Starting a nonprofit organization is a complex process, requiring extensive planning and compliance with both state and federal jurisdictions. But there’s an easy way not to be overwhelmed—as with anything in business, a solid plan and careful research are the keys to starting a nonprofit without encountering any nasty, potentially expensive surprises along the way. The more informed you are, the more road bumps you’ll be able to anticipate and avoid!
There are several ways of structuring a nonprofit organizations, but this article assumes that your intention is to operate as a tax-exempt 501c3 nonprofit. These types of nonprofits are formed for one of the following purposes:
- Public safety
- Fostering amateur sport competition
- Child or animal cruelty prevention
Before doing any filing at all, it’s important to carefully plan your strategy so that you’re able to navigate the rules and regulations and understand your requirements.
Part 1 of our “Starting a Nonprofit” series begins with some of the preparation that you should do before leaping into the process.
1. Write a Purpose Statement
While many not-for-profit purposes statements consist of nothing more than “any and all legal purposes,” a nonprofit purpose statement is more involved, specifically mentioning the purpose and activities of the business.
The purpose of your nonprofit mission statement is twofold. First, it needs to be included in your Articles of Incorporation; nonprofit corporations enjoy significantly reduced filing fees and tax responsibilities in most states, and in order to receive these benefits, the state needs to know what it is your business is doing.
Additionally, continuing the assumption that you’re forming a nonprofit corporation in order to become a tax-exempt organization and accept tax-deductable donations, your purpose statement will need to quote specific IRS laws in order to be accepted as a 501c3 nonprofit by the IRS—more on that in Part 2.
(At any rate, for a small filing fee your Articles of Incorporation can be amended with the state to include this information after filing; if the IRS information isn’t included in your purpose statement right from the beginning, it’s nothing that can’t be fixed after the fact.)
For step-by-step instruction on how to write a great nonprofit mission statement, here are a few resources to help you out:
- “Demystifying the Mission Statement,” Society for Nonprofit Organizations
- “How to Write an Effective Nonprofit Mission Statement,” About.com
- “What Should a Mission Statement Say?,” Idealist.org
One quick note on mission statement resources—There are any number of fantastic resources out there to assist you in writing your mission statement. However, be aware that while your research is extremely valuable, purpose statement templates might not be; your nonprofit purpose statement should be tailored specifically to your business and specifically what it is you’d like your organization to accomplish. A vague or generic purpose statement will not only fail to provide your organization with specific direction, but will fail to pass the IRS’s scrutiny for tax-exempt status later.
2. Pick a Business Name
Naming a nonprofit organization is an exciting process. But before getting ahead of yourself and running with the nonprofit name of your dreams, it’s important that you scrutinize your selected name to determine whether it’s available and how it’s going to hold up.
Choosing a business name is something that should not depend solely on how you think it sounds (though there’s nothing wrong with being passionate about the name of the nonprofit organization of your dreams!). There are a few additional factors that should weigh into your decision:
- Is your chosen business name available in your state?
- Is the name currently another business’s trademark?
- How will the public respond to the name of your organization?
- Can your business name face the future?
If the name does clear your state’s corporate database, that doesn’t necessarily mean it isn’t being used elsewhere as a state or federal trademark—information that would not come up in a preliminary state check.
Additionally, unregistered trademarks—by definition something that isn’t on file in any specific searchable database—can enjoy certain levels of trademark protection and can be difficult to track down.
In addition to legal concerns, you need to be aware of how your nonprofit organization’s name will be taken in by the public, including potential donors or investors—as well as how it might artificially limit your growth potential. For example, if you name your nonprofit “Kids Growth Program of Florida, Incorporated,” what will you do when the opportunity to expand into Georgia presents itself? Certainly, amending your articles is a possibility (or registering a fictitious name for your foreign entity in the new state); however, the possibility is something you should be aware of.
Before printing three years’ worth of promotional material, take a look at the following resources to help you cut your list down to the names that you’ll be able to use:
- Search the USPTO’s trademark database
- Search your Secretary of State’s corporate database (state-by-state listings courtesy of Coordinated Legal Technologies)
- “Business Name Search,” Click and Inc
- “Does Your Nonprofit Need a New Name?,” Red Rooster Group
3. Choose your Board of DirectorsThe board of a directors of a nonprofit organization have a very important role: to facilitate the nonprofit achieving its objectives, and to protect the public while doing so.
Choosing a board of directors is a crucial decision; the directors are the ones who will steer your nonprofit organization to success. They have the power to terminate a corporate officer; even the executive officer can be removed if the board of directors deem it necessary for the success of the organization. They appoint the key players. And they control the business and govern its endeavors and actions.
One of the key factors in choosing a nonprofit board of directors, according to the Foundation Group, is to select a team of individuals who share your vision for the organization’s mission. Your board of directors should be able to work as a team toward a common goal, not bog the progress down with frequent quibbles about how to get there.
Only you and your team can make the ultimate determination, but here are a few resources to help you choose a great nonprofit board of directors.
- “Serving on a Nonprofit Board of Directors,” SCORE
- “Establishing a Nonprofit Organization,” Foundation Center
- “Choosing a Board for Your Nonprofit,” CharityNet USA
4. Decide Where to Incorporate
According to the IRS:
To be organized exclusively for a charitable purpose, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify. However, an individual will not qualify.
This nonprofit checklist assumes that you are forming a nonprofit corporation; if you prefer to organize in any of the other accepted ways, it is best to discuss this with a lawyer or legal adviser.
While the majority of smaller nonprofit corporations organize in the state in which their management team is located (as this is the most convenient), there are no government requirements that a corporation does so.
Each state has its own set of rules and regulations, as well as tax structure, filing fees, and other factors that can directly impact your nonprofit organization. Because of this, some new business owners feel that it would be cost-effective to simply locate and select the state where business conditions for small nonprofit organizations are most favorable (protection of statues, flexibility of regulations, and so forth).
But while this makes sense and might look like a good idea on paper, in reality there are a number of other factors that must be considered if your goal is to save money on taxes and other state fees.
It’s certainly worthwhile to look into ways to cut down your financial responsibilities. Many for-profit businesses, for example, choose to incorporate in Delaware because of the state’s moderate filing fees and its Court of Chancery, Delaware’s business-friendly and comprehensive business statutes. But if you’re considering registering your small nonprofit organization in a state in which you and your directors and officers do not live, consider the following:
- You are required to have a registered agent with a physical in-state address. If you do not live in the state, you cannot act as your organization’s registered agent, your choices are to hire a commercial registered agent (for $100–$150), or move there.
- With few exceptions, a business registered in one state must register for foreign qualification in order to do business in another—if you incorporate in another state just to take advantage of a favorable business climate but you also plan to operate your nonprofit in your home state, you’ll need to register as a foreign nonprofit corporation there first. Fees for this can be as low as $100 or as high as $750, so choose wisely.
If you’re starting a small nonprofit organization consisting of only a handful of people, it’s a good possibility you plan to operate locally. Between the in-state registered agent requirement (for which a PO box does not suffice) and the cost of registering as a foreign corporation and maintaining a tax presence in both states, it’s important that you carefully study any potential cost benefit you believe you will be receiving by registering in a state other than your own.
And, as with any other financial or business decisions, it’s important that you educate yourself with general business information—but it is even more important that you discuss these decisions with your accountant or attorney before leaping.
[This two-part blog post continues with “Starting a Nonprofit: Checklist (Part 2).”]