You have an idea about how to improve your community or help a community in need, but you do not know where to start to make the idea in your brain a reality. To make that dream a reality, create a nonprofit organization!
We have both created nonprofits and served in leadership roles in nonprofit organizations. The creation phase requires more upfront work than running an existing nonprofit, but going through the process of setting the nonprofit’s goals, creating an organizational structure and team, forming a legal entity, and filing for tax-exempt status will set up the organization for success well beyond the nonprofit’s initial existence. Building a nonprofit takes work, but it is the type of work that rewards you with the feeling that you are truly contributing to your community or improving the lives of others.
What exactly is a nonprofit organization, anyway?
A nonprofit organization, or simply “nonprofit” for ease of reference, is exactly that: unlike a typical business, its purpose is not to generate a profit, but to advance a particular goal. This goal can be to raise funds for any cause from scholarships to research or to allow a certain ongoing activity to continue happening in a community.
Why do it? What are the benefits of forming a nonprofit?
From a financial standpoint, forming a nonprofit is necessary to receive tax-exempt donations from potential benefactors. Donating to a nonprofit has tax advantages that handing over large sums of money as a gift does not. Creating a nonprofit to further a specific goal increases the probability that your goal will receive financial support since individuals prefer to support nonprofit organizations to receive the tax benefit.
From a logistics standpoint, the process of setting up a nonprofit also improves the organizational structure working to further a goal. Solidifying an enduring organizational structure in the beginning allows an organization to harness collective energy towards a common goal. In the long-term, this same structure enables the organization to survive and thrive beyond the tenures of key founding individuals by creating processes for shared institutional knowledge.
How do I actually form a nonprofit?
Step 1: Define your passion project.
Brainstorm and outline the precise goals of your future nonprofit organization. If a team of individuals collaborated to generate the idea of a nonprofit, it is worth including all initial stakeholders to work through the primary goal and values of the organization. In general, it is worth keeping the primary goal and values narrow in vision. A specific goal is more achievable than a broad goal like ending global poverty. How would you, a group of ten people, end global poverty? Instead, improving access to healthy and affordable food options in a local food desert is a more achievable goal that is likely to attract local benefactors looking to improve their community.
Just about any goal that improves a community is a sufficient goal for a nonprofit organization. We both worked to create the DC Revolution Rugby Club in 2019 to establish an inclusive rugby community in Washington, DC. Establishing an inclusive rugby team may seem a lot smaller than the end-global-poverty organizations we picture when we think of nonprofits, but it improves the community. Any idea you have that creates a space, opportunity, or funding for someone who may not otherwise have it could be a future nonprofit.
Step 2: Assemble your team.
Start assembling a team by considering these two questions:
What structure is required to make your organization run successfully?
What key personnel do you have onboard for your cause, and what talents do these individuals have?
The answers to these questions will determine your approach. If you are the only person (or one of only a few people) generating the idea of this nonprofit, you will need to find additional support. If this is the reality for your situation, it makes sense to create a general organizational structure first and then seek key personnel who can fill the roles established to run the organization.
On the other hand, if you have a number of key individuals invested in the cause, shaping the organizational structure around their skills and experiences may be more beneficial than copying an existing nonprofit’s organizational structure because you think that is the way your organization “should be” structured. Some folks have unique combinations of skills, and shaping the initial organizational structure to maximize these can facilitate initial success.
Adjusting the initial organizational structure around unique skill sets can feel uncomfortable for founders also worried about the enduring functionality of an organization. Here is the good news: Organizational structure is not permanent! While a brand-new organization may benefit from a tight-knit team, that same organization may see improvements a few years down the road by expanding the team and changing the division of responsibilities. Organizational structure should change over time as an organization grows! If your nonprofit is successful, you can worry about those changes after the initial years establishing yourself within your community.
Your initial team should be established to ensure the nonprofit’s sustained existence and consistent growth. At the beginning, this means finding a team that is ready to work, and in some way fight, for existence and initial growth. I (Xa here) previously served as president for a brand new nonprofit as well as an established one. It is much easier to lead an established nonprofit than build a new one. However, building a nonprofit, growing it, and bringing it to a point when you can hand it over to someone else with the belief that it will endure is the most rewarding experience.
Step 3: Form the legal entity.
Once you have defined your purpose and assembled your team, the next step is to formally organize as a legal entity. You do this at the state level where the organization is located. Be sure to register as a nonprofit corporation (or other descriptor appropriate to your state). You will need to obtain a federal employer identification number from the Internal Revenue Service during the process or immediately upon completion. If your organization will be seeking tax-exempt status—more on that below!—your organizational documents must include certain provisions required under state and federal law covering the following:
organizational purpose (i.e., your passion project),
limitations on earnings and activities,
dissolution provisions, and
miscellaneous provisions.
Failure to include the appropriate language in your organizational documents could result in rejection of your tax-exempt status application, so it is always advisable to consult a professional when setting up your nonprofit. Lean on my experience (Patrick here) helping folks legally establish all kinds of for-profit and nonprofit entities!
You may also need a local license or operating permit, so check with the city and county where the nonprofit is located.
Step 4: Apply for tax-exempt status.
You have probably received solicitations for donations that included a footnote describing the solicitor as tax-exempt under section 501(c)(3) of the Internal Revenue Code (“I.R.C.”). While nonprofits can be organized for any purpose, those organized for the purposes described in I.R.C. § 501(c)(3)—often referenced as charitable organizations—may receive tax-deductible contributions. A possible tax deduction can be a powerful incentive for potential donors. If your nonprofit wishes to receive tax-deductible contributions, you need formal recognition of your tax-exempt status from the Internal Revenue Service. This is separate from, and in addition to, obtaining a federal employer identification number. Remember, nonprofit does not automatically equal tax-exempt!
While I.R.C. § 501(c)(3) charitable organizations are the most common, nonprofits organized for certain other purposes can also receive tax-deductible contributions. See I.R.C. § 170(c) for the full list of types of organizations eligible to receive tax-deductible contributions.
If a tax deduction is part of your motivation for making a donation, use the IRS tax-exempt organization search tool to verify the status of a potential donee.
This sounds intimidating, but it does not have to be. IRS Publication 557 has all the details on applying for and maintaining tax-exempt status. The IRS website also lists the steps involved in applying for tax-exempt status. The application form you will use depends on your nonprofit type and size. Most nonprofits seek exemption under I.R.C. § 501(c)(3), so they will file either Form 1023 or Form 1023-EZ (the streamlined version). The forms generally require the applicant to describe the organizational and membership structure, purpose, officers, activities, and sources of funding; attach copies of organizational documents; and pay an application fee at the time of submission.
If the IRS approves your application, you will receive a determination letter stating that the organization is tax-exempt and can receive tax-deductible contributions and other types of deductible gifts. The determination letter will also outline the annual information return filing requirements for your organization. Be sure to file any required information returns each year to maintain your tax-exempt status.
Your state may also require a separate permit or registration to solicit charitable contributions.
This is a lot to handle, so reach out to us for help along the way!
Growing Your Nonprofit for the Future
Depending on your nonprofit’s goal, becoming part of larger community collaborations or a member of national organizations that help individuals find local organizations that address your issue area may be a crucial next step for growth. You want folks interested in your goal to find your organization. Create a website and online presence, grow your audience or membership, and participate in relevant community events.
Once you feel established enough to not worry about the daily survival of your nonprofit, work on growth and longevity of the organization. This involves increasing your outreach, recruiting future members, and expanding your role in the community. From a logistics standpoint, it also means documenting key processes so key personnel can transition in and out of leadership roles in the organization with minimal disruption to the success of goal achievement. This is rarely seamless and can often inspire revisiting organizational structure, seeking advice from leaders who left in a consulting capacity, and accepting when processes need to be improved over time.
You are creating a nonprofit organization because you are passionate about a certain goal or cause. Make it happen, and make it endure the inevitable friction that any organization encounters because succeeding at your goal is worth it.
Comentarios