How to Start a Non-Profit Organization

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(Quick Note: Before forming a non-profit organization, we highly recommend brushing up on the basics of what it means to have one. Scroll down for our savvy breakdown of the advantages, disadvantages and resources at your disposal.)

Common Questions About Forming a NonProfit

Thank you! We don’t know what kind of non-profit you’re setting out to start but, your service and your impact will be greatly appreciated. Now, we put this concise information regarding how to form a non-profit together to help address the basic concerns of those who’re REALLY just starting.

The focus is to answer some common questions we get from our readers without going too deeply into any of the legalities or specifics regarding corporate formalities. Sound good? Enjoy!

What is a Non-Profit & What Does it do?

This can be a very difficult question to answer, especially if you want an explanation beyond, “An entity formed under law that is typically not-for-profit and tax exempt under IRS regulations.” Why? Well, first there are many kinds of non-profits. Currently the IRS recognizes more than 25 categories of organizations that can attain “charitable” 501(c)(3) status and a ton can fit under that umbrella.

This is because there’s such a huge variety of purposes that drive non-profits: public interest, religious, educational, scientific, literary, public safety testing fostering national/international sports competitions and on and on. For simplicity’s sake, let’s look at four major categories that do a good job of summarizing:

  1. Public Charities: must document that they receive at least 1/3rd of their annual income from the public, a unit of government, or an organization formed to raise money for a specific school, hospital, governmental unit or publicly supported charity.
  2. Private Foundations: derive their primary financial support from the contributions of individuals, family, or a corporation. That said, foundations are subject to substantially more restrictive rules governing their operations, including how much they must distribute for charitable purposes, and their donors receive less favorable tax treatment for donations.
  3. Member Serving: mutual societies, cooperatives trade unions, credit unions, industry associations, sports clubs – so they benefit a specific group of people.
  4. Community Serving: human service programs, medical research, education and health services, etc. – they serve specific communities or geographical areas.

Member-Run vs Volunteer-Run Non-Profits

In essence, a member-run non-profit is really a corporation, so it has a board of directors and officers (official members) who manage the non-profit through an Operating Agreement and Bylaws. Whereas a purely volunteer-run non-profit usually doesn’t have an official board of directors or officers that have serious fiduciary responsibilities.

Can you have a volunteer-run non-profit with a board of directors? Yes. The big difference is usually with volunteers no one’s getting paid. Make no mistake though, there are TONS of all volunteer organizations (AVOs) but for some crazy reason they’re often treated and regarded differently than corporate non-profits.

Are conventional non-profit corporations better? No! They’re not better or worse. It really all comes down to who’s running the show. Here are just a couple pitfalls that official directors of non-profit corporations make:

Keep in mind that non-profits can lose their tax-exempt status and must meet a certain amount of criteria over time to remain compliant on state and federal levels. We won’t dive into all that complexity right now but here are some elements of importance for non-profits.

And finally, some type of affiliations may also be taken into account in as much as they may reflect the non-profits stated purpose.

What are the Advantages of Forming a Non-Profit?

You mean aside from making massive amounts of positive impact on people’s lives and our world? At the end of the day we could boil it down to these four:

  1. Branding: What do you think/feel when you find out a certain company has their own non-profit which they donate to and collect funds for? It’s a great way to earn extra credibility and win trust with your specific audience (along with exposing your company to everyone else interested in the specific cause.).
  2. Limited Liability: What this means is the management of the non-profit corporation, including founders, directors, any paid employees, and other members aren’t personally liable for debts. However, notice it’s “limited” not a shield to protect against fraud or criminality. The status can be revoked, and individuals can be prosecuted if they’re found to have acted maliciously or with the intent to default on debts.
  3. Funding: Once you form a non-profit it opens up the doors to both public and private grants. Not to mention angel investors, different kinds of funds, etc. Non-profits can solicit charitable donations.
  4. Tax-Exempt! No…federal…taxes…so that these funds can instead be put towards the non-profits mission or purpose. Also, those who donate to your non-profit are allowed to deduct them from their yearly income which helps come tax time.

What are the Disadvantages of Forming a Non-Profit?

The disadvantages are rather logical and you could say these same exact things about any conventional business idea. We’ll break things down into these four just to keep everything nice and tidy.

Cost & Funding Issues: 99% of the time creating a serious non-profit is costly in terms of time, human effort/elbow grease, and yes…$$$! Remember, this is a legal entity formed under law (ideally with the help of both a lawyer and accountant which themselves can be expensive) so there are dues and fees to be paid on top of everything else.

Paperwork & Logistics: There’s all kinds of ongoing documentation and record keeping (and their corresponding deadlines) that needs to be in place and strictly enforced if the non-profit is going to hold onto tax-exempt status. Then of course there’s the logistics involved in making a real impact!

Management: As we touched on earlier, a non-profit is only really as good or effective as its management. Because of the laws and regulations you’ll face, it’s critical to either have someone aboard who understands them or take the time necessary to do all the research.

Heavy Scrutiny: When we say heavy, we mean it, and on multiple levels – state, federal, local, social media, the public in general, and of course those who your non-profit impacts. Most non-profits are under a magnifying glass around the clock, 365 so be prepared!

When is it the Right Time to Form a Non-Profit?

There really is no perfect time to form a non-profit, well, unless you have access to a great lawyer and accountant! Because of how complex non-profits can get (and in a hurry) having these two professionals is going to be indispensable. Without them, to be frank, you’re adding a TON of risk.

Here are five easy questions that can help you figure out if this is the right move, in general.

  1. Is there already an organization filling this need, and if so, could you do it much better?
  2. How many people are truly involved and already on board for this initiative?
  3. Are you sure this mission wouldn’t be better/more productive as a for-profit corporation?
  4. How vital is this situation you want to address? Consider how long it can take to officially form a non-profit and then begin having an impact.
  5. Keeping a non-profit funded is half the battle, if not more so. Take a good look at your cause and see what the funding landscape looks like.

What Resources Can I Use to Get Started?

Absolutely, Startup Savant has a TON to offer just about anyone interested in founding their own non-profit organization. Feel free to browse around the site and start taking it all in, or here are three great places to begin.

This content on Forming a Non-Profit is not a legal document or legal advice. It is for informational purposes only and the information is subject to change over time. For specific questions and concerns regarding how to form a Non-Profit, please consult an accredited attorney or a qualified professional.