Do you have a passion for making a difference in the world? Are you called to go beyond volunteering to found a nonprofit organization? Passion and hard work will take you far, but every nonprofit needs a firm legal foundation.
Starting a nonprofit without that foundation is like driving a car without learning the rules of the road. You might be able to get around, but you risk violating the law (and paying the price). You can start and run a nonprofit without learning the pertinent rules, but you could end up paying a huge price down the road—including personal liability exposure for your officers and directors.
To protect yourself and your organization as you launch your nonprofit, follow these five steps. You’ll be on your way to turning your dreams into a (functioning, legally compliant) reality.
- Build your board wisely
- Incorporate your nonprofit
- Prepare (and follow) your bylaws
- Hold your first board meeting
- Secure tax-exempt status
Build your board wisely
Launching a nonprofit is a big task, one no one should do alone. Every nonprofit needs a board of directors—a repository of wisdom and practical knowledge to guide you through good times and bad.
Choose board members with the knowledge and skills your organization needs to succeed—especially any you might lack. Even though most nonprofit board members are unpaid, they are still corporate directors, with fiduciary duties to the corporation and are accountable to donors, employees, recipients, and state and federal government offices, including the Office of the Attorney General and the Internal Revenue Service. Choose board members who will take their service seriously, and make sure the majority have served on boards before.
Incorporate your nonprofit
Incorporating is the only way to legally protect you and your directors and officers. An entire article could be written on this point alone—but for now, the important thing to know is that as a corporation, your organization will be required to follow all pertinent rules in your state’s Corporations Code, which dictates the rules regarding governance of nonprofit organizations. You’ll need a basic knowledge of nonprofit corporation law—or a lawyer to help you (see below).
Other initial filing activities include obtaining a tax ID number from the IRS, filing an initial statement of information with your Secretary of State, and in some cases, registering with your state’s Attorney General.
Prepare (and follow) your bylaws
Next, you’ll need to prepare your corporate bylaws—the roadmap your board will use to properly govern the corporation.
Not creating or following bylaws is one of the most common mistakes nonprofit founders make. (Many don’t even know where their bylaws are, let alone ensure they’re adhered to.) Not following bylaws can invalidate the actions of your directors and officers or, worse, make them or you financially liable for acts of the organization.
Your bylaws are a reflection of your state’s Corporations Code. Don’t take a shortcut here: Copy someone else’s bylaws, or use bylaws you found online, and you risk invalidating parts of your bylaws. Also be aware that each state has different rules in its Corporations Code; what’s valid in one state might not be in another.
Hold your first board meeting
Filed all the required documents? Congratulations—it’s time to hold your first board meeting. This is when you officially authorize the directors and officers to do their jobs. A board typically passes 20 or so resolutions—adopting bylaws, electing officers, establishing the corporation’s fiscal year, opening bank accounts, obtaining a nonprofit mailing permit (yes, you need a resolution for that), authorizing applications for tax-exempt status, and so on.
In nonprofit corporations, the directors hold all decision-making authority. They must make decisions as a group, never individually—otherwise, they can put the organization at risk. Passing resolutions, which are recorded in board minutes, creates a record of all decisions.
That is not to say that no one can make an individual decision. Corporate officers (typically president, secretary, and treasurer) have the authority to act within set parameters, either by law or by board resolution. Such resolutions are critical—especially those passed in the initial board meeting, which set a foundation for your ongoing work.
Secure tax-exempt status
Once you’ve incorporated, it’s time to obtain tax-exempt status. Yes, preparing and submitting a multi-part application to the IRS can be daunting. But follow the directions (and ask for help when you need it) and you can do it.
Start by reviewing the IRS page on tax-exempt status. If you’re applying for charitable tax-exempt status (501(c)(3) designation), use Form 1023; be sure to read and follow all instructions. The filing fee depends on the size of your organization; it’s typically $850. There are no refunds, so do what you can to get it right the first time.
After you submit your application, approval can take several months. Once you’re approved, however, your tax-exempt status will date back to the date of incorporation with your state.
Note that you may also be required to obtain tax-exempt status from your state, as well as from the IRS. Check with your state’s franchise tax board to determine specific requirements.
Do you need an attorney?
You’re not legally required to hire a lawyer. But someone has to do the heavy legal lifting, which takes significant time, energy, and patience. If you do go the DIY route, don’t compromise or cut corners—the stakes are too high.
Want to put your energies elsewhere, and leave the legal work to the experts? Look for an attorney with experience starting nonprofit organizations; seek recommendations from other successful nonprofits and knowledgeable board members. Now that you’re primed on how to start a nonprofit, you’ll soon be on your way to making a difference in the world.
Read Nonprofit Funding Sources You Need to Know for more tips.