How to start a nonprofit organization

Starting a nonprofit can be an incredibly rewarding journey. However, getting from your initial idea to a fully operational organization involves several important legal and administrative steps.

An important step is deciding how you will structure the entity. A nonprofit can be a nonprofit corporation (sometimes referred to as a nonstock corporation) or, in some states, a nonprofit LLC. This guide focuses on the steps for setting up a nonprofit corporation – the structure most often used if you’re seeking federal tax-exempt status.

To officially create your nonprofit corporation, you will need to file Articles of Incorporation with your state. Other steps include defining your nonprofit’s purpose, naming it, recruiting your initial board of directors, designating a registered agent, and more.

Once you’re up and running, you will need to file a separate tax exemption status application (501(c)(3)) with the IRS.

This guide walks through each stage of this process, from planning to ensuring compliance once you’ve incorporated.

1. Establish the mission and purpose

Before you form a nonprofit corporation, define its purpose. Unlike for-profit companies, which have clear reasons for existing, such as increasing shareholder value, nonprofits often lack this clarity. Nonprofits also serve different groups of people, each with their own needs and sometimes conflicting expectations.

To complete this step, you will need a mission statement and an exempt purpose:

Mission statement: This is your nonprofit’s reason for existence and communicates clearly and succinctly its purpose to the public, donors, staff, and the board. The statement should include what it does, for whom, and how it will operate. Think of it as a guide that informs all the decisions your nonprofit will make, such as new projects and programs you may want to undertake, as well as those to avoid or exit.

Your mission statement serves as a vital fundraising tool and supports your nonprofit’s efforts to obtain tax-exempt status by clearly outlining its goals, objectives, and operational structure.

Exempt purpose: To qualify for 501(c)(3) tax-exempt status, your nonprofit must have a specific purpose as defined by the IRS:

• Charitable
• Educational
• Religious
• Scientific
• Literary
• Testing for public safety
• Fostering national or international amateur sports competition
• he prevention of cruelty to children or animals

However, not every worthy cause automatically qualifies, so it's worth confirming early that the intended purpose aligns with an exempt category.

2. Select a nonprofit name

Another pre-formation step is choosing a name for your nonprofit corporation that complies with your state’s corporate filing office rules. Refer to their website, but the following guidelines typically apply:

• Corporate identifier: Many states require the name includes a corporate identifier, such as “Corporation”, “Company”, “Incorporated”, “Limited”, or “Corp”.
• Uniqueness: States usually won’t allow you to register a business name that is already in use by another company or business in their records.
• Prohibited and restricted words: Many states limit the use of certain words in business names. Some words are completely banned because they are seen as inappropriate. Other words, like "Bank," "Trust," or "Insurance," need approval from a state board or regulatory agency before you can use them.

When choosing a name for your nonprofit, first make sure it follows your state’s naming rules. Then, check if the name is already trademarked at the federal level. You can do this by checking the U.S. Patent and Trademark Office's online trademark database (TESS). If you use a name that is already trademarked, you could face legal issues, even if your state approves it.

It's important to check if the domain name and social media handles are available at this stage. Most nonprofits need an online presence to help with fundraising, outreach, and program delivery.

3. Develop a preliminary business plan

A well-thought-out business plan is important for any organization, including nonprofits. Even though your nonprofit is focused on its mission, not profit, it still needs careful planning, financial management, and effective execution to achieve its goals.

Creating a preliminary plan now can help you identify the skills and experience your nonprofit needs and inform your choice of board members and key staff.

Most nonprofit business plans should have certain key elements. They can vary depending on your organization’s size and mission, but the following basics usually apply.

As your nonprofit grows, revisit your business plan. Consider including strategic goals, more detailed operational planning, and multi-year financial projections.

4. Form the initial board of directors

Nonprofits operate differently from for-profit businesses. Rather than having owners, they are guided by a board of directors, whose main job is to act as stewards for the organization – ensuring the nonprofit serves its community effectively and stays true to its mission.

The board sets the overall direction and ensures the organization has the necessary resources to meet its goals and to navigate legal and ethical guidelines effectively.

If you’re thinking about starting a nonprofit, it’s important to know that most states require you to have a board of directors to comply with the local laws where your organization is formed. Typically, you’ll need at least three members on your board. Gather the names and addresses of your board members early on, as many states will ask for this information in your Articles of Incorporation or other related documents.

5. Select a registered agent

Like for-profit corporations and LLCs, nonprofits must have a registered agent. This agent can be a person or company and is designated to receive important legal documents and official communications on behalf of your nonprofit. These include lawsuits, subpoenas, and government notices. The agent serves as the nonprofit's main contact for legal and regulatory matters.

The registered agent plays an important role in protecting your nonprofit. By promptly receiving and forwarding important legal and government documents, the agent helps the nonprofit respond to notices, meet deadlines, and avoid complications such as default judgments, penalties, or losing its good standing. It is crucial that the agent is dependable, accessible during business hours, and maintains accurate records.

A registered agent must have a physical address in the state where your nonprofit is incorporated (a P.O. box is not acceptable) and be available in person during standard business hours.

The registered agent's name and address are often required in the Articles of Incorporation or similar documents, so be sure to choose your agent before filing.

6. File the Articles of Incorporation

The Articles of Incorporation is the document used to formally create your nonprofit corporation. In some states, it's called a Certificate of Incorporation or similar.

Each state has its own version of the form, but typically, the following information is required:

• Nonprofit's name
• Name and address of the registered agent
• Names and addresses of the initial board of directors (and sometimes the incorporators)
• A statement of the nonprofit's purpose
• Provisions regarding the distribution of assets if the organization is dissolved

When preparing the Articles of Incorporation, consider the following:

• Include essential statements for IRS tax-exempt status: This should cover your nonprofit’s specific exempt purposes and state that remaining assets, upon dissolution, will go to another tax-exempt organization or a government body for public use.
• Ensure clarity: Make sure the purpose statement is clear and detailed enough for the IRS to accept while still allowing your nonprofit some flexibility to change its programs in the future.
• Consider engaging a lawyer or qualified service provider to review the Articles of Incorporation before filing, especially the purpose and dissolution clauses. Mistakes in this language often lead to delays in receiving tax-exempt status.

Note: Forming a nonprofit corporation at the state level doesn’t automatically grant tax-exempt status. Federal tax-exempt status must be applied for separately to the IRS, and sometimes for state-level exemption as well. Some states also require additional approvals from specific state agencies before or after filing. In New York, for example, several state agencies must approve the business purpose of certain nonprofits depending on the activities involved.

If your nonprofit plans to operate in states beyond its state of incorporation, you’ll typically need to register in those additional states through a process known as foreign qualification.

7. Conduct the organizational meeting and adopt bylaws

After you file Articles of Incorporation with the Secretary of State, your nonprofit must hold an organizational meeting of the directors (and members, if applicable).

Common items addressed at the organizational meeting include:

• Adopting bylaws
• Confirming the initial board of directors and electing officers
• Authorizing the establishment of bank accounts
• Granting permission for essential state and federal filings and registrations, including the Form 1023 application for federal tax exemption
• Implementing a conflict-of-interest policy
• Discussing any additional initial business matters

Bylaws are the internal rules that guide how a corporation is run. They should give the Board of Directors enough flexibility to govern effectively and allow the officers to manage the corporation.

Typically, the bylaws cover various key topics related to this structure.

• Election of directors and officers
• Authority of members (if applicable), directors, and officers
• Quorum and voting standards for member and board meetings
• Procedures for addressing conflicts of interest
• Protection and indemnity for officers and directors

8. Obtain an EIN

An Employer Identification Number (EIN) is a federal tax ID number that identifies your nonprofit corporation to the IRS (as well as other federal and state agencies). Every corporation, including nonprofit corporations, must obtain an EIN from the IRS, even if it has no employees.

An EIN is also needed to open a bank account and apply for tax-exempt status.

9. Apply for federal and state tax exemption

To obtain federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, submit a completed Form 1023 (Application for Recognition of Exemption) to the IRS. (Smaller nonprofits can use Form 1023-EZ to apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.)

Follow these steps to ensure an accurate filing:

• Include detailed information: Explain your nonprofit's purpose and the activities it plans to carry out. Describe your governance structure, finances, and how you handle compensation. Include important documents like the Articles of Incorporation, bylaws, and conflict-of-interest policy.
• File within 27 months after formation: File Form 1023 within 27 months after forming your entity with the state. This ensures your nonprofit’s tax-exempt status is effective from the date it was incorporated or formed.
• Review carefully: The IRS will not process applications that are incomplete. Before you submit your application, review it carefully. Make sure you provide all the required information and that an authorized director or officer has signed it.

If approved, the IRS will send a letter confirming your organization’s tax-exempt status. This letter is important for fundraising, grant applications, and compliance with ongoing rules.

Once your organization gets federal approval, ensure it's recognized as tax-exempt at state and local levels to avoid state corporate income, sales, or property taxes. Requirements vary by state.

Sometimes, recognition by the IRS is all your nonprofit needs to obtain a state-level tax exemption.

10. Address state and local business licensing requirements

Before starting operations, nonprofits need to obtain various state and local registrations and licenses. These include:

• State-level registrations: Some states require nonprofits to register with the state Department of Revenue, especially if they will collect sales tax or apply for state tax exemptions. If your nonprofit plans to hire employees, you must also register with the state Department of Labor (or its equivalent) for unemployment insurance, workers' compensation, and payroll taxes.
• Business licenses: Local government agencies, like city or county offices, usually issue business licenses. In some states, such as Washington, you also need a general business license from the state. Most cities and counties do not require nonprofits to obtain a business license, but rules can vary widely. Contact your local clerk's office to check what's needed.
• Zoning and location requirements: Local governments decide where nonprofits can operate based on zoning laws. These laws impact where your nonprofit can set up offices, run programs, and manage any properties it owns or leases. Operating without the necessary registrations or licenses can result in penalties, fines, or disruptions to programs.
• Additional permits: Depending on what your nonprofit does and where it operates, you may need extra permits to follow local rules. These can include permits related to building, health and safety, fire safety, or signs.

11. Complete charitable solicitation registration

Many states require nonprofits to register for charitable solicitations.

As a rule, if your nonprofit conducts charitable solicitation within a state’s borders, it must register before funds are solicited from residents of that state. The registration process involves application fees, supporting documents, renewal deadlines, and annual financial reporting requirements. You may also need to provide a copy of your IRS Form 990 tax return.

Although many states have a uniform registration statement, the forms and requirements can still vary by state.

12. Meet Annual Reporting and Compliance Obligations

Starting a nonprofit means you must work closely with state and federal regulators. To keep your nonprofit in good standing and maintain its tax-exempt status, you need to follow various reporting and compliance rules regularly. Some common requirements include:

• State annual or biennial reports: Most states require nonprofits to file an annual or biennial report with the state agency that maintains corporate records. The report may have a different name in some states, and you often need to pay a filing fee.
• Charitable solicitation renewals: Most states require charitable nonprofits that ask for donations to file a renewal registration every year. This is in addition to their initial registration for fundraising.
• Federal annual information returns: Tax-exempt nonprofits must file an annual report with the IRS called Form 990. Failure to file this form for three years in a row results in the automatic loss of its tax-exempt status.
• State financial disclosures: Many states require nonprofits to renew their corporate or charitable registrations and to provide financial information. IRS Form 990 is usually all that is needed, but each state has different rules. Check what is required in the state where your nonprofit is registered and in any state where it asks for donations.
• State tax-exempt status renewals: Some states require nonprofits to renew their tax-exempt status periodically. For example, many states provide their own tax-exempt certificate for sales and use tax. Nonprofits must apply for and regularly renew this certificate.
• Business license renewals: Nonprofits typically need to renew their business licenses and local permits every year. The requirements, fees, and deadlines for renewal can vary by city and county. Keep track of the renewal deadlines for any licenses or permits your nonprofit obtained when it started.
• Ongoing governance and recordkeeping: Nonprofits must keep accurate records related to governance. This includes minutes from board meetings, updated bylaws, conflict-of-interest forms, and financial records. Auditors or donors may review these documents during audits or when checking on grant applications.

Common questions about nonprofits

What is the difference between a nonprofit and a for-profit corporation?

Nonprofit and for-profit corporations are similar in many ways. Both are created by filing documents with the state, have boards of directors, and must follow regular filing requirements.

The main difference is in how they handle profits. Nonprofit organizations cannot give their profits to private individuals. Instead, they can pay reasonable salaries to those who work for them. In contrast, for-profit businesses can attract investors, who share in the profits if the business does well. Any profit made by a nonprofit goes back into the organization to support its mission and serve the public good.

Are a not-for-profit and a nonprofit organization the same thing?

Not-for-profit organizations are similar to non-profits because they do not generate profits for owners through fundraising. They rely on donations to support their work. However, not-for-profit businesses do not have to serve the public or have a humanitarian goal, as many non-profits do.

Examples of not-for-profits include sports clubs, trade associations, and credit unions. These organizations need to apply for tax-exempt status, and donations to them from businesses or individuals may not be tax-deductible.

What is a 501(c)(3) organization?

Section 501(c)(3) of the U.S. tax code provides tax-exempt status for nonprofit organizations. If an organization meets the requirements of Section 501(c)(3), it does not have to pay federal income tax.

Organizations that can qualify for 501(c)(3) status usually fall into three groups: charitable organizations, religious organizations, and private foundations.

However, simply forming a nonprofit at the state level does not automatically grant 501(c)(3) status. The organization must first be created as a nonprofit corporation in the state. Then it must apply to the IRS for tax-exempt status by completing and submitting Form 1023 or 1023-EZ.

How long does it take to form a nonprofit?

Starting a nonprofit involves several steps. How long it takes depends on how quickly the state processes your application, how fast the IRS reviews it, and how quickly you complete the necessary preparations.

• State incorporation: Filing the Articles of Incorporation usually takes a few days to a few weeks. This timeframe depends on the state where you are filing and whether you choose expedited processing.
• EIN: Obtaining an Employer Identification Number from the IRS is usually immediate when applied for online.
• Federal tax-exempt status: The IRS review process for Form 1023-EZ usually takes between three weeks to three months. For the standard Form 1023, the review can take anywhere from three months to a year. This part of the process is often the longest.
• State tax exemption and charitable registrations: Each state has its own process for handling these matters, usually starting after the IRS gives its decision. Some states even allow people to file at the same time as the IRS. The amount of time it takes can differ a lot from state to state, ranging from a few weeks to several months.

How do nonprofits make money?

Nonprofits can generate revenue, but any extra funds must go back into their mission instead of to owners or shareholders.

To last over time, nonprofits need to build savings and operate sustainably.

Common ways nonprofits earn money include individual donations, grants from foundations or government agencies, membership fees, fundraising events, and income from services or selling branded products.

RASi can help!

Forming a nonprofit involves more than filing paperwork — you need the right language in your articles to qualify for IRS exemption. Our specialists handle the entire process, from formation through Form 1023. Get in touch!