Nonprofit organizations often come from the heart.
They can begin with a goal of addressing a social or community issue or need. Making money may not be on the priority list. But you can still set up your nonprofit in ways that help keep costs down, particularly taxes. You can then direct more funds toward achieving your organization’s objectives.
Here’s what you need to know:
Steps to get started
What registering as a nonprofit does for you
Details on benefits of 501(c)(3) status
How to finance your nonprofit
Now that you know the basic steps, let’s take a step back.
There are different kinds of nonprofits:
Because your nonprofit is supposed to be doing work for the public good, your organization can enjoy a host of cost-saving benefits, mainly tax exemptions from federal, state and local governments.
But you must comply with IRS rules and other requirements, including that your organization’s income and assets not be used to benefit private investors or parties.
Registering allows you to take advantage of those cost-saving benefits. The rules and regulations vary by state, so check the requirements in yours. The previously mentioned National Association of State Charity Officials has good advice.
You may be required to submit other documents, beyond your bylaws and standard incorporation papers, related to your nonprofit status in some states, according to the National Council of Nonprofits, a nationwide network of U.S. nonprofit organizations.
For example, your nonprofit will be required to file a written “conflict of interest” policy, which states that your organization’s members, particularly officers and directors, are required to disclose any potential conflict related to the nonprofit’s affairs.
After registering your nonprofit, applying for this IRS status grants your organization certain tax benefits. The classification is based on Section 501(c)(3) of the tax code, which is why nonprofits are sometimes referred to as 501(c)(3) groups.
Having this IRS classification can help in several ways:
On the other hand, these tax and other benefits come with responsibilities.
You’ll be expected to keep detailed and comprehensive records of your activities, particularly your finances. For example, your nonprofit will be required to make its annual tax returns available to the public for inspection.
And we’re not just talking about having them on file in a box stored in the office basement. The IRS requires you to ensure these documents are readily available at your organization’s office during regular business hours, according to an IRS publication on applying for nonprofit tax-exempt status.
Then there are restrictions on your nonprofit’s activities.
For example, your organization will be prohibited from taking part in the political campaigns of candidates for local, state or federal office. Your nonprofit also cannot engage in lobbying efforts meant to aid the interests of a private shareholder or individual.
There also are strict rules related to compensation, especially for officers and directors. Nonprofits are expected to pay their executives “reasonable” but “not excessive” compensation, according to the National Council of Nonprofits. To figure out what that means, your nonprofit is expected to go through a review process involving an independent body.
Most nonprofits rely on grants and financial support from foundations and donors. The National Council of Nonprofits offers information and tips on how to secure funding. There also are state associations of nonprofits that offer both information and services, including workshops on fundraising.
Online small-business loans are another option for nonprofits. BlueVine offers accounts receivable financing to small businesses that sell products or services to other businesses, or B2B firms. But the company also offers financing to nonprofits that have invoices due in one to 12 weeks from other companies, Ed Castano, BlueVine vice president of marketing.
Nonprofits have played an increasingly important role in society. Setting one up in response to a need in a community is a worthy endeavor. And the good news is the IRS and other agencies have rules that make it easier for nonprofits to survive and thrive.
There also are rules that you must follow, including those that govern your activities as an organization. Creating and running a nonprofit, especially one that enjoys federal tax-exempt status, entails strict record-keeping and making sure your operations are in line with IRS requirements.