Nonprofits exist to serve the common interests of their members or to benefit the general public, and the nonprofit sector remains one of the most vital (and growing) parts of U.S. society and its economy. While there are several types of nonprofit organizations, the most common is the nonprofit corporation, which provides the liability protection and asset separation typical of corporate entities. Many nonprofit organizations also go on to seek tax-exempt status under Section 501(c) of the Internal Revenue Code, and the different states often offer tax exemptions for different types of nonprofit organizations. Although seeking federal tax-exempt status isn’t required for nonprofit corporations, there is no surer sign of a nonprofit’s legitimacy than federal recognition of its tax-exempt status.
To start a nonprofit, you either hire an attorney or an incorporation service, or you can file the paperwork yourself in the state where you wish to start your nonprofit.
The advantages of hiring an incorporation service are obvious: you don’t have to worry about making basic mistakes because professionals will incorporate your nonprofit and provide you with the necessary supporting paperwork and services to properly run your organization.
Most nonprofits are corporations, which means they get the asset protections typical of corporations and get taxed as corporations unless they apply for (and obtain) federal tax-exempt status from the IRS. But within the nonprofit type, there are three main sub-types defined by their common purposes: cooperative associations, mutual benefit organizations, and public benefit organizations.
Most nonprofits, including most tax-exempt nonprofits, exist for the public benefit. Your state’s individual filing requirements may differ depending on the type of nonprofit you decide to form.
Selecting your nonprofit’s name can be tricky, but one thing that may help narrow the possibilities is to search a domain registry and see if a corresponding URL is available. Having a matching name and website URL is pretty savvy.
Another determining factor will be selecting a name that is available in your state. To see what’s available in your state, go to your state’s secretary of state website, find the “business services” section and perform a Business Name Search. There you’ll see what’s already been claimed.
Many states offer a name reservation service, we highly recommend NOT reserving a name, unless you know you won’t be incorporating your nonprofit for an extending period of time (months). Reserving a name typically only slows down the incorporation process.
Also, be aware that your nonprofit will often need to have a corporate name ending like Inc, though this isn’t required for nonprofits in every state. For example, if you were to name your company Yellow Submarine, the legal company name might need to be something like Yellow Submarine Inc or Yellow Submarine Incorporated.
If you’re starting your first nonprofit organization, reading the term registered agent probably just melted your brain. Registered agent is a bland term for an extremely important piece of your nonprofit.
A registered agent is an individual or business that serves as the official point of contact for your nonprofit organization. If your nonprofit gets sued, the lawsuit is delivered to your nonprofit’s registered agent. If the state needs to send a tax document to your nonprofit, it’s sent to your registered agent. If someone looks up your company in the state database, they’ll find the contact details for your registered agent.
What you need to know about registered agents:
The downside of being your own registered agent is your contact details get plastered all over the web and you’ll get plenty of spam and junk mail. Plus, it’s easier for would be scammers to figure out which assets are yours.
If you don’t live in the state where you formed your nonprofit, you’ll have to hire a registered agent service.
We’re breaking advantages of hiring a registered agent out into its own section, not because we think you should hire an additional service, but to better explain what registered agents do and provide a clear explanation of what they’re really offering.
If your nonprofit gets sued, a registered agent will accept the service of process (lawsuit) and send you a digital notification. They should provide an online account through which you can access and store a variety of business documents and view everything you need to be aware of, including any upcoming maintenance or annual reports that need to be filed with your state. All this is a nice perk but not necessarily vital.
This is where we think messaging gets a cloudy. If you’re just entering the nonprofit sector, you’re probably pumped to let the world know you started up a nonprofit, and that’s understandable. Privacy is likely the last thing you’re concerned about. But you might want to be.
The digital age has brought with it a host of new privacy concerns. When you hire a registered agent, they’ll list their address and contact information wherever they can on the public record. We’re not talking about being a sketchy anonymous company. This is simply adding a layer of address security and protection to your personal information on the web.
Again, you do not need to hire a registered agent if you live in the state where you formed your nonprofit (registered agents have a physical residency requirement in every state). If you’ve hired an incorporation service to start your nonprofit organization, moreover, it’s very likely they’ll include registered agent service with your package. However, be aware that registered agent service renews annually and will likely cost around $100 to $300 a year.
While your nonprofit’s bylaws don’t officially form your organization, the document does lay out all the rules for how it will function, who is responsible for what, whether your organization will be managed by members or directors, and how your organization will distribute its assets if it ever shuts down (among answering dozens of other important questions). Most websites recommend creating your bylaws after you officially form your nonprofit, but it really makes sense to do this beforehand, as once you start the nonprofit, you already have planned out how it will function. However, your nonprofit may need to officially adopt its bylaws at its organizational meeting shortly after incorporating with the state.
For nonprofit bylaws, you can hire an attorney to draft one for you, but that’s definitely the most expensive route, and likely they’ll already be working from a template.
If you Google “nonprofit bylaws template,” you’ll see lots of websites advertising them, but most make you enter an email or do some weird 7-day free trial. It’s also unclear whether any nonprofit bylaws on the web are better than another. We recommend grabbing a template and tailoring it to your nonprofit. Again, if you’ve hired an incorporation service, they should provide you with a template when you sign up.
What to Include in Your Nonprofit Bylaws?
You can, of course, draft nonprofit bylaws yourself, and they really don’t need to be fancy, but you’ll want to at least cover the basics. Try to include the following:
If you take the time to try to address each part of this bulleted list in writing and have all members sign the document, you’ve just created your nonprofit’s corporate bylaws.
Most states require nonprofits to adopt corporate bylaws. You wont’ usually file the bylaws with any state agency, but you will need ratified bylaws if your nonprofit wants to apply for 501(c)(3) federal tax-exempt status or open a bank account in most states. However, even if your state didn’t require your organization to adopt bylaws, you’d be risking a lot to start a nonprofit with other people and not have the bylaws approved by your organization’s board of directors. If a legal dispute between members, directors, or officers occurs, the bylaws may be relied upon in court. Even if the language isn’t fancy, it’ll serve essentially as a contract shared by everyone involved in your nonprofit.
The nonprofit Articles of Incorporation is the document filed with the state that formally creates your nonprofit. Each state will have its own requirements. You’ll need to file this document in the state where you want to form your nonprofit.
Fortunately, you’ll be able to form your nonprofit online in almost every state. Just visit your local secretary of state’s website and find their business services section and go from there. The other commonality is that you’ll need to pay a filing fee. Depending on the state, this fee ranges from $10 to $800, but most are around the $100 range.
Generally, you’ll need to include the following in your nonprofit Articles of Incorporation:
The EIN is essentially your nonprofit’s social security number. This is the number that you’ll use when filing taxes, opening a bank account, and hiring employees. It’s important.
Fortunately, you can get an EIN online for free on the IRS website if you have a Social Security Number. Simply follow the prompts on the IRS website after you’ve formed your nonprofit, and you’ll have one in about 15 minutes. That said, most incorporation services can obtain an EIN for you, and many include this service in their formation packages.
The process of obtaining an EIN is only slightly more complicated if you are a non-US resident without an SSN. In this case, you can still get an EIN for free, but you must file Form SS-4 by fax or mail. It’s a little more of a hassle, but non-US citizens can still get the EIN. You can also hire most formation services to do this for you for an additional fee.
One final note about obtaining the EIN. Wait until your nonprofit has been approved by the state before doing so. If you try to get an EIN before your nonprofit’s articles get approved by the state and the state ends up denying them on some technicality, you’re going to be in for a lot of headaches and confusion with the federal government. Just be patient, wait for your filing to come back from the state, and then get your EIN.
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Not all states have general business licenses, but depending on the state you may be required to obtain various permits and licenses to operate your nonprofit. We recommend first checking out your local secretary of state’s website for specifics. The US Small Business Administration also offers a wide array of free resources.
Even if your state does not require any business license registrations, be aware that your local municipality may. They may even have their own sales tax rate. We highly recommend visiting your city or town’s website and figuring out if there are any additional licensing requirements for your nonprofit.
Additionally, most states require nonprofits that solicit donations to register as charitable organizations with the state.
Opening a bank account in the name of your nonprofit is the final step in starting your nonprofit organization. It may seem like it’s unimportant, but in reality it’s absolutely crucial.
Opening a bank account in your nonprofit’s name is what will fully separates your nonprofit’s assets from the personal assets of its officers, directors, and/or members. This is extremely important because if the nonprofit gets sued and all its assets are in your personal bank account, a court may rule that there is no difference between your nonprofit’s assets and yours. The solution to avoiding that is to keep a strict separation of personal and business assets. A business bank account is your primary piece of separation.
To open a corporate bank account for your nonprofit, you’ll need all of the following:
Additionally, each bank may have its own requirements. We highly recommend calling your bank to understand its requirements before arriving in person. Most banks don’t open a lot of business checking accounts, so person in charge may be unfamiliar with its own requirements. Calling ahead will save you time and present fewer hassles in the end.