How do you launch a non-profit company – a manual

A growing number of charities and so-called social en­tre­pre­neurs opt to form a non-profit cor­po­ra­tion to advance their social mission. This business or­ga­ni­za­tion offers at­trac­tive ad­van­tages: greater legal se­cu­ri­ties (due to limited liability), extensive tax benefits and access to grants. But starting a non-profit cor­po­ra­tion is as­so­ci­at­ed with con­sid­er­able bu­reau­crat­ic burden and is subject to many formal re­quire­ments. In this step-by-step guide, we’ll explain what you have to consider when setting up a char­i­ta­ble or­ga­ni­za­tion.

This step-by-step guide provides an ex­pla­na­tion of the steps you need to consider when launching a non-profit or­ga­ni­za­tion.

In the US, a non-profit or­ga­ni­za­tion is usually launched as a cor­po­ra­tion. Limited liability companies (LLCs) can become non-profit LLCs, but only if all its owners are verified as tax-exempt non-profit entities. Because this is a very cum­ber­some process, it’s rare to find non-profit LLCs and most in­di­vid­u­als will start a non-profit cor­po­ra­tion instead.

But before you get started, you should ask yourself which char­i­ta­ble, benev­o­lent or ec­cle­si­as­ti­cal purpose your non-profit fulfills. It’s important to develop a clear concept over which unmet needs your non-profit tries to address. Ask yourself if the cor­po­ra­tion serves a unique purpose and who would be likely to support it. It’s also worth taking a closer look at the cor­re­spond­ing pro­vi­sions clas­si­fied under IRS Code 501(c)(3). This code clearly states that char­i­ta­ble busi­ness­es must be operated ex­clu­sive­ly for char­i­ta­ble causes.

If the non-profit cor­po­ra­tion is the right choice for you, you can begin to draft a business plan. This should include your company’s name, reg­is­tered business address, mission, budgets, and an op­er­a­tional and or­ga­ni­za­tion­al overview.

Before you in­cor­po­rate your non-profit or­ga­ni­za­tion, let’s take a quick look at the costs of starting a non-profit cor­po­ra­tion.

Non-profit cor­po­ra­tions are busi­ness­es and as such you should have some capital right from the start to cover certain expenses. These include:

Reg­is­ter­ing for 501(c)(3) status: The simplest IRS form (1023-EZ) costs $275 whilst the more advanced 1023 form costs $600 to fill out. You may wish to consult a lawyer or ac­coun­tant to help you fill out the form. This will incur ad­di­tion­al costs.

In­cor­po­ra­tion: Becoming in­cor­po­rat­ed is the formal step required to forming a non-profit cor­po­ra­tion. The costs depend on the state you are operating the non-profit from. It ranges from as little as $10 to $300.

Office space and equipment: You may be able to set up the business at home to begin with, but as your business grows renting office space may become a necessity. Office equipment such as a telephone, laptop and paper should also be included in any pre­lim­i­nary budget cal­cu­la­tion.

Staff: At the start, many non-profits set up by in­di­vid­u­als can be run by them alone. But as your or­ga­ni­za­tion scales, you may have to hire staff. Salary cal­cu­la­tions for your staff should include yourself. It’s important to pay yourself a fair wage for your hard work to set up and maintain a char­i­ta­ble business.

All start-up non-profits should have a solid or­ga­ni­za­tion­al structure. So, before you can in­cor­po­rate your non-profit cor­po­ra­tion, some US states may require you to assemble a board and list the names of your board members.

A typical board has three officers – the President, the Secretary and a Treasurer. While the President heads a board meeting, the Secretary takes minutes and a Treasurer is in charge of managing the company’s books. But what makes the board of a non-profit or­ga­ni­za­tion different from many others is that its members must be pas­sion­ate about the cause the company serves. Other important at­trib­ut­es include a strong and de­pend­able work ethic.

There are various online platforms such as Board Match or Board Net USA where company founders can recruit board members.

Once you have recruited and trained your board, you can in­cor­po­rate your non-profit or­ga­ni­za­tion.

In­cor­po­ra­tion is an important part of forming a non-profit cor­po­ra­tion. There are several benefits for companies to become in­cor­po­rat­ed which include limited li­a­bil­i­ties, tax de­duc­tions and an easier transfer of ownership. In addition, it lends your business a defined legal framework from which to operate. But it’s also a necessary step before applying for tax exemption status under 501(c)(3).

Only once you’ve in­cor­po­rat­ed, your business formally exists as a non-profit cor­po­ra­tion. Most busi­ness­es choose to in­cor­po­rate in the state where they are operating or where they conduct their services from.

In­for­ma­tion needed to in­cor­po­rate usually includes your company name, business address, and the purpose of the cor­po­ra­tion. But if you are also filing for tax exemption status under 501(c)(3), you must include the relevant in­for­ma­tion in your in­cor­po­ra­tion letter.

Specif­i­cal­ly, you should include language stating that your cor­po­ra­tion’s purpose is in line with those set out in 501(c)(3) and that it is not engaged in political or leg­isla­tive actions. You should mention that if the or­ga­ni­za­tion dissolves, remaining assets are to be shared among other non-profit companies. The IRS provides guidance on the matter.

Now that you’ve in­cor­po­rat­ed your non-profit or­ga­ni­za­tion, you are ready to apply for tax exempt status under IRS code 501(c)(3). The following three legal forms can apply for tax exemption:

• Trusts, which are usually set up for in­di­vid­ual and personal purposes.
• Cor­po­ra­tions, which operate for business purposes.
• As­so­ci­a­tions, which is a group of people who come together for a shared purpose, for example a sports club.

Your cor­po­ra­tion also must meet one of the exemption purposes set out in the IRS code. These include business purposes that are “char­i­ta­ble, religious, ed­u­ca­tion­al, sci­en­tif­ic, literary, testing for public safety, fostering national or in­ter­na­tion­al amateur sports com­pe­ti­tion, and the pre­ven­tion of cruelty to children or animals”. You can read more about char­i­ta­ble purposes on the IRS website.

You may need to use a different code for busi­ness­es that are fra­ter­ni­ties (501(c)(8)), social and recre­ation­al clubs (501(c)(7)) and trade as­so­ci­a­tions (501(c)(6)).

Besides the costs involved, you should be aware that when you’re starting a non-profit cor­po­ra­tion, it can take 3 to 12 months for your ap­pli­ca­tion to be approved. Ap­pli­ca­tions can also be denied. The most common reasons include or­ga­ni­za­tions that are operating for-profit, those that apply using the incorrect code for their type of or­ga­ni­za­tion, and busi­ness­es that operate for private benefit rather than public good.

If you’ve assembled all the necessary in­for­ma­tion, you can apply for tax exemption via the IRS website.

After suc­cess­ful­ly forming a non-profit cor­po­ra­tion, you must keep up with a series of com­pli­ances in order to keep your cor­po­ra­tion’s tax exempt status.

Each year, you will be required to fill out a 990 form, which tracks your or­ga­ni­za­tion’s revenue, ex­pen­di­ture, achieve­ments and any changes to its or­ga­ni­za­tion­al structure, for example where a new board member joins. Even if you took in no money, you must fill out the form.

If your total receipts and assets came to more than $50,000 for the year, you should file a 990 form. If they were less than $50,000, use a 900-N form instead.

But before you can go and raise funds or accept char­i­ta­ble donations through your non-profit or­ga­ni­za­tion, you must also complete a Char­i­ta­ble So­lic­i­ta­tion Reg­is­tra­tion.

Remember that setting up non-profit or­ga­ni­za­tion may sound cum­ber­some, but running a non-profit long-term is con­sid­er­ably harder. Nev­er­the­less, if done correctly, it can be a rewarding and worthy endeavor.

Click here for important legal dis­claimers.