A non-profit company is different from a for-profit company on several levels. First, it has a special tax status with the government and distributes profits back to the organization. For-profit companies, on the other hand, can distribute profits to the owners or shareholders. Second, non-profits must obtain tax-exempt status within their provisioning state or region.
If you are interested in forming a non-profit, the steps below are a good way to start the process.
1. Explore the Space You Wish to Enter
As much as you want to champion your lofty ideals over petty concerns like competition, the best place to start is to see if there are any other non-profit organizations in the same space you wish to enter. Check to see if an existing organization is already committed to the type of effort you are looking to achieve. Great places to start your search include GuideStar, 2-1-1 or Google.
You shouldn’t be discouraged if you find a similar organization. In this case, you should familiarize yourself with what other non-profit corporations are doing and how they are doing it. If after your research, you believe you can provide a better service and make a greater impact, then march on. At the very least, your research can help you avoid some of the pitfalls and inefficiencies that other organizations encounter, which can only help you as you set up your non-profit.
Another thing to keep in mind is licensing and certification requirements, which will depend on the type of service your non-profit hopes to provide. For instance, a non-profit animal shelter will likely need local and state certifications to handle animals.
2. Find a Proper Name for Your Cause
Finding a good name for your organization will also require research of other companies, since you need to see if others have already trademarked or are currently using your preferred name. To make sure your search is thorough, use the following resources:
- Internet searches. See if someone already uses your name, whether they’re for-profit or not. Again, GuideStar is a good resource to research pre-existing non-profit names. A Google search should help you determine if another company already uses your proposed name.
- U.S. Patent and Trademark Office (USPTO). After your search with the USPTO, you should also check with the trademark office that regulates your state. Remember that even if a business hasn’t registered a trademark, they may still qualify for certain trademark protections related to its use and seniority.
- County Clerk. By checking with the county clerk, you can see if your potential name already appears on a list of fictitious or assumed names.
3. Select Your Initial Board of Directors
This may be required in some states before composing your Articles of Incorporation because directors must be included in that document. A minimum board size varies, but it normally ranges from one to three people.
Directors perform a key function for non-profits. In most jurisdictions, board members assume responsibilities that span from ensuring fiduciary compliance, to the organization’s commitment to the public interest and its tasks. There is also a large fundraising component to their roles, as non-profit directors usually tap their networks to help fund projects, sometimes from their own pockets. It should be noted that board members typically take care of high-level strategic aspects and do not have a daily focus on the grunt work that the non-profit demands.
When recruiting board members, provide them with vital information about your organization and your expectations for the position. This can also include a minimum money and/or time contribution in order to serve on the Board. Should you require a large Board of Directors, you can divide these members into smaller committees to best utilize your directors’ specialties. You can also consider forming a Board of Advisors for more granular advice. For help with forming a Board of Directors, check out our article on the topic.
4. Submit Your Articles of Incorporation With the Minimal Fee
This is the first major document for your non-profit. It provides key information about your organization, such as its purpose and duration. Articles of Incorporation are usually submitted to state governments and can require fees ranging from under $100 up to $1,000. Be sure to visit your Secretary of State website to find the appropriate fees for the location of your non-profit.
5. Secure 501(c)(3) Tax-Exempt Status
You will need to submit IRS Form 1023, also known as “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” It is important that you apply within 27 months of your non-profit’s Articles of Incorporation date, as this will ensure that all activities with your organization have been and will be considered tax-exempt. If you apply later, then only from that date forward will the activities be tax-exempt.
IRS Form 1023 has 11 parts:
- Identification of applicant. This includes contact information and other basic details. It may also require a federal employer identification number (EIN), which can be obtained easily.
- Organizational structure.
- Explanation of clauses in your Articles of Incorporation that get you 501(c)(3) exemption.
- Information about all of your organization’s activities.
- Compensation information.
- Details about your goods and services for the public.
- History. This will outline if your organization is being passed down from a pre-existing company.
- Specific activities, including political involvement and fundraising. This section will be carefully reviewed by the IRS, as there are important restrictions in this area.
- Financial details and balance sheet.
- Determining whether your non-profit will be classified as a private foundation or public charity. Organizations usually prefer to be listed as a public charity because there are fewer rules that govern this type of entity. If Form 1023 shows that the non-profit will generally receive public support, then the company will be classified as a public charity for the first five years. After the first five years pass, the IRS will review this information to see if it was correctly classified or if it should be reclassified based on its activity.
- Fee details.
6. Determine Your Bylaws
Bylaws comprise the second most important document for your non-profit, as this document outlines details regarding how your non-profit will operate. There are resources available to develop your bylaws on your own, or you can find a lawyer to help you draft them. Bylaws are usually determined at your first Board of Directors meeting, although you should give them some thought ahead of time.
7. Obtain Licenses and Permits
All businesses, whether non-profit or for-profit, must obtain a business license (or tax registration certificate). Check with your state and industry-specific sources to ensure that you have proper licenses and permits to operate legitimately.
Once you have properly followed the above steps, you can set out with your non-profit to change the world. Be aware that some of the above stages can take a few months, so you should be patient and thorough as you move through the process. However, once you are ready to begin operating as a fully functioning non-profit, you can embark on an exciting process of improving your community and the public at large.