Start A Nonprofit

Overview 

These are some of my thoughts on starting a nonprofit, which come up constantly in my consulting work. Some of this was covered in my Masters program at Our Lady of the Lake University, most of it I learned in my volunteer work, but I have found that a lot of is is assumed rather than documented. Since I keep sending the same introductory emails out to  clients,  I thought I would write it down in one place.

These are the mechanical steps, there is a lot of work and thought implied before each one. It’s much like obsessing over the delivery of a baby – you tend to forget that the delivery doesn’t take that much time, and then you have a baby to raise.

First, a disclaimer: I am not a lawyer, and you might find one helpful. Same with an accountant.

TL;DR

Starting a nonprofit is not as simple as giving $1000 to a corporation-creation website, especially if you don't understand what they are doing for you behind the scenes. A nonprofit is not a website with a donate button. You will deal with State agencies, the IRS and your corporation will have State and Federal tax forms (and other forms) to complete. As always, ignorance is no excuse, especially with the IRS. Neither is "but I'm doing good!" 

Important Nonprofit Notes

A nonprofit is a corporation just like any other corporation – however, it does not have making a profit as its primary purpose. It doesn’t mean your organization can’t make money, it just means you personally can’t benefit from it. Your organization needs money to operate. It does mean you are subject to all the rules of a corporation plus the additional rules of being a nonprofit.

Again, a nonprofit is a corporation. You are running a company. If you don’t want to run a company, just go volunteer with an existing nonprofit that has a similar mission.

A corporation is not you. It is a separate legal entity. It has its own bank accounts - you can't just share yours. It files its own taxes (State and Federal.) It should be designed to outlive you. 

A nonprofit is not tax exempt automatically. “Nonprofit” is defined at the State level. In Texas, you can form a Texas nonprofit corporation. “Tax Exempt” is a Federal designation. The IRS determines if your organization is tax exempt. (Another key point to dissuade any “get rich quick” schemes – your organization is tax-exempt, not you. If you get a salary from a tax exempt organization, you still owe income tax on the income.)

You want your organization to be a tax exempt nonprofit, so you have to be a nonprofit in your State before the IRS can determine if you are tax exempt.

First Things First

First, let’s talk about theoretical ideas. The three critical concepts all nonprofits must define are a vision, a mission and a business plan. They are so important, they got their own page. 

A bit of rain on your parade – a nonprofit does not traditionally receive donations before its tax exemption is in place, and a nonprofit does not traditionally receive grants to fund operations or startup costs, though there are some exceptions. So, do not expect to get started with other people’s money. If you do everything yourself, startup legal costs are probably under $700, depending on the State. If you use a service to do everything for you, it’s probably $1000 or so. If you don’t have that extra money lying around, think about how you will fund just getting the paperwork in place, much less operating a nonprofit corporation.

A nonprofit is a business. It offers services to people, which means you do have to do market research. You can't just start a transitional housing project in the house your Grandmother left you if the house is completely inconvenient to your potential clients. You can't charge for services the city is giving for free. If you want to give stuff away, you need a marketing plan to convince other people to give you the money to buy the stuff.  

The Basic Steps

Here are the basic steps in starting a nonprofit (in Texas, anyway):

Prework

• Google your vision. See how many other people are already trying to do the same thing. Consider just volunteering there. (I have had a dozen or so clients who want to "empower women." First, be more specific. Second, go meet the other people trying to do the same thing.)

• Decide what you are going to do – specifically. “I want to help people” is not enough. Remember, this time it’s mission, not vision.

• Create your business plan. If not a full business plan, at least do a budget for startup costs and a monthly budget for ongoing operations. “Nonprofit” does not mean “Needs no money.” How are you going to fund operations? What are your operations? How much is it going to cost? Do you have employees? Do you expect to pay yourself? Do you need a physical location? What are your startup costs? If you can’t afford your startup costs, perhaps finding an existing nonprofit with a similar mission and volunteering there is simpler.

• Select your board of directors. You need at least three directors to incorporate a nonprofit in Texas. They do not have to live in the State. They should have some idea of what running a corporation entails. (I can help with that.) 

• Choose a name. Do a name search (online) to make sure it’s unique and not close to an existing corporation. Don’t be cute – you may regret it later. Don't be excessive - you will be typing this name for a long time (hopefully.) "Women's Hope Center" is probably just as meaningful as "The Center of Hope for Women - Dallas' Loving Home for Women and Girls" and it's easier to remember and type. Also, "Dallas' loving  home for women and girls" is the start of a mission statement, not a name. Think about names that might be close but different in meaning (an example - our humane education organization is Sparky’s Pals and was named after our dog, Sparky (RIP). We arrived at one library that expected Sparky the Fire Dog. That was awkward.) 

• Register a domain. It should be the same as your organization's name, if possible. There is nothing more confusing (and less professional) than having a name that doesn't match the domain. If your name is too long for a domain, rethink your name. You will eventually want professional-looking email and a web site. The domain is used for both. (Look at Google’s G Suite for Nonprofits after all of your other paperwork is done - you have to have your tax exemption in place to apply.)

State-Level (Incorporation) And Preparations

• Incorporate as a Texas Nonprofit Corporation - or incorporate in your State. In Texas, you can do this online – it’s fairly simple to do. Nolo is a good source for understandable guides. The Texas Secretary of State has some helpful notes, as well. Texas requires a nonprofit to be a corporation, not a sole proprietorship or an LLC. This is why you need directors. Your nonprofit can also be an unincorporated association, but I personally don’t think anyone will take you very seriously - and unincorporated associations are usually homeowners associations, golf clubs or other groups.

• See what you have to do in order to solicit donations in the State. This can be anywhere from nothing to filing an entirely different application with a different department. 

• Prepare for receiving donations from other States - if you have a website, you can't control where people see it. You may have to file as a charity in multiple States. 

• Request your Employer Identification Number or EIN (this is like a Social Security Number for a corporation.) You do this online from the IRS. If the site asks you for money to get your EIN, you’re being scammed – they are free. Make sure it's the IRS site. 

• Open a corporate bank account. This is a business account. Ask your bank if they have lower fees for nonprofits. Some do. You will need your EIN for this. Your nonprofit is not you – you cannot commingle funds!

• Get your corporate insurance – Directors & Officers policies and liability policies.

Federal-Level (Tax Exemption) And Getting Started

• File for your 501(c)(3) – which technically is your tax exemption determination. The IRS looks at the documents you submit and determines if you are tax exempt. Without this determination, donations to your organization are not deductible to your donors, and you probably can’t apply for grants. (You can be a nonprofit that is not tax exempt, but you will be paying state taxes.) You will apply for your tax exemption online. There are two forms available, the Form 1023 and the Form 1023-EZ. The EZ form is easier and cheaper, but some have said those organizations are more prone to audit. Mainly, they’re being audited because it is easy to create a fraudulent organization using it. Also, some grant organizations do not like 1023-EZ organizations because it is subject to fraud. 

• Wait for your determination letter from the IRS. In the meantime, get ready to begin operations. If you can fund it yourself, perform startup activities. If not, did you do your business plan?

• When you receive your determination letter, begin operations. Technically, you can begin anytime, but any donations are not tax-deductible to the donor until you have your determination letter. If you meet certain deadlines, the determination will be back-dated to your date of formation.

• Prepare for the State franchise tax – you should be exempt after the 501(c)(3). You can file your exemption letter with the State to be exempted. 

• Prepare for sales tax – file for a sales tax permit if you will sell anything that is not related to your organization’s mission.

• Prepare for unemployment tax – you will get a letter from the State that will basically say you can ignore the letter, if you don’t have employees.

• Ask for donations.

• Apply for grants.

• Keep good books.

• Do your annual paperwork.

• Save the world.