Starting A Non Profit >> What Are The Key Steps to Forming A Non Profit?
Most people who start nonprofits do so because they have a desire to make the world a better place than the way they found it. Here is a step by step guide to successfully establish a 501(c)(3) nonprofit corporation.
Step One. Draft a mission statement. A mission statement should be the mantra of the group and should be a drafted based on your organizations’ purpose, services and values. A mission statement should be limited to on one or two sentences on who the organization is, what it does, for whom and where. Be conscious to make your mission statement compelling as it will be published on all your printed materials. Keep in mind, a mission statement also serves as a means to distinguish your group from other groups.
Step Two. Form a Board of Directors. When forming a
nonprofit organization, most state regulations require you to have a Board of Directors. The standard minimum amount is three board members; however this might differ from state to state. It is up to you and your organization to determine what number of directors is optimum. You can decide how many directors you need based on what you would like to accomplish and what special skills your organization may need to achieve its goals. Because you have already identifies your mission statement, select individuals that are supportive of this mission and are willing to give their talents and time.
Wondering still what to look for in a board member? Look for individuals whose values reflect your statement of purpose. Although it is recommended that the majority of your board be consumers, include the community at large, not just your specific community of focus (e.g. the mental health community). Consider the religious community, local service clubs, legal professionals, and colleges and universities as sources for prospective a Board of Directors. Do not overload people who already serve on many committees – seek a balance between old and new leadership.
Step Three. Draft and File Articles of Incorporation. Articles of Incorporation can be defined as the official statement of creation of your organization. These not only need to be drafted but they are to be filed with the appropriate state agencies. Please visit our section on
State Resources for links to your individual state’s resource page. It is very critical you consider how important this document is, as it protects both your board and staff from legal liabilities that an organization may incur. This document makes the corporation the holder of debt and liabilities, not the individuals and officers who work for the organization. The specific requirements governing how to incorporate are determined by each state. Our State Resources Page has direct links to individual state’s State Charities Regulation, State Tax Filings, State Nonprofit Corporation Filings and Small Business and Self Employment Business Filing Information. Before you spend your money, please consider consulting with an attorney who is experienced in the area of nonprofit law so that you do not make one of the many major mistakes that people make when they try to incorporate by themselves. Find a
sample Articles of Incorporations here.
Step Four. Draft Bylaws. Bylaws are simply the “rules” of how the organization operates. Bylaws are not required to file for you 501(c)(3) status, but they are very important for helping govern your organization. Bylaws should be drafted with the help of an attorney and approved by the board early in the organization's development. Please see our
section on Bylaws for a sample Bylaw for nonprofit organizations.
Develop a budget. Success can fall heavily on proper budgeting. Correct budgeting can be a challenging task but a very integral one for the success of your nonprofit organization. A budget is the financial plan of your organization that helps you achieve you objectives. As a new organization your first challenge may be looking at the process of obtaining initial income and figuring out how much to spend. Budgeting however does not stop there, so be prepared for startup and future costs.
Record-keeping System. Systems for any organization are very import. Just the thought of developing a system may make you tired, but a proper system helps you to avoid pitfalls later on. Your system can take care of things you are legally required to do when you have a nonprofit. By law, for all nonprofits, all Board documents including and minutes and financial statements must be recorded. It is necessary to preserve your important corporate documents, including board meeting minutes, bylaws, Articles of Incorporation, financial reports, and other official records. You should contact your appropriate state agency for more information on what records you are required to keep in the official files.
Develop an Accounting System. Here we go another system for you to do! Again, this is very important to the success of your organization. Think about this from the time you are forming your Board of Directors. This may be easily solved if you choose wisely and engage a board member with some financial or accounting background. Even better would be if the board member is familiar with accounting for nonprofit organizations. Keep in mind when creating your accounting system that nonprofits are accountable to the public, their funders, and, in some instances, government granting bodies. With this in mind, it is vital to establish a system of checks and balances when establishing the organization’s accounting practices. Responsible financial management requires the establishment of an accounting system that meets both current and anticipated needs.
The organization needs to open a bank account and ascertain whether to use the accrual or cash method of accounting. The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced). In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not.
File for 501(c)(3) status. To apply for recognition of tax-exempt public charity status, you must obtain, complete and file
Publication 557 (detailed instructions
http://www.irs.gov/pub/irs-pdf/p557.pdf ). The filing fee depends upon the size of the organization’s budget. The application is an important legal document, so it is advisable to seek the assistance of an experienced attorney when preparing it.
Apply for a federal employer identification number (EIN). Regardless of whether or not you have employees, nonprofits are required to obtain a federal Employer Identification Number (EIN) — also referred to as the federal ID number. Available from the IRS, this number is used to identify the organization when tax documents are filed and is used not unlike an individual’s Social Security number. If you received your number prior to incorporation, you will need to apply for a new number under the corporate name. Check out
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html with all your options for applying for your EIN.
File for state and local tax exemption. In accordance with state, county, and municipal law, you may apply for exemption from income, sales, and property taxes. Contact your state Department of Revenue, your county or municipal Department of Revenue, local Departments of Revenue, and county or municipal clerk’s offices for more information. Check out
State Resources links page for links to your state.
Fulfill charitable solicitation law requirements. If your organization’s plans include fundraising, be aware that many states and few local jurisdictions regulate organizations that solicit funds within that state, county, or city. Usually compliance involves obtaining a permit or license and then filing an annual report and financial statement. Contact the state Attorney General’s office, the state Department of Commerce, state and local Departments of Revenue and county or municipal clerk’s offices to get more information. Check out
State Resources links page for links to your state.
Apply for a nonprofit mailing permit. The federal government provides further subsidies for nonprofits with reduced postage rates on bulk mailings. While first-class postage rates for nonprofits remain the same as those for the for-profit sector, second- and third-class rates are substantially less when nonprofits mail to a large number of members or constituencies. For more information on eligibility, contact the U.S. Postal Service and ask for Publication 417, Nonprofit Standard Mail Eligibility