Starting a nonprofit is a mix of art and science. One of the highlights of our law practice is getting to work with founders of new nonprofit organizations to help make their vision a reality, whether they’re seeking to launch an international film festival, form a family foundation for philanthropic endeavors, or start a new charity to provide critically needed services to the local community.
The process for starting a nonprofit will vary somewhat for each organization but essentially involves forming a legal entity in the state of choice, obtaining the appropriate federal tax status for that entity, then making any additional filings necessary at the state and local level.
Let’s look more closely at the primary steps in the process as well as the key considerations for the founders along the way:
Step 1: Form the legal entity
- Key considerations: What is the purpose of the organization? What type of legal entity is most appropriate for that purpose? Which state should the nonprofit be formed in? What will the name of the organization be?
Step 2: Draft bylaws
- Key considerations:What type of governance structures will the organization need? Will the governing body members be elected by a separate voting membership, by a specific designator, or by the governing body members themselves?
Step 3: Hold an organizational meeting to adopt the bylaws, elect officers and directors, and commence operations
- Key considerations: Who is authorized to act on behalf of the organization, e.g., open bank accounts, sign checks and contracts? When and how may the organization begin fundraising? How and when to commence programming? What approvals, licenses, or permits will be needed first?
Step 4: Register with the state charity regulator (if required)
- Key considerations: Will the organization engage in fundraising activities? If so, does it need to register with a state charity regulator? About 80% of states have such a regulator, but each state has different requirements for registration and exemptions.
Step 5: Obtain federal tax exemption
- Key considerations: What type of federal tax exemption will the organization seek? While most organizations we work with are organized for charitable purposes as described by Section 501(c)(3) of the Internal Revenue Code, another category of tax-exemption may be more appropriate, such as 501(c)(4) (social welfare organizations), 501(c)(6) (business leagues), 501(c)(7) (social clubs) or 501(c)(19) (veterans organizations). Will its activities qualify for the desired tax status? What will be its main sources of funding and primary expenditures? If it will be a 501(c)(3) organization, will it be a public charity or a private foundation?
Step 6: Obtain state tax exemption (if the state of incorporation has a state income tax and state exemption is not automatically conferred upon organizations recognized as exempt by the IRS)
Step 7: Obtain any other necessary state or local exemptions or permits (e.g., property tax exemption, sales tax exemption, mailing permits, local solicitation permits, business licenses)
Step 8: Make all required periodic and annual filings to maintain the entity’s good standing and tax-exempt status
It is our sincere joy to shepherd founders through the nonprofit formation process. While the various forms to be completed along the way are often readily available online, it is critical to work with a knowledgeable attorney who can advise you on the key considerations involved and decisions to be made by the founders to ensure that the organization is built on a firm foundation and will avoid unpleasant surprises down the road. We spend a great deal of time educating clients on best practices for operating a nonprofit and providing a host of resources on good governance and ongoing compliance so that you can launch with confidence. Learn more about our Quick Launch service here.