Ten-Steps for Starting a Nonprofit
At Carrack Accounting Services, we offer nonprofits essential accounting services in order to provide them with accessible financial navigation, so that they can accomplish their mission. We recognize that one of the most daunting tasks for many nonprofit organizations is getting set up as a nonprofit organization. Because of this, we set out to create a brief guide on starting a nonprofit organization per Section 501(c)(3) of the United States Internal Revenue Code (IRC). Keep in mind that there are nonprofit organizations that have other designations per the IRC, such as a 501(c)(4) or 501(c)(7).
As professionals working in the industry of nonprofits, we hope that this ten-step guide will get you started on your dream of building a nonprofit organization. We have included references where you can find additional information. Please note that we are not sponsored by anyone, especially the references noted in this guide. We are not attorneys, and we always recommend consulting with the appropriate experts and professionals. Our intent is to provide basic information that will lead you to where we can help most, which is financial guidance and accounting best practices. We look forward to helping you on your journey to making the world a better place.
1. Identify the Purpose: Every nonprofit organization begins with a mission that its members wish to pursue. This is essential for filling out paperwork and your organization’s guiding vision and virtues.
2. Research & Plan: We recommend researching nonprofit organizations that perform similar duties as yours, especially if there is already one in your area. Take time to research federal and especially state regulations, which vary from state to state. Different missions come with different regulations whether your organization is a church, clinic, etc. A good place to start is by reading the instructions for IRS form 1023.
3. Establish an Organization: A nonprofit organization cannot be established until there is a preexisting organization, usually a corporation. According to Part II of Form 1023 instructions, “You must be a corporation, limited liability company, unincorporated association, or trust to be tax-exempt under section 501(c)(3).” Most organizations will file as a corporation or a limited liability company (LLC). As an LLC, you must elect to be a corporation, which requires additional paperwork.
a. Fill out policies and documentation such as Bylaws, Articles of Incorporation, Conflicts of Interest, etc. See below for services that can help establish an organization.
4. Elect a Board of Directors: A Board of Directors is required before an organization can obtain 501(C)(3) status for becoming a nonprofit. Establish the process, determine roles, and document it when forming an organization.
5. Receive Employer Identification Number (EIN): This number identifies organizations to the Internal Revenue Service (IRS). This is vital to an organization’s function and legitimacy and is required when the organization is actively engaged in activities such as opening a bank account or hiring employees. You can apply online here.
6. Build a Website: Most jurisdictions do not legally require nonprofits to have an active website, but it is highly recommended that nonprofits do have an accessible website, especially before filing to become a nonprofit. Websites are essential for fundraising, networking, credibility, and transparency. Many nonprofits publish audited financial statements on their website.
7. File for Tax-Emption 501(C)(3): To officially obtain nonprofit status, you must fill out form 1023 and send it to the IRS. This must be completed online via: pay.gov
a. Additional instructions for filing form 1023 can be found at: www.irs.gov/Form1023
b. Additional information about Tax-Exempt Status here.
c. Additional information about applying as a 501(c)(3) here.
d. Organizations are required to submit a 3-year budget. Learn how in our future course.
8. File for Licenses and Permits: Depending on the nonprofit organization, additional licenses and permits may be required. Read this article from Indeed for more information.
9. Review State Regulations: Some states may require additional information or documentation before you can be recognized as a nonprofit organization in that state. States may also have certain requirements for nonprofits to maintain their Tax-Exempt status. Go to the IRS website for a comprehensive directory of state nonprofit information.
a. File to Fundraise: As of 2024, before requesting donations from individuals and organizations, 40 states require nonprofits to register with their state.
b. Audits: Some states require independent audits as often as once a year. Certain grants and contracts may require independent audits or government audits.
c. Donor Platform: It is not required to use software for tracking donor information, but it is required by the government to provide receipts for some donations, so it is recommended to have software that can do this for you.
10. Fulfill Your Mission: We look forward to the good that you can give to your community. As always, we recommend consulting professionals for your legal and financial needs. If you are looking for accounting expertise, then feel free to reach out to Carrack Accounting Services (CAS).
Tools for Starting an Organization
Recommended Accounting Tools and Services
References
Cody, S. (2020, November 17). How To Start Your Own Nonprofit In 7 Steps. Kindful. https://kindful.com/blog/how-to-start-a-nonprofit/
How to Start a Nonprofit | National Council of Nonprofits. (n.d.). Www.councilofnonprofits.org. Retrieved March 25, 2024, from https://www.councilofnonprofits.org/running-nonprofit/how-start-nonprofit
Indeed. (n.d.). Business Licenses and Permits: An Overview. Indeed. Retrieved March 25, 2024, from https://www.indeed.com/hire/c/info/business-licences?gad_source=1&gclid=Cj0KCQjwwYSwBhDcARIsAOyL0fivWyfUy8tmaZHzHCeuqf115_LEqthSiW4s2GgK1xfSs6XV23xzENEaAkqBEALw_wcB&aceid=&gclsrc=aw.ds
IRS. (n.d.-a). About Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code | Internal Revenue Service. Www.irs.gov. Retrieved March 25, 2024, from https://www.irs.gov/forms-pubs/about-form-1023
IRS. (n.d.-b). EIN Application Online. IRS Tax Number. Retrieved March 25, 2024, from https://irs-taxnumber.org/
IRS. (n.d.-c). State Links | Internal Revenue Service. Www.irs.gov. https://www.irs.gov/charities-non-profits/state-links
Pay.gov - Home. (n.d.). Www.pay.gov. https://www.pay.gov/public/home
PS, C. N. (2020, July 29). Legal Basics for Nonprofit Websites | Clark Nuber PS. Clark Nuber PS. https://clarknuber.com/articles/legal-basics-for-nonprofit-websites/