How to Form a Nonprofit

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Common Questions About Forming a Non-Profit

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!

Is a Non-Profit The Right Choice for Me Professionally?

This can be a difficult question to answer as there are many reasons why people form non-profit corporations (also known as non-profits).

Some are government funded or meant to give back in fields like the arts or athletics, while others provide more widespread services for humanity, such as the YWCA and Girls’ Club. Currently the IRS recognizes more than 25 categories of organizations that can attain “charitable” 501(c)(3) status and a ton can fit under the non-profit corporation umbrella.

The IRS recognizes so many non-profits as viable business entities because there’s such a huge variety of purposes that drive non-profits. Examples include public interest, religious, educational, scientific, literary, public safety testing, fostering national/international sports competitions and the list goes on.

There are four main categories of non-profit corporations set forth within this article:

  1. Public Charities: must document 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, etc. Essentially, these types of non-profit corporations benefit a specific group of people.
  4. Community Serving: These include services such as human service programs, medical research, education and health services, etc. These non-profits serve specific communities or geographical areas.

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.

Member-Run vs. Volunteer-run

What’s the difference between a member-run as opposed to a non-profit run by volunteers?

In essence, a member-run non-profit is really a corporation, so it has a board of directors and officers (official members) who manage 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. That doesn’t mean that a particular corporation, group or agency doesn’t have accounting and other legal responsibilities. They do. They just differ from member-run corporations. The bottom line here is that someone, whether it be a group or individual or government agency, is funding money for this non-profit and they have a reasonable expectation of accountability for monies expended and the tax authorities will require that you account for those monies and the non-profit’s time.

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.

Is One Type of Non-Profit Better Than Another?

The answer is “not necessarily.” The better question is what’s best for goals and needs of your particular non-profit.

When venturing into the non-profit world, it’s essential that you do so with your eyes open to:

These are some examples of how the failure to clarify goals and responsibilities can lead to trouble for a fledgling or seasoned non-profit corporation.  Be sure that this doesn’t happen to you!

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:

How About the Disadvantages?

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 this nice and tidy.

When's 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?

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 two 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.