When we think of entrepreneurs, we tend to picture big names like Steve Jobs or Elon Musk, who founded major for-profit companies. However, plenty of entrepreneurs fly under the radar by creating nonprofits that benefit society.
Running a nonprofit business offers numerous benefits. In addition to making a meaningful difference in your community, you can receive public and private donations to fund your efforts and gain tax-exempt status if you file for 501(c)(3) status with the IRS. There are similarities between nonprofit incorporation and starting a for-profit business, but incorporating a nonprofit isn't quite the same as launching a for-profit startup, and like any business, it will present some challenges along the way.
The Vision Group, founded by Mike Stickler, is an organization that helps other nonprofits get started. With the help of The Vision Group, pediatric physical therapist Brett Fischer founded Victory Lane Camp, an organization that offers a "vacation with a purpose" for children with disabilities and their families. As successful founders of nonprofits, Stickler and Fischer, along with other experts, shared their experiences and tips to help fellow do-gooders start their own nonprofit organizations. [Related: Why Nonprofits Are Viewed Differently Than For-Profits]
1. Turn your idea into a vision.
As with all startups, the first thing you need for a successful nonprofit business is a great idea. Once you have that idea, you need to figure out how to make it a reality. You'll want to flesh out your idea and start thinking about both the organization's mission, which includes the mission statement, and the vision moving forward.
"When you're starting a nonprofit, you have to move from an idea and a mission to a vision," Stickler told Business News Daily. "Without finances, you can't really get there."
In startup planning, a vision statement is often used to outline a company's long-term future goals, while a business plan describes how the company is going to achieve them. You'll need both to start your nonprofit.
"Create a compelling vision and mission statement that reflects your desire to serve a particular constituency," said Doug Lind, founding partner at Clearwater Business Advisers. "Keep in mind that the vision and mission will need to stimulate not only funding sources but attract key people."
Finding potential donors and key influencers in the industry will help your nonprofit gain traction. For this to happen, you need a strong mission and vision statement. If you're unsure of where to start, it's never a bad idea to consult business and nonprofit advisors. Find advisors who won't blindly support your ideas. You want to receive constructive criticism throughout the early stages; honest advice and feedback are critical as you learn how to start a nonprofit.
"Recognize and avoid entrepreneurial hubris," Lind said. "That means becoming a bad listener and surrounding yourself with people who always say yes. It is important to have individuals who will be your truth tellers, able to help you stay on track."
2. Apply for nonprofit status as soon as possible.
If you're planning to apply for tax-exempt 501(c)(3) status, Stickler recommended filling out your application as soon as possible, since it can take up to two years to get approved. He also advised seeking legal help, but to be very careful in selecting an attorney to work with.
"Find out how many nonprofits the attorney has helped in the past," Stickler said. "A lot of them have never done it before."
You want to work with qualified advisors and lawyers. Gaining tax-exempt status isn't the simplest process, and it requires a few steps. To receive tax-exempt 501(c)(3) status, you must apply within 27 months of the end of the first month your nonprofit was officially created. This is in addition to other work the IRS requires to apply. The IRS site provides the applications needed to apply for tax-exempt status. There's also an IRS-sanctioned site devoted entirely to staying exempt.
"If you intend to apply to the IRS for recognition of federal tax-exempt status as a charitable organization under section 501(c)(3) of the Internal Revenue Code, your articles of incorporation must contain certain provisions," the IRS webpage says.
Make sure you follow those provisions to ensure you have a chance of being approved for tax-exempt status. It's important that you cover all the legal requirements in the early stages of starting your nonprofit organization. As you form a nonprofit, it's helpful to speak with your board of directors and other advisors when you write your bylaws and navigate legal regulations.
Tax law changes from 2018 also require nonprofits to understand what is and isn't tax-exempt. The National Council of Nonprofits developed a checklist to outline the new rules created by 2018 legislation. This affects quite a few areas of nonprofits, including the following:
Fundraising – "Most analysts predict that overall donations to charitable nonprofits will be lower because of four changes in the new tax law: (1) individual income tax rates will be lower, which reduces the value of all deductions; (2) state and local tax deductions are capped at $10,000, which will reduce the number of taxpayers who itemize; (3) the law doubles the standard deduction, which also reduces the number of itemizers; and (4) the new law doubles the exemption on estate taxes, which may make the tax advantages of some bequests less attractive," the organization wrote in the checklist.
Remote workers – "Employees (for-profit and nonprofit) will no longer be able to take an individual deduction for home office expenses," the organization wrote.
Employees with salaries more than $1 million – "Nonprofits that pay high compensation will pay an excise tax (penalty) of 21% on compensation more than $1 million of the top five highest-paid employees," the organization wrote.
- Unrelated business activities – "The new tax law will impose a tax on nonprofits at the new corporate rate (21%) on income from each unrelated business activity separately," the organization wrote.
Following regulations goes beyond the federal level, however. Be sure to monitor the state legislation in addition to the rules put in place by the IRS.
"Nonprofits are regulated at the state level, typically by the state attorney general, and at the federal level by the IRS," said Allen Bromberger, nonprofit law expert and partner at Perlman & Perlman. "Each state has a set of rules that govern nonprofits that are formed in that state or operate in that state, including solicitation of charitable contributions – a separate area of regulation that is quite significant. The IRS also has extensive rules, constituting permissible activities, prohibitions on private benefit, reporting, political activity and commercial activity. You need to be familiar with how these operate in order to stay in compliance. States like Delaware, Connecticut and South Carolina are low [in] regulation, among others, and then there are states like Massachusetts, California, New York, Pennsylvania and others that are high-regulatory with more detailed rules and [spend] more time on enforcement than others."
State regulations also require that nonprofit corporations have a registered agent in the states they are registered to do business. With the number of regulations at both the state and federal level, it's a good idea to speak with a lawyer specializing in nonprofits.
3. Develop your brand.
Your nonprofit organization could be the most brilliant, life-changing idea in the world, but unless you take the time to develop a relatable, cohesive brand that people will care about, you won't get very far. The process of laying this foundation was one of Victory Lane Camp's biggest challenges.
"Our concept of incorporating the child's rehab needs and equipping their parents in a camp setting is a new idea," Fischer said. "Helping listeners grasp all the facets of what we are doing is difficult, which is why we have built 'vacation with a purpose' into the camp as our brand."
It's not easy to build a brand, and it helps to connect with influential people in the industry. Building a strong group of connected supporters can help you build your brand quickly. This tends to be a faster solution than trying to build a following through traditional marketing tactics, although it's a good idea to implement digital marketing measures.
For example, creating a web presence can help you spread the word about your organization. Creating social media accounts and a website helps give your brand credibility in addition to providing a medium for you to share elements of your business. Your website can include a page that solicits donations from interested viewers.
"Portray the heart and culture of the organization you want to create," said Lind. "Donors often are motivated by the person as much as the cause."
One of the most consistent issues facing a nonprofit is resources. In a for-profit business, investors will give money because they expect a return. Securing funds for a nonprofit is a bit trickier, but "selling" it the same way as you would a for-profit organization can be helpful. Crafting a strong brand image makes that process easier.
"When you're looking for supporters and major donors, the approach should be similar to investing in a for-profit business," Stickler said. "Their return on investment is changed lives. They'll give readily to your organization if they can see that ROI."
Develop a page devoted to explaining both the mission of the organization and the motives of the founder. Like Lind suggests, potential donors of all sizes will be more willing to donate money if they believe in the founder of the company. You can even include board members on the website if they're OK with that arrangement. Potential donors may respond positively to the connection to well-respected board members. For example, if your nonprofit centers on education, showcasing the bios of your board members with decades of experience in education adds credibility to your organization.
4. Build a great board of directors.
Your board of directors is going to be your team of go-to people for all fundraising, support and outreach efforts for your nonprofit organization. Many nonprofits start off with an incorporator board of the founder's family and friends. As your organization gets off the ground, you may want to turn to some professional contacts who understand entrepreneurship and running a business to serve on your board, said Stickler.
Board members offer advice and insights to help your organization develop. Surround yourself with a knowledge board that will provide a good balance of support and constructive feedback. Running a nonprofit is similar to running a commercial business, and you'll want an intelligent board to guide you through certain points of your journey.
Building a board also means complying with additional IRS regulations. The IRS says, "To guard against insider transactions that could result in misuse of charitable assets, the governing board should include independent members and should not be dominated by employees or others who are not independent because of business or family relationships."
You shouldn't hire a board of predominantly family members, as it can be considered a conflict of interest. Follow the IRS' guidance and look for independent board members who can still help move your nonprofit in a positive direction.
The IRS also states, "Although the IRC does not require charities to have governance and management policies, the IRS does encourage boards of charities to consider whether the implementation of policies relating to executive compensation, conflicts of interest, investments, fundraising, documentation of governance decisions, document retention and whistleblower claims may be necessary and appropriate."
In short, there are rules and standards in place that affect nonprofit boards. Make sure you follow the rules for hiring board members and implementing policies that apply to the board. There's more that goes into hiring a board than just bringing on great people.
5. Don't give up when it gets tough.
Nonprofits face just as many challenges as for-profit businesses, if not more. It's important not to get discouraged if things take longer than expected, or if you don't receive the overwhelming support you hoped for. Starting a nonprofit and building it into a successful organization takes time.
Take the necessary time to organize your plan. You want to check all the boxes, from meeting legal requirements to putting a board together. Taking the time to earn exempt status and thoroughly handle your nonprofit incorporation will be worth it in the end. Starting a nonprofit isn't easy, and people might doubt your mission, but with the right support, the task is achievable.
"Criticism will come, but do not let anyone's thoughts or impatience in getting off the ground stop you, especially your own," Fischer said. "People of excellence rise to the top and are drawn to great causes, so keep casting your vision and trust that the people will come."
Additional reporting by Nicole Fallon. Some source interviews were conducted for a previous version of this article.