Starting a new nonprofit organization can be fulfilling experience as you work to address pressing issues affecting your community. We know that there are many questions in the formation stages of a new nonprofit. Here are some common questions with new nonprofit start-ups.
What is a Nonprofit?
The word “nonprofit” generally is used to describe an organization that works to serve a public purpose, rather than to provide financial benefit to any particular individual, corporation, or entity.
Nonprofits are organized around a cause, mission, or community need. They are organizations that work to serve a public purpose.
Nonprofit organizations can be set up in several different legal formats, depending on your state.This is a state law concept.
Who owns a nonprofit?
One of the most often confused aspects of nonprofits concerns “ownership” of a nonprofit.
No person or group of persons can own a nonprofit. Nonprofits cannot be sold. And any surplus earned by a nonprofit is invested in the nonprofit’s activities.
Once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, officers, and employees. The nonprofit corporation owns all assets of the business; if the nonprofit closes, remaining assets generally are distributed to another tax-exempt entity.
Since there are no owners, generally nonprofits are managed by a board of directors or by its members.
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What is a 501(c)(3)?
501(c)(3) refers to a specific tax category in the Internal Revenue Code. There are dozens of 501(c) categories — the (3) is just one of many. Many nonprofit organizations apply for and receive 501(c)(3) status from the IRS.
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- Nonprofit status refers to incorporation status under state law.
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- Tax-exempt status refers to state and federal income tax exemption. The 501(c)(3) designation is one such federal tax-exemption.
Tax-exempt status exempts a nonprofit from paying corporate income tax on income generated from activities that are substantially related to the purposes for which the group was organized.
To become tax-exempt, the corporation must meet certain requirements and apply with both the IRS and the State.
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Nonprofit Corporation vs. 501(c)(3) Tax-Exempt Organization
Public Charity vs. Private Foundation
What is the role of the founder?
When founders start a public charity, they certainly feel a certain sense of ownership in the organization. They are the ones with the initial vision and the ones giving time, energy, and resources to see this vision come to life. Overtime, the role of the founder may change.
Many times the nonprofit founder serves as an initial member of the board of directors; sometimes the founder will work as an executive director in a more hands-on role. However, if an executive director becomes a paid employee of the organization, that person’s role on the board often changes to avoid conflicts of interest.
Please note that the role of a founder at a private foundation can be very different from that of a public charity. Learn more about private foundations here.
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Role of the Board of Directors Vs. Role of the Executive Director
Can the Executive Director Serve on the Board of Directors?
What are the Duties of a Nonprofit Board of Directors?
How do we develop a mission statement?
What are you trying to accomplish? Writing your mission statement takes time and discussion with key partners. Begin by figuring out who your clients are, what kinds of programs and activities you will provide, and what your ultimate goals are. Do your programs and activities relate to your mission statement? Are your goals feasible with the resources you have?
Learn More:
Writing a Memorable Mission Statement
Inventory The Resources and Skills You Will Need
Before starting a nonprofit, you may find it helpful to have some resources (in addition to time, money, and dedication). These might include:
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- Network of Contacts – You will need a diverse network of contacts to help get your nonprofit up and running. One of your first steps is to recruit your board of directors. Your network will also come in handy when looking for funding. Do you know people with various skills who have the time and desire to join your cause?
- Program Development Experience – Whether it is you or someone in your network, program development experience will be incredibly important. Effective nonprofits know that strong programs are ones that produce results aligned with the organization’s mission.
- Fundraising Expertise – Starting a nonprofit takes money. Keeping it running takes money. It is never too early to start thinking about your organization’s budget. What will it cost to start the nonprofit, hire staff, develop programs, purchase supplies, lease space, promote the organization, buy insurance, train volunteers, etc? Where will the money come from to support the organization? Friends and other personal contacts can help with starting the nonprofit, but what other types of funding can you rely on to sustain the organization? You also need someone who understands laws and regulations related to fundraising.
- Marketing Experience – How will people know that your organization exists? How will clients and potential funders know what you are doing? Is an online presence enough to promote your organization? How will your organization utilize social media? You will need someone on board that has experience in marketing/communications to spread the word about your organization.
- Human Resources Experience – As your nonprofit grows, you may transition from a volunteer-run organization to one with paid staff members. You may like having a team member with human resources experience. Understanding employment laws and practices is important, especially as your organization grows.
Starting a nonprofit can be an exciting (but sometimes overwhelming!) experience. We are here to help.
We handle all the legal and tax start-up matters, so you can focus on your cause and community.
We provide comprehensive, straightforward solutions to manage all of your legal needs: starting an organization, maintaining legal and financial oversight, and even handling complex legal crises. Legal services include general counsel, financial oversight, legal compliance and audits, as well as time-sensitive issues such as IRS audits.
