Starting your own nonprofit can be an excellent way to give back to your community, but there are a number of complicated laws surrounding the coveted tax-exempt status. Make no mistake: A nonprofit is much more complicated small business to launch than your average for-profit business, but that's not meant to deter you. Nonprofits can provide a rewarding and meaningful career. Everyone wants to make a mark on the world. Wouldn't it be great to leave the office every day knowing you've truly made a difference?
How to start a new nonprofit — which is already complicated in itself — is one thing, but how to start a successful nonprofit is next level. It takes some serious planning and a whole lot of paperwork. The good news is that people are giving more and more every day. The United States is home to 1.5 million nonprofits, and American foundations, corporations and private citizens gave $471.71 billion to charity in 2018 alone. If you’re looking to jump into this meaningful type of work, these tips can help you get started.
Know the Difference Between Nonprofits and For-Profit Businesses
Before you start a nonprofit organization, you need to understand the difference between a nonprofit and a for-profit business. At the heart of it, a nonprofit is an organization or corporation where none of the net profits benefit a single individual. In layman’s terms, that means nonprofits aren’t created to make people wealthy, like Amazon, Samsung or McDonald's. They’re created to service a group of people, though unlike the name suggests, they may make some profit along the way.
Unlike for-profit businesses, which are really meant to line the pockets of shareholders, any leftover profits at the end of the tax year stay within the organization. You can’t sell a nonprofit and make half a billion like Tom from MySpace. (Tom Anderson, the infamous founder, made $580 million after selling his tech company in 2005.) No single person can actually own a nonprofit, and if you fail in your efforts, your nonprofit's assets are distributed to other nonprofits. You don't get to take them with you.
When most people think of nonprofits, they're thinking of the 501(c)(3) organizations with federal tax-exempt status. These are charitable organizations like food banks, museums and animal welfare groups that generally receive funds through grants, donations and membership dues. Nonetheless, the IRS (internal revenue service) outlines 27 different types of organizations that can be considered nonprofits. This includes everything from social advocacy groups and federal credit unions to trade organizations, public charities and social clubs. You’ll need to know where your business stands before you launch.
Do Market Research
A nonprofit is still a business, and it still has competition. Even if you’re all fighting for the greater good, you’re still competing with other corporations for business. If you want to start a nonprofit that’s successful, you’re going to have to do some solid market research to make sure your business is something that’s needed and that people will support. You probably won’t be successful with a charity that provides medical relief funds to billionaires. Of course, this is an egregious example, but the sentiment still stands.
Find your niche and make sure you’re filling a hole in the market. You may have trouble landing donations if a lot of other charities are doing the same kind of work or if it’s not a charity that anyone would ever support.
Keep an Open Mind to Alternatives
Running a nonprofit is a lot more complicated than running a for-profit business. It’s certainly not for everyone, and that’s OK. You don’t have to start a charity from scratch to help your community.
After you do some market research, you might find out that a popular national charity already exists to serve the cause you hold so close to your heart. Rather than compete, you may want to try to launch a local chapter. Alternatively, you can always volunteer for an existing local charity or inquire about joining the board.
Make sure that starting a nonprofit is really what you want to do. This business is so highly regulated that you can’t even quit once you’ve started. There are laws surrounding how you must legally dismantle a registered nonprofit if it’s no longer working out. Once you're in it, there's no simple way out, so be totally sure.
Don't Do Anything Without a Business Plan
Nonprofits have an extremely strict designation with the IRS. You can lose your tax-exempt status if you, say, accidentally make too much profit from something that’s seen as an unrelated business activity. For example, if an animal welfare charity runs a cat cafe and makes a profit from selling coffee, it may be viewed as unrelated business income. For this reason, you have to be ultra clear about your sources of revenue and the mission of your nonprofit.
A solid business plan will make sure that your nonprofit stays on the proper course, helps the people it’s meant to help and fully complies with the law. If you’re struggling with how to start a nonprofit or write a business plan, lead with a mission statement. Remember that every move your nonprofit makes should be in the service of your nonprofit’s mission. Almost nothing is more important.
Incorporate Your Nonprofit
If you’re wondering how to start a nonprofit and make the most money, the answer probably lies somewhere in your business structure. Not all nonprofits are tax-exempt organizations, and let’s be real: Corporate taxes are much pricier than taxes on, say, an LLC. There’s still a huge benefit to incorporating because it allows you to formally submit a 501(c)(3) application. If approved, your nonprofit will be exempt from paying federal income taxes.
To get incorporated, you’ll likely have to create articles of incorporation and file a charter with the state. The state is largely responsible for regulating nonprofits and charities.
Be Transparent and Get Help With Your Bylaws
Some states legally require nonprofits to have bylaws, which are essentially the operating rules of your organization. Even if your state doesn’t require them, it’s still immensely advisable because a good set of bylaws will guide your board and help settle conflicts and issues that may arise throughout the course of doing business. Bylaws also help the board of directors make sure that you’re following all the applicable state and federal laws so you don’t lose your tax-exempt status.
Make no mistake: Bylaws are legal documents, so you should hire a lawyer or professional who specializes in nonprofits to help you make a final draft. Avoid including information that might frequently change, like job descriptions or marketing guidelines, and learn the clear distinction between the words “shall” and “may”. “Shall” denotes a required action, while “may” denotes an optional action.
Once you’ve drafted a final version of your bylaws, you'll probably want to make them public. Though it’s not required, transparency can help raise public trust and foster more donations.
Know Your Needs and You’ll Hire the Best Board Members
Are you wondering how to start a successful nonprofit? Look no further than your board of directors. Even the tiniest nonprofits rely heavily on their board members. Among the most important is your executive director, who will lead the charge when it comes to fundraising efforts, appropriating funds, implementing marketing strategies and organizing your business. So, how do you hire a good one?
The best way to find a solid director is to identify your needs and create a distinct hiring plan that outlines everything, including the interview process, which board members and employees are involved and salary requirements. If you’re running the type of nonprofit that’s hosting live events, find an executive director who specializes in live events.
If your charity is centered around offering financial assistance to underprivileged homeowners, consider hiring someone with experience in both real estate and nonprofits. Remember that board members should be people who are already connected and influential in their own right.
Compliance Is Key
As a nonprofit, the government will hold you accountable to your mission statement. Make sure you register with the state office that regulates charitable organizations and nonprofits before you start raising money. Every year, you’ll be required to file IRS Form 990, which basically outlines your business’s yearly finances.
To further transparency and compliance, you may want to make your financial information publicly available. Just like with your bylaws, this will help make people feel more comfortable with donations. They're more likely to choose your charity if they know exactly how the money is going to be spent and whom it's going to help.
Develop a Clear Fundraising Plan
Financing is tricky for nonprofits because the wrong revenue stream can cause a nonprofit to lose its state and federal tax exemption. Exempt organizations generally get financing a couple of ways:
- Government grants
Sales could include things like selling donated merchandise (a business model found in organizations like the Salvation Army or Goodwill), holding events (like a church carnival or fundraising gala) or selling new merchandise (like how Livestrong gained popularity with yellow, plastic bracelets).
Like Livestrong’s business model, some revenue streams can also double as grassroots marketing, provide something people need or want and raise money at the same time, but you must make sure that all sales are related to your nonprofit's mission. Generally speaking, if your nonprofit relies on generating its own revenue (like through merchandise sales or membership dues), you’ll have to pay federal and state corporate income tax for all unrelated business income greater than $1,000. Profit isn't a problem, but you must make sure that your business doesn’t generate the majority of its income through unrelated business, or the IRS will revoke your nonprofit status.
Utilize Google for Free Advertising
A key part of growing your nonprofit is advertising, but most first-time nonprofit founders don’t realize that there are plenty of free advertising options that actually work. One of these options is Google Ad Grants, which gives nonprofits $10,000 a month to spend on advertisements in Google Search.
To get the most out of a Google ad grant, you’ll want to hire someone who specifically has experience in online marketing. There are certain best practices when it comes to maximizing your pay-per-click via keywords, and the way Google's algorithm reads keywords is always changing. The right marketing person can make the most out of your money. It's especially important that you spend every cent Google gives you because the cash does not roll over month to month.
Beyond Google, you’ll want to implement a solid marketing plan. This could include sites like Facebook, which has a designated fundraising tool to collect donations, or Instagram, which helps raise visibility and transparency. Out of every online platform, an email list is still the most direct way to connect with your supporters and promote events and other fundraising efforts.
Use the National Council of Nonprofits
The National Council of Nonprofits offers a variety of resources that help startup nonprofits maintain compliance and run their day-to-day operations. This organization has local branches that can key you in on specifics, and they'll help you expand your knowledge of the nonprofit sphere through various webinars. From ethics and accountability to best fundraising practices, the National Council of Nonprofits is there every step of the way.
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Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.