How to Start a 501c3 Nonprofit Organization
Have you always wanted to leave the world a better place than you found it by starting a nonprofit? Here's a simple, straightforward guide on how to successfully establish a 501c3 nonprofit corporation.
- Understand what a nonprofit is: an organization whose primary objective is to support some issue or matter of private interest or public concern (such as the arts, charities, education, politics, religion, research, or some other endeavor) for non-commercial purposes. There are different kinds of nonprofits, one of them being a 501c3, which is exempt from income and property tax, able to receive tax-deductible charitable contributions.
- Formulate a mission statement. As a non-profit organization, you exist to accomplish your mission, which should be crafted based upon your purpose, services and values. The mission statement is a concise expression that covers in one or two sentences who the organization is, what it does, for whom and where. It should also be compelling, as it will be used in all published materials, funding requests and public relations. It should also portray how your organization is distinct from others. (See Tips for a sample mission statement.)
- Form a Board of Directors. Forming a board requires careful thought and extensive recruitment efforts. Each state has regulations that determine the minimum size of the board, typically three, but the optimum number of people who sit on the board should be determined by the needs of the organization. Based on what your organization would like to accomplish, you should decide what special skills and qualities you will require of the individuals on your board. Identify qualified individuals who are supportive of your mission and are willing to give of their talents and time (see Tips for more information).
- File Articles of Incorporation. Articles of Incorporation are official statements of creation of an organization filed with the appropriate state agency. They are important to protect both board and staff from legal liabilities incurred by the organization, making the corporation the holder of debts and liabilities, not the individuals and officers who work for the organization. The specific requirements governing how to incorporate are determined by each state. You can obtain the information you need to proceed with this step from your state Attorney General’s office or your state Secretary’s office.
- Draft bylaws. Bylaws are simply the “rules” of how the organization operates. Although Bylaws are not required to file for 501(c)(3) status, they will help you in governing your organization. Bylaws should be drafted with the help of an attorney and approved by the board early in the organization's development.
- Develop a budget. Creating a budget is often one of the most challenging tasks when creating a nonprofit organization. A budget is the expression, in financial terms, of the plan of operation designed to achieve the objectives of an organization. New organizations may start the budgeting process by looking at potential income – figuring out how much money they have to spend.
- Develop a record-keeping system. Legally, you must save all Board documents including minutes and financial statements. It is necessary to preserve your important corporate documents, including board meeting minutes, bylaws, Articles of Incorporation, financial reports, and other official records. You should contact your appropriate state agency for more information on what records you are required to keep in the official files.
- Develop an accounting system. If your board does not include someone with a financial or accounting background, it is best to work with an accountant familiar with non-profit organizations. Nonprofits are accountable to the public, their funders, and, in some instances, government granting bodies, and it is vital to establish a system of controls (checks and balances) when establishing the organization’s accounting practices. Responsible financial management requires the establishment of an accounting system that meets both current and anticipated needs.
- File for 501(C)(3) status. To apply for recognition of tax-exempt, public charity status, obtain Form 1023 (application) and Publication 557 (detailed instructions) from the local IRS office. The filing fee depends upon the size of the organization’s budget. The application is an important legal document, so it is advisable to seek the assistance of an experienced attorney when preparing it. Both of these documents can be downloaded from IRS web site listed below.
- Apply for a federal employer identification number. Regardless of whether or not you have employees, nonprofits are required to obtain a federal Employer Identification Number (EIN) — also referred to as the federal ID number. Available from the IRS, this number is used to identify the organization when tax documents are filed and is used not unlike an individual’s Social Security number. If you received your number prior to incorporation, you will need to apply for a new number under the corporate name. Ask for Form SS-4 when applying for your EIN.
- File for state and local tax exemption. In accordance with state, county, and municipal law, you may apply for exemption from income, sales, and property taxes. Contact your state Department of Revenue, your county or municipal Department of Revenue, local Departments of Revenue, and county or municipal clerk’s offices.
- Fulfill charitable solicitation law requirements. If your organization’s plans include fundraising, be aware that many states and few local jurisdictions regulate organizations that solicit funds within that state, county, or city. Usually compliance involves obtaining a permit or license and then filing an annual report and financial statement. Contact the state Attorney General’s office, the state Department of Commerce, state and local Departments of Revenue and county or municipal clerk’s offices to get more information.
- Apply for a nonprofit mailing permit. The federal government provides further subsidies for nonprofits with reduced postage rates on bulk mailings. While first-class postage rates for nonprofits remain the same as those for the for-profit sector, second- and third-class rates are substantially less when nonprofits mail to a large number of members or constituencies. For more information on eligibility, contact the U.S. Postal Service and ask for Publication 417, Nonprofit Standard Mail Eligibility (also available at the link below).
- Sample mission statement: "The National Mental Health Association is dedicated to promoting mental health, preventing mental disorders and achieving victory over mental illnesses through advocacy, education, research and service; The National Consumer Supporter Technical Assistance Center’s purpose is to strengthen consumer organizations by providing technical assistance in the forms of research, informational materials, and financial aid. The mission of Texas Mental Health Consumers is to organize, encourage, and educate mental health consumers in Texas. TMHC supports and promotes the mental health recovery process through peer directed and operated services, advocacy, economic development, and participation in public mental health policy design."
- What to look for in a board member: Look for individuals whose values reflect your statement of purpose. Although it is recommended that the majority of your board be consumers, include the community at large, not just the mental health community. Consider the religious community, local service clubs, legal professionals, and colleges and universities as sources for prospective a Board of Directors. Do not overload people who already serve on many committees – seek a balance between old and new leadership.
- The organization needs to open a bank account and ascertain whether to use the accrual or cash method of accounting. The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced). In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not.
- Hire an attorney to help you with your Certificate of Incorporation and the By-Laws. Hire an accountant, particularly one that has experience with 501c3 nonprofit corporations, to help you file the state and federal exemption forms. It will save you time and money in the long run.
- Do not use an Incorporation service or Paralegal document processing service to start your nonprofit. They often only provide part of your documentation needed for full Tax Exempt Corporation status.
- It is important to file your 1023 within 15 months of the date when your organization was established, or when your Articles of Incorporation were filed. Although the IRS automatically provides a 12-month extension, missing the deadline may result in your organization not receiving recognition as a private foundation.