Stepping Stones: How To Start A New Nonprofit

For the purposes of this article: I will assume you are a new nonprofit Founder, have limited experience in the sector (at least in terms of how to start a brand new organization or lead/grow one), and seek information about where you should begin with your noble endeavor. (Otherwise, you probably wouldn’t have clicked on this article link.) And so, that is where we will focus for today; our first set of stepping stones when establishing a new 501(c)(3).

You are probably already wondering how you will fund your program, and you might think the logical place to start is with grants. (Umm. Yeah. I hear that a lot.) Sorry to so quickly dash your hopes this early in our relationship, but you need to reframe your expectations with regard to grant funding and how “easy” it is to get this kind of fiscal support. First, let’s check if you are ready for the grants process at all.

You need to apply for—and officially RECEIVE APPROVAL of—your 501(c) 3 IRS tax-exempt status before you will qualify for most, if any, grant funding. (There is a potential work-around on this, but I will address “fiscal sponsorship” in a future article.) With that, let’s back up a bit. In order to establish your tax-exempt, 501(c)(3) nonprofit organization, here is a list of what needs to occur, in the order in which you should proceed:

1. While a “business plan,” in the traditional sense of the word, is not necessary for setting up a nonprofit (and much of what would go into a for-profit business plan is not applicable to nonprofit operations anyway… since, with the exception of social enterprises, nonprofits are NOT businesses), you do need to put all your programmatic, fiscal, and operational components down on paper. Your program does not exist—or, at very least, is not a functional program but just a preliminary idea—until you hash out all the minute details.

• • I suggest you start with an outline. It is probably easiest to do this on a computer since you can add subsections and move things around so easily, but if free-form handwriting is your more creative place—by all means, do it that way!  (As a starting point before you computerize it.) Find what works for you—lists, flowcharts, index cards, “Post-Its,” a white board, whatever. Be creative and let your mind wander wherever it may.  Some of the best ideas come about that way. There are even studies that support the handwriting method as particularly conducive to creative processes. At the same time, our brains all work differently on this. Find your sweet spot; YOUR way.
  • Think of your program development ideas as a triangle or pyramid. At the very top is your main idea, and, as you break it down, the details become more complex and greater in number. Remember, as with the pyramids, more blocks build the foundation than the absolute top. Without it, the entire structure crumbles. Be kind to yourself during this exercise. At this stage of the game, you only need the basics to get started and this part of the process, in full, will take you quite a bit of time and thought. It will evolve.
  • The outline should begin with your overall purpose, then broken down into program goals.  Program goals are then divided into program or project objectives. Next, list the activities that need to take place under each of the objectives. Once you get to this stage, both for development of the program and the operational phase itself, you have…  “a program.”  At least, that is, for our starting point. (For clarification, some organizations may only have one program, which means that program and organization (from a planning, implementation, and budgetary standpoint) are virtually the same. If you plan to have more than one program, you need to plot out your particulars for each.)
  • Utilizing this plan, you can then better understand what costs may be attached to its implementation. We’ll discuss budget preparation in a future article, but I cannot emphasize enough the importance of determining all your needs and realistic fiscal requirements early on. You will not have any luck in funding of any kind until you lay out all the particulars. Do your homework. Yet, much of this can be done after filing the nonprofit legal and tax paperwork that will only require a more sketchy explanation for now. With that said, the full 501(c)(3) application requires you to specify all your intended fundraising activities as well as plot-out the first few years of budget projections. You really can’t do these things without the preliminary work.

2.  Formulate your Board of Directors, keeping in mind your need for a diverse group of people in both backgrounds and talents. At a minimum, you will need 3 people for this, although most nonprofits have Boards consisting of 10-12 members and up.

• • Typically, bringing a set organizational plan and structure to your initial Board of Directors will ensure that the organization looks more like your idea at inception rather than how it evolves once others get involved. Just some food for thought in terms of what you decide before forming your legal Board of Directors and what can or will happen after others have a say. This means that you should do what you can before creating a Board, getting buy-in for YOUR vision, and starting there rather than developing the organization with the opinions of many—which MAY not be in full alignment with your own. Once the Board gets involved, the Founder has less control over what will end-up happening short and long-term. What would I do? I’d create and offer a full organizational manual to them. Allow for adjustments (as Boards always have the power to make such changes), but make sure the first iteration of your organization reflects your Founder intent. Bottom line, it is easier to come to agreement with 1-2 people than 12.
  • I strongly urge you not to have your Executive Director as your Board President or even a sitting member of the Board of Directors. Even if that person is the Founder, no one owns a nonprofit. An Executive Director REPORTS to the Board of Directors and is charged with daily operations and management of the organization. I additionally caution leaders about nepotism and filling Board seats with relatives. It reflects poorly on the organization, and certainly is a red flag for funders. (It’s a real “Mom & Pop” structure, filled with conflicts of interest.) In short, this is a MISTAKE. Instead, find people in the community who can contribute something unique to your program.  Find people who will actively offer the “Three Ts” —time, talent, and/or treasury.  Look for balance in the group you invite to join you, including people with different backgrounds—both professionally and personally. Diversity.
  • Apply for your federal EIN (Employee Identification Number).  This can be done either online or over the phone: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online 
  • Create your By-laws and Articles of Incorporation.  There are books and resources on the web that can help you do this, but you can also turn to an attorney to handle these documents in addition to filing them in your state.  (This needs to occur while you formulate your Board. They need to vote on these prior to submitting them for legal incorporation.)
  • Once you have identified your team, you need to plan a formal first meeting to hold elections for the leadership roles of President, Vice President, Treasurer, and Secretary, OR, as some organizations prefer, Chairman/person, Vice-Chairman/person, Treasurer, and Secretary—and receive approval of your By-laws and Articles of Incorporation (see below).  Maintain minutes of every meeting you hold.
  • Once you are officially a nonprofit or not-for-profit corporation (based on steps 3 & 4), it is time to prepare your form 1023 IRS 501(c) 3 application for Recognition of Exemption.  You can access the application at https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status.  This paperwork contains questions that YOU can complete largely on your own.  Other sections, however, may require you to consult with an attorney or accountant who specializes in nonprofits (or a nonprofit consulting firm like CEC).  PLEASE hear that.  I have seen new organizations choose to stick with their for-profit consultants to experience disastrous and costly outcomes. There is a difference between the for-profit and nonprofit world.  Choose your consultants wisely. Everyone has his or her areas of specialty. And it is easier to get it right the first time than to have to file amendments. Mistakes also lead to delayed goal attainment and progress.
  • At very least, if you prepare the application yourself, I recommend you have an attorney or accountant (or us) look over your document before you submit.  Oh, and … a heads up—the application fee is currently $600.  You should also know that there is a backlog with IRS 501(c) 3 approvals that has been going on for many, many years.  At present, most organizations are waiting a minimum of 6-9 months before they receive final approval. More commonly, you will wait 9-10 months to get official IRS recognition. And, you cannot submit grant applications until you receive your “IRS Letter of Determination” (which is what this official recognition is called and a document that becomes a staple of most funding applications). Also, please be sure you qualify for the lower-cost alternative before you file your 1023, if you are thinking you can take the cheaper shortcut. If you intend on running a nonprofit that will have annual revenues over 50k, you do not qualify for the short-version application. In other words, if you expect to earn a living through this effort and it will be more than 50k a year (which I see all the time)… you don’t qualify for the brief 501(c)(3) application route. It’s not what you have TODAY in terms of a budget, it is where you are expecting to go.

3. File your Charitable Registration application with your state’s Office of the Secretary of State. More information, which can vary by state, should be easily accessed on your state’s governmental website. Some states may process these applications within a different office than that of the Secretary of State. It should be easy to find this information on your state’s governmental websites. It is most likely in the same place where you get information about your state legal filings. The charitable registration filing is required before you can solicit funding from people. What states you need to file in will depend on where you do your fundraising. If you are a national organization, you’ll have more complex filing needs. If you are limited to one state with all activities, you will only need to file in your state. However, this may change if you get donations from patrons outside your state.

4. While you wait on things like your IRS 501(c)(3) approval, there is work to be done!!! LOTS of it.  Keep in mind that establishing any program does not happen overnight and when you are ready to apply for grants—which you cannot do until you receive your tax-exempt letter—much of what will be needed can be prepared during this agonizing period of wait.

• • Prepare or gather the following materials:  (A few of these are already done because they are included in your Articles of Incorporation or By-laws)
    • Mission Statement
    • Program Description
    • Purpose of Program
    • Measurable Goals & Objectives
    • List of all the tasks/activities involved to create and implement services
    • Organizational Chart
    • Job Descriptions
    • Resumes of key staff (if known)
    • Policies & Procedures (both personnel and program)
    • Expected Outcomes
    • Detailed organizational budget and project-specific budgets, if any
    • Research or statistics that demonstrate a need for your program
    • Marketing plan
    • 1-3 year strategic plan
    • Research grant/sponsorship opportunities and develop your funding plan.

After you receive your IRS 501(c) 3 approval, get cracking on grants, corporate contributions and sponsorships, and personal donations! Of course, you should have a detailed plan for all these things… and CEC can help.

As someone who specializes in guiding new nonprofit start-ups, I would say that at least 1/3 of all the new Founders I have met realized at some point in the development phase that forming a new organization is biting off more than they can chew.  It, without doubt, requires time, tenacity, passion, and money. First things first… let’s open your eyes fully to what is in store for you.

The path to establishing a solid nonprofit is long. But it is surely worth it to those of us who feel this calling. For now, place your foot upon the next rock, and I will do my best to hold your hand, encourage you, and prevent you from falling.

It most certainly will be a rollercoaster. That just comes with the territory.  It will be exciting, frightening at times, and both an up and down adventure. Just hold on, especially when you hit the curves, and don’t forget to occasionally throw your hands up in the air and yell, “wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!”

Till next time… Enjoy the ride! And keep learning.