4 Key Steps to Guide Entrepreneurs in Setting Up a Nonprofit

As you evaluate 2022 and look forward to 2023, exploring the idea of starting a nonprofit may be on your New Year’s resolution list. If you have an entrepreneurial spirit, can think strategically and creatively or have ever owned a business, setting up a nonprofit organization may be well within your reach. 

Your passion for your nonprofit alone can go a long way, but just like with a for-profit business, nonprofit founders must understand the basics of starting an organization and then how to transition from being a start-up to becoming a self-sustaining entity. This requires having a logical mind, a strategic mind, a scrappy mind, and a creative mind – all at once.

To help you translate your passion and vision into a nonprofit reality, Resilia has compiled four major steps you’ll need to follow:

Step 1: Starting a Nonprofit Requires Developing a Clear Mission

Serving as your guiding North Star, your nonprofit's mission statement is an essential component in the early stages of your nonprofit’s formation. It will help you connect to the community you wish to serve as well as recruit board members, staff, volunteers, and other key contributors. A great mission statement will compel others to contribute to your cause, attract donors, and uncover fundraising opportunities that can help you scale your reach and impact. To create a powerful nonprofit mission statement, start by answering the ‘big 3’ questions: 

• Why does your nonprofit exist?

• What group(s) does it serve?

• How does it benefit those you serve? 

Because your mission statement will become the foundation of storytelling and fundraising for your organization, it’s essential to take the time to get it right. Your mission statement should capture the essence of your nonprofit’s work clearly and compellingly by being direct and concise. 

While creating a mission statement is the first step to setting up your nonprofit, it’s not a quick, one-and-done process. A compelling message will take several drafts of writing and rewriting to get to the finish line, but it’s worth the time you put into it. 

Step 2: Lay a Solid Foundation When Setting Up a Nonprofit

Once you have created your nonprofit’s mission, it’s time to set other foundational aspects of your organization in place. This includes your name and purpose statement – both of which are essential for starting a nonprofit.

Your name should follow this 3-point guide:

• Does it convey the space you’re in (humanitarian, education, racial equity, etc.)? 

• Does it use descriptive language to convey your mission statement? 

• Is it easy to remember? 

Once you’ve decided on a name, do your due diligence to make sure it’s not taken within your state or online. You’ll want to have a digital presence, which means making sure the domain you want (which should be associated with your name and will be the primary way others will find and connect with you) is available.

You can check its availability by going to www.godaddy.com and verifying the name. 

It’s also important to make sure your nonprofit’s name isn’t already in use by someone else from your state. Do a quick search with your state’s business filing agency and get it trademarked so it remains unique to you. 

While your mission statement tells others what you do and who you’re serving, your purpose statement will explain your unique service (the good you’re putting out there!) and why donors should support you (as opposed to other “competing” nonprofits). 

This statement should illustrate a compelling picture of the importance of your nonprofit's impact in 50 words or less, focusing on your mission and using descriptive language that resonates with donors and encourages them to support your efforts. 

Step 3: Choose Wisely When Setting Up Your Nonprofit Board of Directors 

Once you have your mission statement, organization’s name, and purpose in place, it’s time to get one of the most critical components in order – your board of directors. Your board of directors isn't just your governing body: they're your nonprofit's most prominent allies, advocates, volunteers, and very first members. From a practical standpoint, they’re also essential to make your nonprofit legal (your paperwork will require it).  

The role of your board isn’t for the faint of heart. It requires clear intentionality, strategic direction, and commitment – so don’t simply recruit family members or friends. (Although it’s okay to have a family member or two on your board, too many identical last names can raise major red flags for the IRS when it comes time to review your tax-exemption application). To build a strong board of directors, recruit those who have diverse skill sets and backgrounds and can offer a variety of expertise, perspectives, and strengths in various topics. 

It’s also essential to start with a small, odd number of board members. When starting a nonprofit, shoot for three to five board members, which is plenty during the formation stage. Additionally, this will help prevent deadlock. Because their job is to make decisions on behalf of your organization, an odd number will ensure that things run smoothly when it comes time to vote. 

Lastly, communicate with board members about the commitment it will take to create a successful nonprofit. Be honest in your early conversations with every board member so the expectations of what it will take to drive impact, awareness, and opportunity to reach your outcomes align with the work and time everyone is willing to put in. 

By prioritizing communication, diversity, inclusion, and resources to support your board, you’ll be well on your way to building a solid infrastructure that will promote a nonprofit positioned to thrive. 

Step 4: File Your 501(c)(3) Tax-Exempt Status Forms 

Once you have your nonprofit’s name, mission statement and board members developed, it’s time to make it legal by applying for and filing your 501(c)(3) tax-exempt status. 

Section 501(c)(3) is the portion of the U.S. Internal Revenue Code that allows for Federal tax exemption of nonprofit organizations. Qualifying for 501c3 status means that your organization serves a general, charitable purpose. 

While it’s not technically necessary to have 501(c)(3) status to start a nonprofit organization, having that 501(c)(3) designation is going to unlock all of the major benefits that come with being a nonprofit organization. 

You’ll need to take a few key preliminary actions to file your 501(c)(3) tax forms correctly. 

The first important action to becoming a 501(c)(3) tax-exempt nonprofit is to incorporate in your state as a domestic nonprofit corporation (or a non-stock corporation if you’re a resident of Virginia) and obtaining your Articles of Incorporation through your Secretary of State’s office. Articles of Incorporation are your nonprofit’s organizing documents, including where your organization is located, who sits on its board, and its purposes.

Keep in mind that the legal guidelines vary by the state your nonprofit resides in. For example, if you want to learn how to start a nonprofit in Texas, the requirements may be quite different than if you were to start a nonprofit in California.

The next action after incorporating and obtaining your Articles of Incorporation is to obtain an EIN. EIN stands for Employer Identification Number. It’s a unique nine-digit number assigned to a business by the IRS for identification purposes.

Once you’ve filed for incorporation with your Secretary of State and obtained an EIN with the IRS, it’s time to apply for 501(c)(3) tax-exempt status! 

There are two applications used to apply for 501(c)(3) tax-exempt status: Form 1023 and Form 1023 EZ. Smaller nonprofits anticipating that they’ll raise $50,000 or less in their first-year qualify for a 1023 EZ, a streamlined version of the 1023 application. 

No matter what form is suitable for you, filling out the paperwork will require you to provide information such as:

• Certificate of proof of state incorporation

• Details about your organization’s financial statements (including revenue and expense statements for the current and future three years) 

• The proposed budget for the next two years 

• A detailed description of all planned activities

• Name and physical address of each member of your board of directors and registered agent

• A filing fee of $275 is required for the 1023 EZ application, or a fee of $600 is required for the standard 1023 form
  

Rely on Resources to Fast-Track Your Nonprofit Formation 

Turning your passion into a legal nonprofit is one of the most exciting steps an entrepreneur can take, but it can also be the most challenging to navigate. Here are some additional resources that can provide you with the support you need to get your nonprofit up and running in no time:

• Partner with a business professional

• Utilize the knowledge of a tax advisor or lawyer

• Partner with an experienced formation expert.

Not quite ready to chat? Download our free Ultimate Guide to Starting a Nonprofit to gain a clear understanding of all the steps and requirements to set up a successful nonprofit organization.