How to Start a Nonprofit Organization

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If you're a civic-minded individual, a nonprofit organization may be your calling in life. There are many types of nonprofits verified by the Internal Revenue Service, including charitable or religious organizations, social welfare organizations, labor and agricultural organizations and business leagues. The common qualification among these organizations is that they all benefit the public or community in some way without making a profit. Nonprofits are powered by a passion for serving others, rather than driven by potential financial payoffs.

Why Start a Nonprofit Organization

If you want to really make a difference to the world, starting a nonprofit organization could be a great first step. Nonprofits are extremely important and can be hugely influential. They carry out research on life-threatening diseases, improve the standard of living for millions of people and strive to change the world for the better, making it safer, healthier and a more beautiful place.

If you’re passionate about a particular cause, starting a nonprofit allows you to use that passion to effect change. A nonprofit can also be a springboard to a wide range of diverse opportunities. It’s a great chance to network, grow your contacts and, crucially, spread your message.

Now is a great time to start a nonprofit because the so-called “compassion boom” that stemmed from the recent economic downturn has spurred many people into trying to make a difference in their own way, whether it's through financial donations or volunteering their time. Modern marketing tools like social networks and Google AdWords help facilitate an expansive reach. "Cause marketing," when a business joins forces with a nonprofit to create a mutually beneficial relationship, is also a growing sector.

How to Start a Nonprofit Organization

Starting a nonprofit organization isn't too different from creating a regular corporation, but with a couple of additional steps.

1. Choose a business name after checking the laws that apply to naming a nonprofit in your state. For instance, around 50 percent of states require a designation such as "Corp.," "Inc.," or "Ltd." at the end of the legal name. Words reserved for state purposes, such as "national" and "federal," are off limits.

2. Appoint a board of directors and work together to draft your bylaws, which are the operating rules for your nonprofit.

3. Decide on a legal structure for your organization: a trust, corporation or association.

4. File your formal paperwork (articles of incorporation) with your state office and pay the necessary filing fee. You can find the details for your state office through the National Association of State Charity Officials (see Resources).

5. If a nonprofit organization meets eligibility requirements it may be exempt from federal income tax, so apply for tax-exempt status following IRS guidance and instructions. To familiarize yourself with the exemption eligibility requirements, consult the IRS Publication 557, a form that clearly explains how to obtain tax-exempt status for your organization (see Resources).

6. Secure all licenses and permissions needed to adhere to federal and state laws, such as a tax registration certificate or a bulk mail permit.

7. Most nonprofit funding comes from individual donors, but grants and loans are available from federal, state and local governments. Use Grants.gov to identify and apply for federal government grants for your nonprofit (see Resources).

How Do You Make Money from a Nonprofit Organization?

While the purpose of a nonprofit organization is to avoid making a profit, you can still earn a living from running one. Some government and corporate grants allow a percentage of the granted funds to be used for administrative expenses. As CEO or director of the nonprofit, your salary and benefits come under the category of administrative expenses.

Passive income sources, such as rents, royalties and investments, can also bring money into your nonprofit. Make sure you know the government restrictions if your nonprofit is a 501(c) 3 tax-exempt organization. Most nonprofits rely heavily on fundraising events which involve operational and administrative costs (which may include costs connected to your salary).

It is important to remember that the actual work done by the nonprofit and how it benefits its target demographic takes priority over personal compensation. Many leaders of nonprofit organizations receive a generous salary, but it must be considered appropriate to avoid accusations of profiteering. According to CharityWatch.org, a charity is efficient when programs receive at least 75 percent of money raised, and when the cost to raise $100 is no more than $25.