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Nuts and bolts of starting a nonprofit organization in the U.S.

Note: The procedures and rules about starting a new nonprofit organization—even the words used to describe such organizations—vary greatly around the world. This page describes very generally the process in the United States. Information from local authorities will be necessary. In some areas, there are regulations about how groups can be formed and operate even without seeking formal status as an "organization." Since these regulations can be highly technical, and recovering from early errors can be time-consuming, expensive, and (sometimes) impossible, any group thinking about starting to work together in some way should check carefully to determine what requirements may apply to their plans. Sometimes the best first step will be to consult with people who are active in existing organizations that operate in the same community doing parallel sorts of work.

If you haven't looked at them already, you might want to consider the "5 Tips and a Warning" post.

In broad outline, there are three steps in the process:

Get ready

Though the process for starting a nonprofit organization as described below may appear daunting, the work of sustaining a nonprofit over the long haul is a much greater challenge. The most important part of the startup process comes before the formal steps of incorporating and applying for tax exempt status.

The usual pattern is that a relatively small group of people with a vision for the organization get things started. Some or all of them may give direction, operating as an informal board of directors. One of their first tasks will be to draft a "mission statement" that summarizes the work the new organization will do and the reasons why it is important. There is more on the subject in Board Basics.

A sense of the challenges that lie ahead for any new organization can be seen in the Internal Revenue Service's outlines of the Life Cycle of an Exempt Organization on its website.

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Incorporate in a state

A key first point is that creating a nonprofit starts with establishing an organization under the laws of some state (usually a nonprofit corporation, as described in the next paragraph). Only after such a corporation has been formed can the process of applying for federal tax-exempt status begin (that's because the federal tax-exempt status is available only for corporations and similar entities). Further, not all federally recognized tax-exempt organizations are eligible to receive contributions that the donor can deduct from their personal income taxes; that special status—recognition under section 501(c)(3) of the federal tax code—requires that the organization meet specific standards.

There is a lot in common among the nonprofit corporation laws that exist in nearly every state, but there are also important differences that can cause delays, distractions and disasters if ignored. The National Association of State Charity Officials has a state-by-state list of contact information on its website at http://www.nasconet.org/agencies; a good first step is reviewing the information offered for the state where the new organization will be formed.

Each state also offers different privileges and exemptions to nonprofit corporations, often subdivided into several specific categories. Usually. too, all the laws and regulations that apply to any business operation apply to nonprofits as well, though there may be specific terms and conditions that affect nonprofit organizations differently. Which taxes and fees must be paid, when exemptions or other special provisions apply, etc., are questions which can only be answered by local research.

A widely used resource is Anthony Mancuso's book How to Form a Nonprofit Corporation in All 50 States published by Nolo Press. You can purchase it online through Amazon.com by clicking on this link: How to Form a Nonprofit Corporation. (Idealist.org will receive a small royalty which is used to support our work.) Or, for an initial overview of the process, check out the brief Harbor Compliance guide Articles of Incorporation.

There are many programs that offer assistance with forming new nonprofit organizations. In states where members of the National Council of Nonprofits are operating, the statewide association may do so itself or refer inquiries to other groups. Use the links at http://www.councilofnonprofits.org/find-your-sa to find contact information for them. An online search for Starting a Nonprofit Organization in [statename] is also likely to turn up useful sources of advice or assistance.

Advice from legal and financial professionals may be useful, or necessary – especially if there are reasons to believe that the newly formed organization will be handling large sums of money, contracting to deliver critical services, or engaging in activities that might pose risks for clients or the general public. The state associations of lawyers and CPAs can usually provide referrals to members who specialize in working with nonprofits.

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Apply for Federal tax-exempt status

With few exceptions, every corporation that operates in the United States is liable for taxes on its net income – that is, the amount left at the end of each accounting year after paying ordinary business expenses and taking other deductions permitted by the Internal Revenue Code (IRC).

The IRC provides that corporations formed for certain specified purposes may apply for tax-exempt status. The most familiar exempt organizations are often known as "501(c)(3)s" after the ID of the section of the IRC that covers exemptions for "public charities" and "private foundations."

IRS Publication 557—Tax-Exempt Status for Your Organization—offers a detailed presentation of options and procedures for applying for federal tax-exemption. It is available online at http://www.irs.gov/pub/irs-pdf/p557.pdf (a large file). IRS Publication 4220—Applying for 501(c)(3) Tax-Exempt Status—offers a broad explanation of the process for charitable nonprofits. It is available online at http://www.irs.ustreas.gov/pub/irs-pdf/p4220.pdf. For a slightly more user-friendly introduction to the concepts and procedures involved in tax-exempt status, see Harbor Compliance's How to Start a 501(c)(3).

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And then....

Many observers say operating a nonprofit organization is actually harder than maintaining a for-profit organization of similar size. Nonprofits have more stakeholders and less tangible missions (after all, the straightforward goal of a for-profit organization is to return a profit to its owners). Typically, there are special reports that must be filed regularly with local governments, external funders, and the IRS. Many fees and taxes that apply to all organizations apply, of course, to nonprofits. And there are sometimes special requirements (especially around fundraising and accounting) that call on specialized knowledge to meet. Other sections of this Resource Center address some of these issues in more detail and there are books, trainings, courses, and other websites that offer a lot of information about how to manage nonprofits — and how to manage them well.

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