8 Steps to Take Before Opening the Doors of Your Nonprofit
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In Start Your Own Nonprofit Organization, the staff at Entrepreneur Press and writer Cheryl Kimball explain how you can launch a successful nonprofit organization, whether your mission is feeding children, preserving history or any of the other myriad goals nonprofits set out to achieve. In this edited excerpt, the authors outline a few key steps you should take before your nonprofit's first day of business.
If you're ready to start the process of establishing your nonprofit, here's a checklist of eight key tasks you must do:
- Decide on a name. Make sure it's available through your state’s Secretary of State office.
- File articles of incorporation with the appropriate office in your state. This is the document that officially designates the creation and existence of your organization, similar to any other business.
- Create bylaws.
- Line up a board of directors according to the laws in your state.
- Apply for EIN through IRS.
- File for 501(c)(3) tax-exempt status using IRS Form 1023: Recognition of Exempt Status Under Section 501(c)(3) of the Internal Revenue Code.
- File for tax-exempt status in your state, if applicable.
- Make personnel decisions.
Your bylaws is one of the most important documents of your organization. This document outlines everything about the way you do business. Bylaws are the set of rules by which your nonprofit will operate. These rules may include but are not exclusive to the following:
- The parameters for selecting a board of directors, including the number and term of the directors, how directors will be appointed/elected, how the executives will be determined, and any guidelines for how replacements will be made if directors step down before their term is up
- Guidelines on the use of donations such as bequests and gifts of stock
- The curation of artifacts, rules regarding deaccessioning and/or sale of items in a museum’s collection
- The hiring of, review of, firing of and replacement of the executive director
- The rules for changing the bylaws
- Membership rules, if applicable, including whether the organization is required to have an annual membership meeting
The IRS tax status known as 501(c)(3) is the key to your nonprofit non-taxed organization. Apply for this as soon as possible; you'll use the resulting tax status letter often. Log on to the IRS site at irs.gov, and search for Form 1023, Application for Recognition for Exemption Under Section 501(c)(3) of the Internal Revenue Code.
If you're the sole founder, you need to decide what you want your role to be. Do you plan to serve on the board and be an overseer while hiring an executive director to run the day-to-day operations? Or do you plan to be the executive director while you look for community members to fulfill the board of directors?
An executive director may not be in the cards for your startup organization. Many organizations don't hire an executive director until they're operating in the black and have the funding to pay a director’s salary. Executive directors report to the board and run the day-to-day business, manage employees and are responsible for income and expenses and keeping within budgets.
Along with 501(c)(3) status comes the requirement to have a board of directors. The size of the board of directors is variable. Some states have specific rules regarding size of the board in relation to the size of the organization.
Typically you want enough directors for a good representation of the constituents you serve and the design of your organization. For instance, if yours is a medical organization, you'll want a doctor on your board, a museum might want an art curator on the board, etc. Your board will also want to be sure to represent the geography of your organization--if yours is a statewide organization, a board member from every county or region is important. Most organizations also benefit from having a lawyer, an accountant and a banker on the board.
Getting the help of other professionals is critical to the success of your nonprofit. Here are the professionals you should consider also hiring:
A bookkeeper is essential. They'll prepare deposits, pay incoming invoices, prepare outgoing invoices, reconcile bank accounts, keep track of donation pledges and invoices for those that are due, and much more. If you have employees, your bookkeeper will prepare payroll, keep track of payroll taxes and vacation time, and keep your financial reports up to date. For a small nonprofit, all this should only take a few hours a week.
An accountant will take your financials to a higher level. They'll close out your books at year-end and help you prepare your financials for the auditor. They might prepare your IRS Form 990. An accountant will do a higher level of accounting work than the day-to-day bookkeeping.
Even if you have a lawyer on your board who'll do pro bono work for you, it's important to have a lawyer on retainer or standby and familiar with your organization who doesn’t have a conflict of interest by being on your board. A lawyer will help pinpoint things you need to cover yourself for and help you see things that are potential liabilities that might not cross your mind.
An auditor for a nonprofit is someone who comes in and reviews all your financials--from your process to your final reports--and verifies as someone independent of your organization that you're doing things legally and your books are in order. An independent audit isn't cheap--$10,000 is perhaps a low figure--but many large grants require that you send audited financials, so it's another one of those areas where spending money is important.
A marketing professional can help a startup nonprofit with branding--coming up with a logo, image, slogan or whatever that people immediately associate with your organization. A professional may also be the best way to get your message out to potential constituents or donors and help you advertise, especially if you put on events that need attendees or have a site they want people to visit.
Chances are your organization will be using computers in some capacity, so having an IT person available (usually just on call) when things go haywire is invaluable. This is the kind of service you line up before you need it because when you need it, you'll be desperate to get help.