro-bono public legal services per year, meaning there are probably plenty of lawyers in your community willing to help out. Look into pro-bono services offered by local bar associations or law firms.

Understanding your nonprofit’s potential audience and legal considerations will help you get your footing as you start to plan for your new organization.

2. Choose a board of directors

A nonprofit’s board of directors is a governing body typically made up of unpaid volunteers who set policies, determine strategic priorities, and provide oversight. Your board can provide plenty of support when starting your new nonprofit, such as creating your mission statement and leveraging their connections to help your nonprofit get established.

As top leaders in your organization, your board members should be skilled, trustworthy, reliable individuals who are passionate about your mission. Follow these steps to choose the right board members to lead your nonprofit to success:

Step 1. Determine the type of leadership your nonprofit would benefit from

What skills or connections would you like board members to have? For example, you might seek board members who have former leadership experience, work well within a team, and are impeccably organized and punctual. You might also seek individuals with a variety of valuable connections within the community and the ability to network to help your nonprofit earn greater community support.

Step 2. Recruit potential members

Look for people who are passionate about the cause, have experience relevant to the mission, and have served in a fundraising or volunteer role at a nonprofit in the past.

Prioritize diversity to ensure your board benefits from a variety of perspectives. Seek diversity across a variety of categories, including age, race, gender, level of ability, and educational background. This ensures that your board will take steps and recommend actions that benefit your entire community, not just a select few.

Step 3. Host interviews

After you’ve identified potential board members, invite these individuals to an in-person meeting or video conference interview to get to know them and see if they’d be a good fit for the role. During these interviews, ask them about their educational background, professional experience, familiarity with your mission, and experience as a member of your community.

Additionally, clearly outline the requirements of the position so board members can think carefully about whether the role will work for them. Common board expectations include:

• Attending board meetings
• Serving on committees, such as the fundraising or finance committee
• Acting as an advocate for your mission
• Supporting your fundraising efforts
• Staying updated about the nonprofit’s current priorities, programs, and how they fit into the community
• Informing the rest of the board about potential personal conflicts of interest

Be sure to identify any possible conflicts of interest during the interview process. A conflict of interest is a situation where a board member may not be able to make objective decisions because of some aspect of who they are. For example, if the potential board member already serves in a leadership position with a similar organization, or is the family member of your new nonprofit’s executive director, they may not be in a position to lead your organization with an unbiased perspective.

Step 4. Check references

Ask for several references for each potential board member to hear from trusted sources about whether they think the individual would be a good fit for your organization.

After a thorough review process, you’ll be ready to select your nonprofit’s board. Keep in mind that the IRS requires a minimum of three board members, but you may select more based on your organization’s needs.

3. Write a mission and vision statement

Your nonprofit’s mission and vision statements are guiding principles that justify your organization’s purpose. Explore some examples of mission and vision statements below:

Mission statement

Answers the question: What does your nonprofit seek to accomplish, and how?

Vision statement

Answers the question: What will the world look like if your nonprofit’s mission succeeds?

Examples

• CARE
  • Mission statement: CARE works around the globe to save lives, defeat poverty, and achieve social justice.
  • Vision statement: We seek a world of hope, inclusion, and social justice, where poverty has been overcome and all people live with dignity and security.
• World Wildlife Fund
  • Mission statement: The mission of World Wildlife Fund is to conserve nature and reduce the most pressing threats to the diversity of life on Earth.
  • Vision statement: Our vision is to build a future in which people live in harmony with nature.
• St. Jude Children’s Research Hospital
  • Mission statement: The mission of St. Jude Children’s Research Hospital is to advance cures, and means of prevention, for pediatric catastrophic diseases through research and treatment.
  • Vision statement: To accelerate progress against catastrophic disease at a global level.

As you craft your mission and vision statements, remember that they shouldn’t put the main focus on your organization. They should focus on your beneficiaries: the people, animals, or natural spaces you seek to help. It can also be helpful to run your statements through a testing tool like Bloomerang’s communications audit to ensure readability and audience-centricity.

4. File for incorporation

File articles of incorporation within the state your nonprofit will operate from. This legally designates your nonprofit as a business entity. Having a clear corporate structure limits the individual liability of your nonprofit’s leaders, employees, and board of directors. Plus, your nonprofit needs to be legally incorporated to apply for tax exemption with the IRS.

Requirements vary from state to state, but most applications for incorporation require information like:

• Your nonprofit’s name
• Your organization’s purpose
• Your nonprofit’s address
• A statement about whether your organization will have members
• Information about how long your organization will exist (typically perpetual)

Often, you’ll also have to publish a notice of intent to incorporate within your local newspaper. Search for information about your state’s requirements on your Secretary of State’s website.

After incorporating, you can also apply for an Employer Identification Number (EIN), which identifies your organization to the IRS. The IRS requires all organizations to apply for an EIN, even if they do not have any employees. You can apply for an EIN online, or by mail or fax.

5. Create bylaws

Nonprofit bylaws are legally binding regulations that outline how the organization will operate. Examples of bylaws include:

• The composition of your board of directors
• The process for selecting board officers
• How committees work
• How board meetings work
• The definition of your nonprofit’s fiscal year
• Dissolution procedures
• Board member removal processes
• An indemnification clause to protect individuals like the board of directors and employees from personal liability while carrying out their duties on behalf of the organization
• Your record-keeping and reporting processes

Review Bloomerang’s sample bylaws for a template you can use to structure your organization’s bylaws.

6. Develop a conflict of interest policy

A conflict of interest is any circumstance where an individual’s personal relationships or financial situation could influence their ability to make unbiased decisions on behalf of your nonprofit. The IRS recommends that nonprofits develop conflict of interest policies to prevent any issues down the line regarding the appearance or actuality of impropriety.

Your conflict of interest policy should:

• Define what constitutes a conflict of interest (typically a personal or financial situation that compromises an individual’s decision-making ability, or the perception that such a situation exists).
• Require those with a potential conflict of interest (whether the executive director, a board member, or an employee) to disclose it.
• Outline procedures for dealing with the conflict of interest, such as when individuals should abstain from certain decisions or conversations.
• Describe how your nonprofit will handle a breach of the policy, such as disciplinary actions or removal of the individual from their position.
• Include specific times of the year when the organization’s board members and staff will review the policy.

Make it clear that your conflict of interest policy applies to everyone in your organization. Host an informational meeting with board members and staff (once you hire them) to ensure everyone is on the same page.

7. Apply for tax exemption at the federal level

Next, you’ll file with the IRS as a 501(c)(3) nonprofit organization to apply for tax-exempt status. You can either file Form 1023 or 1023-EZ. The main differences in these forms are their complexity and cost. Form 1023 costs $600 to file and is much longer, while Form 1023-EZ only costs $275 and is much more simple.

However, only certain organizations qualify to fill out Form 1023-EZ. Complete the Form 1023-EZ eligibility worksheet to determine if your nonprofit qualifies.

1023-EZ applications are often processed in as little as four weeks, whereas it can take six months or longer for the IRS to review 1023 applications. You can speed up the process by ensuring there are no errors in your application. Review the IRS’s Top Ten Tips to shorten the tax-exempt application process to ensure a speedier turnaround.

8. Register to fundraise where applicable

According to the National Council of Nonprofits, “The majority of states (40) require charitable nonprofits, as well as any paid professional ‘fundraising counsel,’ or consultant hired to assist the nonprofit with fundraising activities, to register with the state before the nonprofit solicits any donations from residents of that state.”

Requirements vary from state to state, so be sure to consult with your legal counsel to understand your registration requirements. You can also explore the National Association of State Charity Officials website, which lists contact information for the government agency of each state that is tasked with managing nonprofit affairs.

9. Hire staff members

According to the Health of the U.S. Nonprofit Sector Annual Review, nonprofits make up about 6.5% of the overall workforce. Nonprofit employees are the lifeblood of charitable organizations, ensuring that the necessary work is completed to advance the organization’s mission.

Take these steps to hire effective nonprofit staff members:

• Determine what positions you need to fill. Since your nonprofit is just starting, you don’t need to worry about building a huge team. After all, you may have minimal funding to contribute to employee salaries at the beginning. Stick to essential roles like a development director, communications manager, and marketing coordinator. You can use software to help fill gaps in your staffing, such as HR software or volunteer management software.
• Determine salary ranges. Create an employee compensation strategy that looks at compensation holistically, incorporating base salary, variable pay (like bonuses or commissions), benefits (like paid time off and health insurance), and perks.
• Identify skill requirements. Determine skill expectations for each position to help find employees who are the best fit for the role.
• Write job descriptions. Your job descriptions should include details about the salary range, role expectations, usual responsibilities, skill requirements, preferred experience, and time requirements. Be honest about the role’s expectations and requirements to whittle down your recruitment pool to the most qualified candidates. Explore Bloomerang’s sample job descriptions for positions like major gift officer and development director.
• Hold interviews. Ask potential candidates about their job experience, whether they’ve worked at a new nonprofit before, and what they will bring to the team. Again, be transparent about the challenges that will come with working at a brand-new nonprofit. Your employees will help lay the groundwork for your organization’s future success, making it crucial to recruit talented, passionate people who don’t mind a challenge.

In addition to paid staff, start to think about different ways volunteers can support your mission and help your organization find its footing. Volunteers comprise one-third of the nonprofit workforce in the U.S. Plus, the value of one hour of volunteer work is an estimated $31.80. These supporters can give your nonprofit the boost it needs in your crucial start-up phase.

10. Invest in nonprofit software

Nonprofit software solutions are digital tools that help organizations manage all aspects of their operations, including donor relationships, fundraising, communications, volunteer management, and more.

As a new nonprofit, you might be tempted to start with free software solutions to minimize spending. However, many nonprofits find that these solutions become limiting as their organization grows and don’t offer the scalability necessary to support their activities. Most organizations find it more convenient to invest in an affordable all-in-one solution upfront to ensure they don’t have to manage any costly data migrations in the future.

To make the most of your investment, it’s helpful to find an all-in-one platform with top-quality solutions for all aspects of nonprofit management, like Bloomerang. With a robust donor management system like Bloomerang, you can access the following tools all in one place:

• Donor database: Store donor data, track supporter interactions, screen donors to discover major giving opportunities, and create donor segments for more personalized outreach. Bloomerang’s donor database also includes an interactive dashboard to monitor metrics like donor retention, incoming donations, and campaign progress.
• Fundraising tools: Accept online donations (including recurring gifts), offer multiple payment options, encourage engagement with peer-to-peer fundraising tools, and allow donors to manage their giving using a personalized portal.
• Marketing platform: Grow your donor network with email marketing tools and insights, donor surveys, and communications audit tools. Build stronger relationships by reaching out with prompt thank-you messages and personalized communications.
• Volunteer management software: Keep volunteers organized and boost program retention with recruitment workflows, scheduling tools, reporting features, and a user-friendly mobile app.

Learn more about why nonprofits love Bloomerang’s platform here:

No matter what software platform you choose, make the most of it by reaching out to the vendor for support as needed. They can ensure you’re using the tools to their fullest extent to enhance your ROI.

11. Start fundraising

Your new nonprofit might start with minimal funding, and that’s normal! As you solidify your mission and purpose and start spreading the word to your community, you’ll be able to increase brand awareness and recruit supporters. The most effective way to get new donors on board is to launch a fundraising campaign!

Follow these steps to plan your first campaign:

Set a budget

Establish your nonprofit’s yearly budget, along with a budget for your fundraising campaign. Remember that it’s completely fine to start small—in fact, 97% of nonprofits in the U.S. have annual budgets smaller than $5 million.

Plan fundraising activities

The sky’s the limit when it comes to choosing a fundraising idea. Explore Bloomerang’s guide to online fundraising campaigns or resources like Best Fundraising Ideas to find the right activity for your organization. Popular, low-cost fundraising ideas include 5Ks or walk-a-thons, social media campaigns, peer-to-peer fundraising initiatives, and giving day campaigns.

Start building donor relationships

As donors give to your organization, send prompt thank you messages and ensure their information is stored in your donor management system. This will help you build a contact list and audience for future campaigns and events.

12. Maintain compliance

After going through all the hard work of setting up your nonprofit, make sure it isn’t derailed by compliance issues. Maintain ongoing transparency and compliance through these steps:

• File a Form 990 each year. Form 990 is an annual information notice that allows the IRS to maintain updated information on nonprofits. The form asks for information about charitable assets, total donations and grants received, and board and staff member information.
• Maintain state tax forms. In addition to Form 990, most states require annual filings. Learn more about annual compliance regulations with the help of Hurwit & Associates state-by-state map.
• Comply with your bylaws. Your bylaws are legally binding, so your organization must take them seriously. Regularly review your bylaws with your staff and board members and resolve any issues quickly.

Maintaining compliance allows your nonprofit to continue benefiting from tax-exempt status and shows your commitment to functioning as a transparent, responsible community organization.