Starting a nonprofit can be a rewarding way to serve your community and make a lasting impact. But before you file paperwork or open your doors, there are some important things to consider. Passion for a cause is essential, but compliance, planning, and structure are what allow your mission to succeed long-term.
Here are seven key things to consider before starting a nonprofit:
1. Define Your Purpose Clearly
Nonprofits must be organized and operated for exempt purposes such as charitable, religious, educational, or scientific goals. The mission must serve the public interest, not private individuals, and political activities and legislative influence must be limited. A clear mission statement not only helps with IRS approval but also guides your work.
2. Choose the Right Structure
A nonprofit can be organized as a corporation, trust, or association. Most new nonprofits choose the corporate form because it provides clear governance and liability protection. Your articles of incorporation and bylaws are critical documents—they must meet IRS requirements to qualify for tax-exempt status. These documents also guide how your nonprofit will operate day to day.
3. Ensure Your Activities Match Your Mission
The IRS applies what’s called the “operational test.” This means your nonprofit’s primary activities must directly accomplish your exempt purpose (your nonprofit’s main charitable or mission-driven goal). Only a small portion of activities may further nonexempt purposes. For example, if your nonprofit is created to provide free tutoring, your main efforts should focus on education, not unrelated projects.
4. Avoid Private Benefit and Inurement
Nonprofits are designed to benefit the community, not private individuals. Inurement refers to the improper use of a nonprofit’s income or assets for insiders’ personal gain. While staff and board members may receive reasonable pay for their work, no one should receive excessive compensation or personal financial gain from the organization. Violating this rule can jeopardize tax-exempt status and erode public trust.
5. Understand the Application Process
To obtain tax-exempt status, most nonprofits must file either Form 1023 or the streamlined Form 1023-EZ with the IRS. Along with the application, you’ll need supporting documents, such as your articles of incorporation, bylaws, a proposed budget, and a statement of assets and liabilities. User fees apply, and the review process can take several months, so planning ahead is essential.
6. Know the Difference: Public Charity vs. Private Foundation
Most new nonprofits are presumed to be private foundations unless they can show broad public support. Public charities are typically community-based and supported by a wide range of donors. Private foundations, on the other hand, are often funded by a small number of individuals or families and face additional restrictions and reporting requirements. Understanding this distinction is important as you plan your funding model.
7. Plan for Ongoing Compliance and Reporting
Getting IRS approval is just the beginning. Nonprofits must file annual information returns (such as Form 990) and maintain records that demonstrate compliance with their exempt purpose. Good bookkeeping and strong financial systems make these filings much easier. Setting up these practices from the start helps your nonprofit stay in good standing and focus on making an impact.
Conclusion
Starting a nonprofit requires more than a great idea—it requires clear planning, compliance, and strong systems. By considering these seven factors before you begin, you’ll be better prepared to launch an organization that serves your mission well.
At Overman Bookkeeping, we can help nonprofits set up reliable financial systems, track donations, and stay on top of IRS reporting requirements. If you’re thinking about starting a nonprofit, we’d love to help you lay a strong foundation.
References & Resources
· Charitable Organizations Under Code Sec. 501(c)(3) (CCH)
· What Types of Organizations are Tax-Exempt? (CCH)
· §501, Tax-Exempt Organizations (CCH)
· Charitable Organizations (IRS)
· About Form 990, Return of Organization Exempt from Income Tax (IRS)