What to Consider When Starting a Nonprofit

A successful nonprofit needs more than a great cause to support. To build an organization that will last, you must understand funding strategies, governance requirements, and how to position it for sustainability.

In this article, we’ll break down how to structure and build your nonprofit for long-term growth and sustainability.

The difference between nonprofits and for-profit businesses

Before deciding to start a nonprofit, it’s important to understand the difference between for-profit and nonprofit businesses on a structural level.

Nonprofit businesses

The internal structure of a nonprofit sustains itself, with profits beyond operational costs being reinvested into its stated mission, rather than being distributed to individuals, including board members. Funding sources can impact your exact nonprofit operational structure.

“[Decide] whether you are going to be a private operating nonprofit, [where] most of the funding comes from a few individuals, or a public operating nonprofit, [where] most of the funding comes from outside sources,” explained Patricia Brown, Co-founder of national nonprofit War Horses for Veterans.

Your nonprofit must also operate to fill a societal need or shared cause, and that can affect the exact legal designation of your organization. Taxation, accountability, and legal requirements can vary between different types of nonprofits, though many are eligible to apply for tax-exempt status with the IRS (more on that below). The type of organization will also alter the degree to which you’re allowed to have political impact.

For-profit businesses

A for-profit business’s goal is to make a profit. It’s liable to pay all of its taxes, including:

In addition to taxes, a for-profit business is accountable to its owners and shareholders, and it must comply with legal and regulatory requirements that govern its operation.

Choosing the right nonprofit designation

Your organization can apply for different IRS nonprofit designations depending on your mission, activities, and advocacy goals. The IRS currently recognizes over 30 different nonprofit designations. Some of the most common designations include:

501(c)(3) charitable organizations

This is the designation for:

Donations to this designation are tax-deductible, but they have limited political activity and strict compliance rules.

501(c)(4) social welfare and civil leagues

This is for organizations that promote social welfare, including groups like volunteer fire departments or rotary clubs. They’re allowed to take part in political activity like lobbying, but donations to them are not always deductible.

501(c)(5) labor, agricultural, and horticultural organizations

This includes groups that improve conditions for farmers and workers in other similar industries. Donations or dues to these organizations are typically deducted as business expenses and not considered charitable gifts.

[Read more: How Do Charitable Donations Impact Your Taxes?]

501(c)(6) business leagues and chambers of commerce

This is for groups that advance common business interests, including chambers of commerce, real estate boards, and trade associations. Donations to this type of organization are not deductible as charitable contributions.

501(c)(7) social and recreational clubs

This category includes organizations like country clubs and hobby clubs. They’re funded through member dues, and what they raise must be used to benefit members.

501(c)(8) fraternal beneficiary societies

This designation is for fraternal groups that have lodges or chapters and bring value to their members, such as insurance, death benefits, and financial support. They’re funded through member fees and donations, and if these groups do not provide benefits, they must apply as 501(c)(10) organizations instead.

Applying for tax-exempt status and maintaining compliance

Tax-exempt status is not an automatic designation for nonprofits; you must apply for it through the IRS and meet certain eligibility criteria. The application process includes the following steps:

Once granted exempt status, you will be expected to comply with state, federal, and local rules governing your 501(c) status. Brown recommends “[having] a good attorney and a good accountant before you start” to avoid potential pitfalls.

Can a nonprofit own a for-profit (and vice versa)?

If you already have a nonprofit and are looking to add a for-profit to your corporate umbrella, or you were gifted one, it is possible to do so. Adding a for-profit arm requires specific ownership or partnership structures that make it an option. The two must remain legally, financially, and operationally separate.

You can legally:

The key is that it must be a separate legal entity owned by the nonprofit. This means the two companies will have separate boards, management, finances, and operations. You cannot use tax-exempt resources to support the for-profit business, but the dividends made by the for-profit may be distributed to the nonprofit for the sake of its mission.

Legal and tax implications of adding a nonprofit arm

Adding a nonprofit arm to your for-profit business introduces additional legal and compliance considerations. The IRS closely monitors how nonprofits interact with for-profit entities. If your nonprofit is structured or operated in a way that benefits your for‑profit business, the IRS may view it as a private benefit, which can jeopardize your tax‑exempt status.

Nonprofits must also adhere to strict rules regarding their activities and governance. For instance, depending on your nonprofit designation, there may be limitations on political activity, and those restrictions cannot be circumvented through the relationship with a for-profit entity.

The basics of building your nonprofit

Before you can launch your nonprofit, you’ll need to build a firm foundation. Brown encourages focusing on three key areas: funding, a facility, and staffing. These core elements can anchor the broader planning process, which includes the following steps:

Find your mission

In order to be classified as a nonprofit, your organization must have a stated mission that is recognized by the IRS. You likely already have a business idea you’re passionate about; Brown recommends taking the time to research the need in your community to ensure your mission fills a meaningful gap.

Build your business plan

In building your business plan, you need to understand the cost of running your nonprofit and research the minimum budget you’ll require. From there, you can pull together:

[Read more: Ready, Set, Startup Checklist: Steps to Starting a New Business]

Choose the right name

Choosing the right name for your organization is crucial. It gives others an idea of what you’re doing at a glance. Your name should be clear, strong, and impactful, and should also not match any existing names on the IRS’s Tax Exempt Organization Search List in your state.

Find your location

Ideally, your nonprofit’s location should be where the majority of your activity takes place, such as where your funds are raised and where your board members live. If you’re not tied to one location, you may consider launching in a state that’s well-suited to nonprofits, such as Arizona, Delaware, Nevada, Texas, or Wisconsin. These states all have fewer fees and regulations when starting a nonprofit compared to other areas of the United States.

Figure out your budget

Without a proper budget, your nonprofit cannot function. You need to consider:

To help manage potential financial instability in the early stages, Brown recommends securing enough funding to sustain operations for at least two years.

Build your team

Brown also emphasized the importance of building a strong team to steer your organization. It’s important to hire an executive director and board of directors with a passion for your mission, knowledge regarding it, and sector experience. Spending time interviewing prospects to put together the right team is a critical investment.

Developing a funding strategy and strategic partnerships

Any nonprofit must have a fundraising strategy. This includes understanding your fundraising opportunities and how to find them, how to foster collaboration with others in your area, and how to expand your reach. The key to all of these is to find sustainable partnerships, including:

Marketing to build awareness and donors

Marketing your nonprofit and its mission strategically can help build awareness among supporters. These approaches can encourage others to donate:

[Read more: What Are the 7 Ps of Marketing?]

Emily Heaslip contributed to this article.

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