Learning how to start a non profit organization is the first step towards creating a successful NPO. It is crucial that the founders do thorough research on the legal boundaries of this type of organization, the development process it needs to follow, as well as its financial rights and requirements.
Running an organization brings about a significant challenge and NPO founders need to be prepared. This is why learning about the process of starting a non profit organization and how to manage it should be the foundation of the entire NPO endeavor.
In this article, we are going to take you through the basics of starting a non profit organization. This should give you an idea of what the process entails and what you need to have in mind when making your own plan.
What Is a Non Profit Organization?
The first of the many terms you will have to get familiar with is “Non Profit Organization”. As the founder, you need to know what your organization is and what it can do within the legal boundaries of the United States.
Non Profit Organizations Definition
A non profit organization is defined as a group created for purposes other than generating profit. The income of the organization cannot be distributed to its members, founders, directors, or officers. From a legal standpoint, these organizations can take the following forms:
- Unincorporated Association
- Individual Enterprise
NPOs may only pursue purposes which are endowed by the statutes for non profit organizations. They must also be in line with legal boundaries of the type of institution that they serve as. For instance, in some states non profit corporations abide by the Revised Model Non Profit Corporation Act (1986).
Profiles for Non Profit Organizations
People associate the term “Non profit organization” with charitable groups. While the vast majority of NPOs are created as organizations serving noble purposes, such as churches, public clinics and hospitals, or volunteer services associations, there are some NPOs that aim to serve social or targeted interests. These would be museums, sports clubs, labor unions, research institutions, and some governmental agencies.
How to Start a Non Profit Organization
If you have decided to start your very own non profit organization, you should be prepared to undergo a lengthy development process. It is extremely important that you research the main requirements of this process and that you make a plan. It is all too easy to get lost in the bureaucracy of these procedures. A clear plan will keep up on track because you can see exactly where you are on your progression path. Here are the main features you should include in your plan:
- Establishing the main purpose of your non profit
- Finding the possible legal structure for your non profit
- Establishing the legal boundaries of your non profit
- Working out the finances for your non profit
- Whether you want to start a non profit organization for saving animals, curing cancer, or supporting human rights, you need to establish the main goals of the activities you want to carry out. This needs to be your fist step because it will affect the entire development of your organization, from the legal profile, financial rights and restrictions, and all the way to target audience and fundraising. All of this information will be included in the constitution of your non profit organization.
- After you have clarified the main purpose of your organization, you need to think ahead to how you will carry out your activities and who you are going to work with. At this point, we strongly advise you seek the counsel of an attorney and a financial analyst because they can offer you the best advice regarding the best possible legal and financial structure for your NPO.They can advise you to create your organization either as a corporation, an individual enterprise, a foundation, or another structure that would be best in line with the profile of your NPO, its members and their level of involvement.
- Depending on the legal structure that you opt for, you will have to abide by a specific set of laws and regulations. It is ideal that you have an attorney walk you through the legal terms, especially if you do not have a professional background in law. He/She can clearly explain to you what your organization is authorized to do and what it is not.You can also contact legal organizations meant to inform the public about their rights and to assist them in overcoming the legal matters of creating their own organizations. Some of these may actually be non profit organizations.
- After establishing the aim of your NPO and its legal structure and boundaries, you should take some time to put together a financial plan. To get a good start, it is recommended that you seek professional assistance. A financial expert can inform you of the income you can make, how you can invest it in carrying out your goals, and which taxes you have to pay and which you are exempt for.You should be prepared to go through an entirely different financial process so as to maintain the organization’s tax exemption status. NPOs are expected to be able to justify that their revenue has been invested in carrying out their goals.
The Constitution for Non Profit Organizations
In relation to non profit organizations, the term constitution refers to a legal document that establishes the main characteristics of the NPO. It features information on the profile of the organization and on the key activities it carries out, as well as the main agreements that its members abide by. The main goals of the constitution are to inform about the following aspects:
- WHY – The constitution will point out what the organization was created for, its main aims and objectives.
- WHO – The constitution will provide information on the founding members of the organizations, as well as its targeted beneficiaries.
- HOW – The constitution will feature the key aspects on how the organization intends to carry out its activities, including the legal and financial aspects of the process.
The constitution is the founding document of a non profit organization. As such, it should include clear information about the NPO, and the rights and responsibilities of its members. You can consult the guidelines established by the Legal Resources Center for detailed information. The constitution should include the following features:
- The purpose of the organization
- The main objectives of the organization
- The legal structure of the organization
- Information about the membership of the organization (how people can apply for membership, the rights, and responsibilities of the members)
- The key procedures carried out within the organization in regards to decision making (who makes the decisions, the process of taking a decision in the organization, etc.)
- The position description of the key members of the organization
- The key financial processes carried out within the organization
- Information about each financial year and the main features of the audit process
- Closing down the organization
Application for Registration by a Non Profit Organization
Each state has its own particularities regarding the process of registering a non profit organization. We strongly advise you to begin your research on the official website of the state’s government. You will find the detailed plan of what you are expected to do, including all the types of forms you need to fill out.
After registering your organization as a legal structure (a corporation, a foundation, a partnership, etc.), you will have to file for tax exemption, as by section 501(c)(3) of the Internal Revenue Code. To do so, you must follow the steps listed on the IRS official website.
Filing for 501(c)(3) Tax-Exempt Status
To file for tax-exempt status, you will need to fill out Form 1023-series, which you can find on the official website of the IRS. You will also have to pay a user fee that is set according to the income that your NPO is expected to have.
As part of your preparation process, make sure you answer the five Form 1023 prerequisite questions developed by the IRS to help NPO founders find out whether or not they qualify for tax-exemption status.
You need to know that this filing for 501(c)(3) tax-exempt status entails an analysis process where the IRS will review the documentation you submit to make sure that your NPO meets their criteria for tax deduction, and respectively tax exemption. Please note that the criteria may differ from one state to another.
Accounting for Non Profit Making Organizations
Once the IRS grants an NPO tax exemption status, the organization will have to take part in an on-going process of maintaining it. An organization needs to meet the 501(c)(3) tax-exempt status criteria for the entire development of its activities.
This means that an NPO requires specialized accounting processes that can justify that the income of the organization has been entirely directed into carrying out its purposes. Moreover, the financial documentation must relay that this income has not been used for the personal profit of the founders or members.
Main Differences Between Non Profit and For Profit Organizations
A for profit organization is owned by stockholders and aims to earn profit for them by providing services or selling goods to clients. These are subject to income tax, as by the IRS. In contrast, a non profit organization does not have an owner.
Its main goal is to provide services that are necessary to society. It will strive to maximize its revenues and minimize its costs so that it can maintain or improve the services it offers. NPOs are exempt from taxes, provided that the IRS considers them eligible. Due to these major differences in the development of their activities, the accounting processes required for the two types of organizations are extremely different.
Fundraising and Non Profit Organizations
Fundraising is the backbone of a non profit organization because it is the main method of acquiring the funds necessary for developing the activities of the NPO and achieving its goals. It is crucial that these fundraising activities are carried out in line with the terms of the tax exemption policies so that the NPO may keep its 501(c)(3) tax-exempt status.
NPO founders need to be aware of these guidelines and plan out the development and the financial limitations of their fundraising activities with the fundamental aim of respecting the IRS’ terms. Here a few things that they need to have in mind when planning an activity or operation:
- All fundraising campaigns carried out by non profit organizations need to be in line with the purpose stated in the constitution of the NPO.
- Fundraising authorization may be limited to state; NPOs must register to carry our campaigns in states other than those where they are founded.
- NPOs must provide receipts for donors to ensure credibility and to have a clear account of the revenue generated by their fundraising campaign.
Accounting for non profit organizations must provide proof of the fact that the NPO is making use of the full amount of donations with the aim of improving the services they offer to society. Since fundraising is a considerable part of this process, all the activities need to be thoroughly documented.
As you can see, starting a non profit organization is a complex process that requires a considerable amount of planning. If you are looking to create your very own NPO, you will have your work cut out for you.
Aside from legal and financial matters, your research process should also include material that can inspire you on your journey. Read about nonprofits that have thrived over the years and study their development strategies to get an idea of the issues you should expect to meet along the way.
Including foreseeable problems in your long-term plan will help you overcome even the greatest challenges. Getting properly informed about how to start a non profit organization will help you thrive in your endeavors and reach the success you are aiming for!