Establishing an IRS Tax-Exempt 501(c)3 nonprofit status is imperative to set up your nonprofit for funding success. Most foundations and federal agencies require this status when awarding grants.
Furthermore, this status will help your nonprofit establish credibility as donors will feel confident that you are not a crooked fronted company looking for easy dollars. Don’t get me started! This tax status will also allow private donors and corporations to receive a tax deduction! Therefore, this should be a first step after you have created your board of directors and articulated the needs that your project will fill.
First, Conduct Market Research to Identify if Your Nonprofit Fits a Gap (Refer to podcast 64: 6 Steps Before You Start a Nonprofit).
Establish Your Corporation
Step One: Select a Name
- Does the name already exist? Make sure that your name is not trademarked or used by someone else. Visit the United States & Patent Office to see if your name already exists.
- Make sure your nonprofit’s name includes some action words about what it will do, who it helps, or if you have a specific type of member or beneficiary; i.e. Micronesian Conservation Coalition, Island Girl Power, Habitat for Humanity.
Step Two:
According to Upcouncil there were nearly 1 million 501(c)3 charitable nonprofits set up in the United States in 2018.
For a full list of different types of nonprofit 501(c) organizations, click here.
As most nonprofits are 501(c)3 or 501(c)4 nonprofits, we will be looking at these two today. But before we get there, the bigger question is, “Should you even open a nonprofit corporation?”
Public charities must be set up and operated for exempt purposes set forth in the set forth in section 501(c)3 of the Internal Revenue Code. If you think you are going to start a nonprofit and make millions on day two, you are very misled. Operating a successful nonprofit organization takes tenacity, dedication, and a lot of sweat equity.
According to data from the National Center on Charitable Statistics (NCCS) on all 501(c)3 nonprofit organizations that filed a tax return between 1989 and 2003, 12 percent closed up shop within five years and 17 percent within ten years. Grantspace states that “The biggest challenge for most new nonprofits is to develop and maintain reliable income streams.” They go on to state that most nonprofit experts say that “less than half of nonprofit startups survive beyond five years. Of those that survive, perhaps one-third are in financial distress.”
Now, I am not saying that to scare everyone off, but just because I get so many people that approach me with very little thinking or research (refer to episode 64) on starting a nonprofit and then get upset that they aren’t pulling in a half-million dollars in a year because now they have access to ‘free money from the government’. Let me tell you, that free money isn’t so easy to get and isn’t exactly free, but that’s a whole other topic.
Let’s get back to this one. So, what are the other options, Holly?
- Volunteer: Well, you could volunteer for a nonprofit that is already doing similar work and broaden a certain area that may need improvement or enhancement. Or maybe you are a lawyer or accountant and could do some pro bono work.
- Be on the Board of Directors: You could join the board of a nonprofit that is doing similar work to your passion and help govern projects.
- Can’t afford to volunteer? Well, you could become a consultant, such as a grant writer (tee-hee) and help nonprofits pull in funding!
- Solicit Sponsorship: You could also leverage relationships with corporations to help fund certain projects and seek fiscal sponsorship under a 501(c)3 nonprofit organization or umbrella to conduct your project tax-free.
- Start a Business: Or you could open a small business and give a certain percentage of proceeds to help your mission. There are many other less complicated ways to be a change agent.
But you are here reading this and want either want to open a nonprofit or you are a consultant and learning how to help your clients. So, you want to know how to start this nonprofit!
Apart from the 501c3, another popular type of 501(c) nonprofit is the 501(c)4, so we will discuss the differences between these two nonprofits.
The primary differences between the two include the type of structure, lobbying, and tax-deduction capabilities.
It really will take some research to find out what type of nonprofit do you want to create and that makes sense for your need.
Forming a corporation is not just meaning a corporation of one person. The next step is selecting your board of directors if you haven’t already. Next week we will go over how to select members for your board of directors.
But to wrap up today, identifying what your nonprofit status will be is not just rolling the dice. On the 1023 application form, this will be asked and there will be questions to check and balance your decision. Make sure you really put thought into starting a nonprofit and understand what your limitations and opportunities are with your specific tax-exempt status.
