10 Steps For Starting a Nonprofit Business
Have you ever considered launching a nonprofit enterprise?
“On Staten Island, many small-business owners work in or near their home communities, and helping others is often a personal mission,” said John J. Amodio, chairman of SCORE-Staten Island. “Starting a business with a cause offers much satisfaction as you work to make lives better for your fellow Islanders, but launching a nonprofit corporation takes some special know-how.”
Some of the steps in creating a nonprofit business are the same you would take to create a for-profit corporation or LLC, but there are some differences,
Amodio explained.
“Nonprofits must comply with some requirements that don’t affect other businesses,” he said. So, where do you begin? To guide you toward successfully launching your nonprofit business, Amodio is sharing the following 10 steps offered by SCORE-Staten Island:
1) UNDERSTAND WHAT IT MEANS TO BE A NONPROFIT
A nonprofit may be created as a nonprofit for charitable, educational or certain other purposes — as long as it doesn’t directly benefit the owner. Nonprofits (if approved by the federal government) operate tax-free, and they can accept donations and apply for grants.
While a nonprofit business can make profits, surpluses must be used toward
fulfilling the organization’s objectives — such as buying computer software to run the business more efficiently, or investing in resources that deliver value to those it serves.
2) CHOOSE A LEGAL STRUCTURE
Most nonprofits choose to register as a 501(c)(3) corporation. The 501(c)(3) classification includes organizations that have a charitable, educational, religious, scientific, or literary purpose.
LLCs, owners of nonprofit corporations receive personal liability protection because the business is a completely separate legal entity. A nonprofit must make sure it meets all business compliance requirements (such as keeping business licenses current, paying taxes, filing reports, etc.) to maintain the liability protection. Otherwise, owners could put their personal assets at risk.
Another issue some nonprofits face is losing their tax-exempt status as a result of misusing the nonprofit. If an owner commits violations like improperly distributing profits or gaining personally from the business, the organization could lose its 501(c)(3) status and then be taxed as a for-profit business.
3) WRITE A BUSINESS PLAN
As with any business, it’s critical to have a firm grasp on the organization’s
mission, vision, and everything that needs to be addressed to start and run the nonprofit. A detailed business plan helps by serving as a roadmap, and parts of it will be needed to apply for federal tax-exempt status — which is critical for future fundraising.
4) CHOOSE A BUSINESS NAME
This step requires a good deal of thought because a nonprofit’s name will represent the brand and be at the forefront of everything it does. A name search with the Secretary of State’s office can show if no other company has already registered a business with the same (or confusingly similar) name. If a nonprofit will be operated nationally, a trademark search can confirm
that no other businesses in other states are using the name.
5) APPOINT A BOARD OF DIRECTORS
Because the board will provide oversight of the nonprofit’s activities and be accountable for guiding the organization in fulfilling its mission, directors and officers should be selected carefully. It’s helpful if these individuals collectively have expertise in the various functions of running a nonprofit corporation.
Each state has its own rules regarding how many directors are required, what qualifications they must meet, etc.
6) DRAFT BYLAWS
Bylaws set the ground rules for operating a nonprofit.
They include governance of the nonprofit (i.e., whether control lies with the board or owners), board meeting rules, voting procedures, how owner disputes should be handled, and other procedural information.
7) FILE ARTICLES OF INCORPORATION
This document needs to be filed with the Secretary of State in the state where the nonprofit will be operated. Fees vary by state for filing this paperwork. If a nonprofit will have locations in more than one state, it will need to file articles
of incorporation in each state in which it will maintain operations.
Some states will also require nonprofits to register to have permission to raise funds.
8) OBTAIN AN EMPLOYER IDENTIFICATION NUMBER (EIN).
As a corporation, a nonprofit must have an EIN. It will need it to open a business bank account, hire employees, and complete certain business filings. The process is simple, just request an EIN for free through the IRS’s website.
9) REQUEST 501(C)(3) TAX EXEMPTION
To apply for 501(c)(3) tax-exempt status, a nonprofit will need to file form 1023 with the IRS.
10) APPLY FOR REQUIRED BUSINESS LICENSES AND PERMITS
Depending on the type of business activity a nonprofit conducts, and where it is located, it may need licenses or permits to operate legally. Do your research to find out what licenses and permits are needed at the federal, state, county or local municipality levels.
ADDITIONAL, VITAL CONSIDERATIONS
All of the details above are meant to give you a sense of what is involved in starting a nonprofit company. Realize, however, they are the tip of the iceberg and not meant as legal advice.
Requirements may vary depending on the type of nonprofit organization
you will operate and where you will be located. To fully understand everything you need to pay attention to, consult with both legal and tax professionals before moving forward.
“As you work through the process of getting your nonprofit off the ground, enlist the help of a SCORE-Staten Island mentor,” Amodio advised. “SCORE volunteers have expertise in all aspects of launching and growing a business, and mentoring is free and unlimited.”
About SCORE-Staten Island
SCORE-Staten Island is dedicated to fostering a vibrant small-business community within its New York City borough by providing
cost-free education and confidential mentoring
to both aspiring and established entrepreneurs. Headquartered at 950 West Fingerboard Road, Grasmere, in the iconic Staten Island Advance Building, the organization is Chapter 476 of the nationwide SCORE, a nonprofit association and resource partner with the U.S. Small Business Administration (SBA). For additional information, or to schedule an appointment, SCORE-Staten Island may be visited at https://statenisland.score.org ; telephoned at 718–727–1221; emailed at info@SCORESI.org, and visited on Facebook at https://www.facebook.com/SCOREStatenIsland.
