How to start a non-profit organization

Starting a non-profit can provide numerous benefits for those with a philanthropic spirit, including increased credibility, greater access to donors, and opening more pathways to grant money.

However, because non-profits must adhere to strict rules, maintain detailed records and are open to increased IRS oversight, forming a non-profit may not be right for everyone. Read on to discover if starting a non-profit is suitable for you and what it takes to launch one.

What is a non-profit?

A non-profit is an organization that operates for a charitable, educational, scientific, religious, or public service purpose rather than for profit. These types of organization are exempt from federal income tax provided they meet certain requirements. Non-profits can generate revenue, but profits must be reinvested in the organization’s mission rather than distributed to owners or shareholders. Non-profits rely on donations, grants, and volunteers to support their activities and often provide essential services, advocate for causes, or support community development. Examples include charities, educational institutions, and foundations.

Can my non-profit pay me a salary?

Yes. It is perfectly legal for non-profits to pay the people who work for them. However, salary compensation must be reasonable as determined by the IRS. You cannot pay yourself or any staff member a salary that could be deemed excessive.

Is a nonprofit right for me?

Launching a non-profit can open routes to many benefits, such as receiving donations, securing tax emptions, and obtaining grant money. However, you must adhere to strict tax laws to maintain non-profit status and your operation will be open to closer IRS scrutiny. Profits from activities must also be plowed back into the organization instead of shared among the business owners. These restrictions mean a non-profit is not best for everyone and starting an LLC or S-Corp may be more suitable for some entrepreneurs.

There are many types of non-profit, but the majority of non-profits in the US fall into one of these categories:

501(c)(3) organizations are the most common type of nonprofit. Their income mainly comes from donors and grants. Examples of 501(c)(3)s are those that address global concerns, such as the need for education, religious support and medical research. Private foundations are also 501(c)(3) organizations
501(c)(4) organizations work in the social welfare sector. Their purpose is to promote the public good. 501(c)(4) nonprofits can also participate in political and lobbying activities. This means they can endorse political candidates and promote legislation.
501(c)(7) status is reserved for nonprofit organizations that run social or recreational clubs. They are primarily membership organizations that are funded by members in the form of fees and dues. Examples include country, dinner, hobby, community association and amateur sports clubs.

5 Steps to start a non-profit organization

Is a non-profit what you need? Follow these steps to get started:

Even if you don’t need investment or a loan, a business plan can still be a very useful vital tool. Use it as your business manual, referring to the contents to guide your strategy and manage your financials.

Find out more about creating your business plan here.

Step 1. Research feasibility and need

Before committing to starting a non-profit, it’s crucial to determine if it’s feasible and if your mission addresses a genuine community need. Launching a non-profit without proper assessment can lead to rapid failure.

To evaluate the feasibility of your idea, answer these questions:

Financial resources: Can you afford the initial costs, which range from $2,500 to $5,000 for legal expenses, entity registration, and business setup?
Team readiness: Do you have enough people to establish a board of directors and enough volunteers or staff to launch and sustain your programs? List potential team members and their skills, noting any skill gaps to address.
Community support: Is there enthusiasm for your cause? Without community backing, securing donations will be challenging.
Economic conditions: Can your community financially support a new non-profit? If people in your local area are struggling, it’s unlikely they’ll be able to contribute to your cause.
Personal commitment: Can you dedicate the necessary time and effort? Non-profits require substantial, often full-time commitment from their founders.
Strengths, weaknesses, opportunities and threats analysis: Assess internal and external factors, such as skill gaps, potential partnerships, donor reliability, your experience, and how you compare to competitors. Will your organization have all the attributes required to meet its objectives?

To gauge the need for your non-profit, ask:

Unmet needs: Does your mission address a truly unmet need, rather than a want? If not, donor funds might go to organizations meeting more critical needs.
Competition: Identify existing organizations addressing similar needs using a non-profit locator tool. If another organization already serves your target area, you’ll be competing for limited resources.
Unique value proposition: How does your service differ from your competitors? If a similar mission exists, consider adjusting your focus to cover unmet needs or addressing different recipients.

After assessing feasibility and need, decide whether to proceed to step two, which involves investing resources. If your initiative isn’t feasible or necessary, consider supporting your cause through other means, such as fundraising for an existing non-profit.

Step 2. Build a strong foundation

To start your non-profit, you’ll need to select your organization’s name, recruit your board of directors, and write your values, mission, and purpose statements:

Write your Values Statement: Your Values Statement defines the principles guiding your organization throughout its development and in every future decision made by staff, executives, board members, and volunteers. Start by listing the behaviors crucial for successfully and ethically fulfilling your mission – such as ‘never cause harm’. Then, describe how these behaviors will be implemented in daily operations across all levels of your organization.
Write your Mission Statement: A Mission Statement keeps your team focused and driven. It should describe what you do, how you do it, and why you do it. Craft your statement by answering, in one sentence, what services you provide, integrating your organization’s core values, and stating the desired outcome of your mission.
Write your Purpose Statement: Your Purpose Statement justifies the necessity of your non-profit despite existing competitors. It communicates to donors and partners why they should support your organization. Describe your non-profit’s activities, starting with the category of service (e.g., educational, humanitarian). Elaborate on your services and explain how they differ from competitors, providing a clear, compelling picture while leaving room for future growth.
Choose your non-profit’s name: Select a name that aligns with the emotions created by your values, purpose, and mission statements. Consider the service category your organization belongs to and choose descriptive words that reflect your mission. Ensure the name is concise, easy to write, say and remember, and suitable for domain names and social media handles. Verify that your chosen name isn’t already taken by searching tools like GoDaddy’s domain search and checking with your state’s business filing agency. Additionally, use online services like Legal Zoom’s trademark check to confirm it’s not trademarked.
Select Your Board of Directors: List the skills and expertise needed to achieve your mission, such as financial, marketing, legal, and industry-specific knowledge. Identify individuals with these qualifications who also share an interest in your cause. Contact them to discuss their involvement. (It may be best to assess their suitability for board positions by having them volunteer before committing to a board role).

Step 3. File articles of incorporation

When you file articles of incorporation, you are requesting state recognition as a business. Approval means your initiative is legally a business, but not yet tax-exempt. To register your non-profit, you’ll need to contact your state’s business filing office, provide the necessary documentation and pay the filing fees. You must also apply for a federal Employer Identification Number (EIN) online from the IRS. This is a business tax ID that you’ll need for most government and financial registrations and submissions.

Step 4. File for tax-exempt status

The process for filing for tax-exempt status varies by the type of 501(c) organization you aim to form.

The most common type of tax-exempt non-profit is the 501(c)(3). You can file for this tax status by completing Form 1023 or you can use Form 1023-EZ if you meet the following requirements:

Gross income under $50,000 for three prior years
Estimate gross income under $50,000 for next three years
Have less than $250,000 in fair market assets
Formed in the U.S. with a domestic mailing address
Organized as a corporation, unincorporated association or trust
Cannot be a successor to a for-profit entity

For 501(c)(4) status, you must register by filing Form 8976 using the Form 8976 Electronic Notice Registration System, then file Form 1024-A to request tax-exempt status.

Step 5. Maintain your tax-exempt status

Maintaining your tax-exempt status is not case of ‘file and forget’. It’s an ongoing process that requires strict adherence to bylaws, detailed record-keeping, and complying with state and federal filing laws. Here’s a checklist for your long-term tax-exempt status maintenance plan:

Adhere to bylaws: Bylaws provide a framework for running your non-profit legally and ethically. They outline board meeting schedules, conflict of interest policies, and donor fund management.
Keep detailed records: Maintain comprehensive records, including all expenses, revenue, grants, bank statements, and canceled checks. Demonstrating that funds are used as intended by donors is crucial for retaining tax-exempt status.
File federal tax forms annually: File Form 990 (or 990-EZ if revenue is under $50,000) annually. This form details financial management and helps maintain tax-exempt status while attracting new donors by proving credibility.
File state tax forms annually: Many states require annual filings for non-profits to solicit donor funds. States like Texas and California also require corporate tax exemption filings. Complete this paperwork annually, attaching your 990 Form if necessary.

How quickly can I start a non-profit?

It depends how fast you move. The quicker you can complete the basics – as shown in steps 1 and 2 above, the sooner you can register your organization and file for text-exempt status. However, be aware that after submitting your Form 1023, the IRS may still need more information. Depending on how thoroughly you’ve prepared the application, this evaluation process could take from a few weeks to several months.

Can I start a non-profit by myself?

Yes. You can launch a non-profit on your own and doing so can give you full control over the direction of the organization and appointing and removing board members. However, board members are still required for running a non-profit, which means you cannot operate the organization with just one person.

Can I start a non-profit with no money?

Yes. You can start a nonprofit with no money by tapping into a fiscal sponsorship. In a fiscal sponsorship, another entity – the fiscal sponsor – is financially liable for the non-profit initiative but the organization being sponsored retains its own tax liability. Because the non-profit is funded via a grant or grants from the fiscal sponsor, it does not need any funds when it is started.

Can non-profits take out business loans?

Yes. Like for-profit businesses, non-profits can borrow money to help finance their operations. To obtain a loan, non-profits can approach banks, credit unions and online lenders one by one, or they can use the services of a loan marketplace that will immediately introduce them to a choice of business loans from different lenders. Some marketplace platforms can also provide advice and help with the application process. This can be especially useful for non-profit founders who have never taken out a business loan before.

Common business loans for non-profits:

Term loan – this is a lump sum that you pay back over time. Borrow up to $5million over as long as 25 years. Collateral may be required.
Business line of credit – a loan that functions like a high-value credit card. Withdraw cash anytime up to the maximum of your credit limit. You only pay interest on the sum you withdraw, not the whole line. This can significantly reduce your borrowing costs. Collateral may be required.
Equipment loans use the asset you’re financing as security, similar to a car loan or a residential mortgage, so no added collateral is required. Buy machinery, furniture, technology, etc. Use the equipment as you pay for it.

Get started with Swoop

Starting a non-profit can be exciting, fulfilling and a lot of fun, but you’ll need cash to realize your dreams and donations may not be enough. Funding is where Swoop can really help 501(c) organizations. No matter if you’re launching a brand-new non-profit, or you’re an established entity, chances are you’ll need extra finance to make your operation grow. Many types of business loan are suitable for non-profits, but working with finance experts can make all the difference when applying for funding. Contact us to discuss your borrowing needs, get help with loan applications and to compare high-quality business loans from a choice of lenders. Put your non-profit firmly on the map. Register with Swoop today.

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Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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