Nonprofit organization

A nonprofit organization is a legal entity organized for a purpose other than generating profit for its owners or members. Nonprofits can still earn revenue and pay employees, but net earnings must be used to further the organization's mission rather than distributed to individuals.

55 steps across 11 sections

1. Define Your Mission and Purpose

  • Write a clear, specific mission statement
  • Identify the exempt purpose: charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals
  • Research whether existing nonprofits already serve the same need (IRS encourages collaboration over duplication)
  • Develop a basic business plan including budget projections for 3 years

2. Establish a Board of Directors

  • Most states require a minimum of 3 directors on the board
  • Directors should bring diverse skills: legal, financial, fundraising, subject matter expertise
  • Avoid stacking the board with family members — the IRS scrutinizes boards where a majority of directors are related, as it raises concerns about private benefit and inurement
  • Directors owe fiduciary duties: duty of care, duty of loyalty, duty of obedience
  • Include at least one person with financial/accounting expertise
  • Establish term limits (2-3 year terms with staggered rotation)
  • Board members are typically unpaid volunteers (reimbursed for expenses)
  • Odd number of directors helps avoid tie votes

3. File Articles of Incorporation

  • Purpose clause: "The corporation is organized exclusively for [charitable/educational/religious/etc.] purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code."
  • Dissolution clause: "Upon dissolution, the remaining assets shall be distributed to one or more organizations that qualify as exempt under Section 501(c)(3) of the Internal Revenue Code, or to a fe...
  • Private inurement prohibition: "No part of the net earnings shall inure to the benefit of any private shareholder or individual."
  • Political activity restriction: "The corporation shall not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office."

4. Develop and Adopt Bylaws

  • Board size and composition
  • Term lengths and rotation schedule
  • Election and removal procedures
  • Vacancy filling process
  • Annual meeting requirements
  • Special meeting procedures
  • Quorum requirements (typically majority of directors)
  • Voting procedures
  • Notice requirements (typically 10-60 days)
  • President/Chair: presides over meetings, general oversight

5. Hold Organizational Meeting

  • Elect or appoint officers
  • Approve conflict of interest policy
  • Authorize opening a bank account
  • Adopt a fiscal year
  • Approve initial budget
  • Authorize filing for tax-exempt status

6. Obtain an EIN

  • Apply online at IRS.gov (free, instant)
  • Required before opening a bank account, filing for tax-exempt status, or hiring employees
  • Select "other nonprofit" or the specific nonprofit type on the application

7. Register with Your State

  • State tax exemption: Most states require a separate application for state-level tax exemption (income tax, sales tax, property tax). This is separate from federal 501(c)(3) status.
  • Charitable solicitation registration: Most states require nonprofits to register before soliciting donations from residents of that state. Requirements vary widely:
  • About 41 states and DC require registration
  • Registration fees range from $0 to $400
  • Must register in every state where you solicit donations (not just your home state)
  • Online fundraising platforms may trigger registration requirements in multiple states

8. File for 501(c)(3) Tax-Exempt Status

  • Form 1023 (full application) — $600 filing fee, 3-6 month processing
  • Form 1023-EZ (streamlined) — $275 filing fee, 2-4 week processing

9. Federal

  • 990-N (e-Postcard): Gross receipts normally $50,000 or less
  • 990-EZ: Gross receipts < $200,000 AND total assets < $500,000
  • 990 (full): Gross receipts >= $200,000 OR total assets >= $500,000

10. State

  • Annual report/renewal with Secretary of State
  • Charitable solicitation registration renewal (annual in most states)
  • State tax exemption renewal (if applicable)
  • State employment tax filings (if applicable)

11. Governance

  • Hold annual board meetings (document in minutes)
  • Hold annual membership meetings (if applicable)
  • Maintain financial records and books
  • Conduct annual financial review or audit (required for some states above certain revenue thresholds)
  • Update conflict of interest disclosures annually

Common Mistakes

  • Skipping the IRS-required language
  • Family-dominated board
  • Confusing "nonprofit" with "no revenue"
  • Not registering for charitable solicitation
  • Not keeping proper minutes and records

Sources

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