The Ultimate Guide to Starting a Nonprofit Organization

Welcome to your ultimate guide to starting a nonprofit! You have a vision, and we're here to help you make it a reality. This guide breaks down every crucial step you need to take, from paperwork to achieving tax-exempt status, in an actionable way that gets results. If you're ready to make a difference, let's get started!

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Step 1: Incorporate or Stay Informal?

Should you incorporate your nonprofit or stay informal? Most nonprofits choose incorporation because it brings benefits like credibility, legal protection, and tax advantages. Sure, staying informal saves paperwork, but it also limits your credibility and makes board members liable for the nonprofit’s actions. Incorporating means establishing a formal legal entity by registering with your state.

Example: Imagine starting an animal rescue. By staying informal, you might save a little money upfront, but you and your board members could be held personally responsible if someone sues over an incident involving one of the rescued animals. Incorporating limits that risk.

Action Item: Decide if you want to incorporate. If yes, proceed to Step 2.

Step 2: Choose Where to Incorporate

Where you incorporate matters. It’s typically best to incorporate in the state where you plan to operate most of your activities. Incorporating out of state could mean extra costs for registering as a “foreign nonprofit” in your home state. Avoid those unnecessary expenses unless there’s a clear strategic benefit.

Example: If your nonprofit is based in California and you decide to incorporate in Delaware, you’ll need to register as a foreign nonprofit in California, which means extra paperwork and fees. Incorporating in your home state will usually be the easiest and cheapest route.

Action Item: Choose your state of incorporation. For most, your home state will be the simplest and cheapest option.

Step 3: File Articles of Incorporation

Time to make it official. Filing Articles of Incorporation is how you legally form your nonprofit. Here’s what you need to include:

• Name: Make sure your nonprofit’s name is unique within your state. Double-check by searching the USPTO for trademarks.

• Incorporator: Assign an incorporator. They sign and file the Articles on behalf of your nonprofit. This can be anyone aged 18 or older.

• Members: Decide if your nonprofit will have members (who function like shareholders and vote on major issues) or just a board of directors (which is more common).

• Initial Directors: Decide who will serve as your initial directors. These people will oversee the nonprofit’s mission and decisions.

Your Articles must also specify what happens to the nonprofit’s assets if it dissolves and must state that no one will profit from the nonprofit’s income.

Example: When forming a youth mentorship nonprofit, you might list three initial directors: a local teacher, a business leader, and a community activist. This diverse group will bring different skills and perspectives to help guide the organization.

Action Item: Draft your Articles of Incorporation. Use a template and customize it to include all necessary information.

Step 4: Draft Your Bylaws

Bylaws set the rules for how your nonprofit will operate. They cover everything from how board meetings are run to the roles of your officers. Without them, there’s no structure.

Example: For a community garden nonprofit, your bylaws might specify that board meetings will be held quarterly, decisions require a majority vote, and the president and treasurer must be different people.

Action Item: Draft bylaws that lay out the rules for decision-making, board meetings, and officer responsibilities. Use your state’s guidelines to make sure all requirements are met.

Step 5: Hold Your Initial Board Meeting

Once the Articles and Bylaws are ready, you need to hold your first official board meeting. During this meeting, you will:

• Adopt the Bylaws.

• Elect officers.

• Set up a bank account for your nonprofit.

Example: At your first board meeting, you might elect a president, secretary, and treasurer, and decide on a bank to open an account with. These decisions set the foundation for your nonprofit’s operations.

Action Item: Hold your board meeting and take detailed minutes. Store the minutes in a “minute book” to ensure good record-keeping.

Step 6: Get an EIN (Employer Identification Number)

Think of the EIN as your nonprofit’s Social Security number. It’s required for tax filings, opening bank accounts, and payroll. Luckily, it’s free and easy to get from the IRS.

Action Item: Go to the IRS website and apply for your EIN. It only takes about 10 minutes, and you’ll need it for all future filings.

Step 7: File for Federal Tax-Exempt Status

To become a 501(c)(3) tax-exempt nonprofit, you’ll need to file Form 1023 with the IRS. This is the most crucial step in ensuring donations to your nonprofit are tax-deductible.

If your annual gross receipts are less than $50,000, you may qualify to file Form 1023-EZ, a streamlined version. Check the eligibility checklist on the IRS website to confirm.

Example: If you’re starting a food pantry with minimal assets and expect modest donations, the Form 1023-EZ could simplify the process and save you time.

Action Item: Fill out and submit Form 1023 or Form 1023-EZ. This form is extensive, but getting it right is critical for tax-exempt status.

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Step 8: Apply for State Tax Exemptions

Federal tax exemption doesn’t automatically grant state tax exemptions. You’ll need to apply for any applicable state income, sales, or property tax exemptions separately.

Example: If your nonprofit operates a thrift store, applying for state sales tax exemption can save significant costs, allowing you to use more funds for your mission.

Action Item: Contact your state’s Department of Revenue to determine what forms are needed to apply for state exemptions.

Step 9: Obtain Required Licenses and Permits

Your nonprofit may need specific permits depending on your activities. For example, fundraising activities like raffles may require special permits. Research is key here.

Example: A nonprofit that organizes charity concerts may need an event permit and a license to sell tickets. Checking with your local government will help ensure compliance.

Action Item: List out any planned activities and determine which permits or licenses are required. Contact your city or county office if needed.

Step 10: Ensure Ongoing Compliance

To maintain your tax-exempt status, you need to file an annual Form 990. Depending on your income, this might be the full form, a shorter version, or the postcard (Form 990-N).

You’ll also need to file an annual report in most states to stay in compliance and maintain good standing.

Example: Let’s say you run a wildlife rescue nonprofit. Filing Form 990-N each year takes only a few minutes but is crucial to keeping your tax-exempt status intact.

Action Item: Mark your calendar for annual Form 990 and state report filing deadlines to ensure compliance and keep your nonprofit in good standing.

Building and Running Your Board

Your board will make key decisions and ensure the nonprofit operates smoothly. Here's how to set it up for success:

• Number of Directors: Most states require at least three directors, but think strategically about how many people can best contribute to your mission.

• Director Qualifications: Choose directors who are passionate and can assist in fundraising or provide skills you need.

• Conflict of Interest: Avoid appointing directors who could personally profit from the nonprofit. The IRS frowns upon this.

• Compensation: Nonprofits generally don’t pay directors a salary. If you do compensate, make sure it’s reasonable.

Example: For a music education nonprofit, your board could include a local music teacher, a financial planner, and a community organizer. This mix brings passion, financial oversight, and community connections to your board.

Action Item: Assemble a diverse and skilled board, and set expectations for their roles and contributions.

Corporate Formalities to Follow

To stay compliant and avoid losing your tax-exempt status, be sure to maintain corporate formalities:

• Meeting Minutes: Take detailed minutes at all board meetings.

• Separate Finances: Open a separate bank account and never mix personal and nonprofit funds. Doing so could risk your tax-exempt status.

Example: Suppose you run an art collective. Keeping separate bank accounts ensures transparency and protects your tax-exempt status, especially when applying for grants.

Action Item: Set up systems for documenting board meetings and managing finances properly. Consistency is key.

Final Thoughts: Make Your Nonprofit Thrive

Starting a nonprofit is a major commitment, but with these steps, you’ll be on solid ground to launch successfully. From filing paperwork to staying compliant, every step is essential to ensure you’re able to make an impact. Stay focused, stay organized, and don’t hesitate to seek professional help when needed.

Action Item: Take action on each of the steps above, and remember—building a nonprofit that makes a real difference starts with the right foundation. Now it’s time to turn your dream into reality!

Do I need a nonprofit lawyer?

The biggest question now is, "Do you need a lawyer for my nonprofit?” For most businesses and in most cases, you don't need a lawyer to start your nonprofit or business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.

Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more