Ownership is just one of many unique aspects involved with starting a nonprofit, and there are several other important factors you should consider before launching your own organization. Here we’ve outlined some of the most critical things you should know about nonprofit startups.
What is a nonprofit?
The term “nonprofit” typically refers to an organization that works to serve a public purpose, as opposed to serving for the financial benefit of a particular person, entity, or corporation. As such, traditional nonprofits are organized around a shared mission, social cause, or community need, and they work to provide some sort of public good. A nonprofit is still a business in the sense that it needs to bring in money, it has expenses, and the money that it brings in has to be sufficient to cover the expenses. A nonprofit’s excess revenue goes toward furthering the organization’s mission, whether that’s growing the organization, paying employees, supporting fundraising, or supporting other nonprofits with a similar mission.
As long as you don’t violate any rules against self-dealing by overpaying yourself or by commingling your personal assets with those of the nonprofit, one of your organization’s expenses can include paying yourself a salary to run the nonprofit. So even though your nonprofit’s purpose is to further your chosen mission, rather than benefiting yourself personally, that doesn’t mean you can’t pay yourself a reasonable salary.
Clarifying Your Mission
The starting point for all nonprofit organizations is to clarify your mission. Clarifying your mission is about defining and quantifying the cause, problem, or issue your organization wants to address.
Setting up a nonprofit
In the U.S., the IRS recognizes 29 different types of nonprofit organizations, the most common type being a 501(c)(3), which we’ll cover in detail below. Outside of 501(c)(3)s, there are 501(c)(5)s, which include labor unions, and 501(c)(4)s, which include social welfare organizations, and 501(c)(7)s, which include social and recreational clubs. In all cases, the organization begins with a business entity, which can be set up in a few different ways (more on that below) depending on state law.
No person or group of persons can own a nonprofit. Instead, once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, officers, and employees. A nonprofit corporation owns all assets of the business. And because there are no owners, nonprofits are typically managed by a board of directors or by its members.
The tax status of your nonprofit is determined by a filing to the IRS. As with all business entities, the entity is formed under state law, while the tax status is determined at the federal level.
Similar to other businesses, incorporating a nonprofit follows a few general steps:
Obtain necessary licenses and permits.
Choose the name of your nonprofit.
Incorporate your entity through your state.
Apply for your IRS tax exemption.
Apply for your state tax exemption, if applicable.
Prepare bylaws.
Appoint directors.
Hold a meeting of the board.
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