We’ve all heard of the YMCA, and not just because of the song. Of course, there are plenty of other famous nonprofit organizations (NPOs) – including the Scouts, the Red Cross, and the Salvation Army – that are making a positive, long-lasting impact on the world, one individual at the time.
If you have a cause you believe in or want to change the world for the better, you might consider starting a nonprofit organization yourself.
But how do nonprofits work? Should you start one yourself? And what does the process involve? In this article, we’ll explain the benefits of nonprofit organizations and outline the steps you should take if you decide to start one.
What Is a Nonprofit?
Informally speaking, any group whose mission is to help others could be considered a nonprofit organization. The group’s primary goal should be to serve the community or to promote and work on a social cause.
Some of the most common NPOs you encounter every day are associations, churches, and clubs. You might have also read about or donated to nonprofit organizations that provide funding for education or humanitarian aid. Many focus on raising funds for research to find a cure for a specific illness.
There is, of course, a more comprehensive answer to the question: “What is a nonprofit organization?” It would be fair to describe an NPO as an organization that receives donations, sponsorships, goods, and services to help with its mission. These are the main sources of income for any nonprofit organization.
A nonprofit organization’s profits must be immediately applied to pursuing its goal or donated to other related nonprofits. This is a major definition of nonprofit organizations. It is extremely irregular, sometimes even illegal, for the leaders of nonprofit organizations to make a profit from their involvement.
What Is the Difference Between Nonprofit and LLC?
Many people assume that a nonprofit corporation isn’t allowed to generate any profits whatsoever. That’s not the case. In fact, the main difference between nonprofits and LLCs lies in how they use their profits.
LLCs can – and usually do – distribute some or all their profits among owners and shareholders. An NPO can’t do this. Of course, nonprofit employees still earn reasonable salaries if they are hired instead of volunteering, but these salaries do not increase based on the organization’s success. The sole purpose of the money a nonprofit generates is to further the goal and mission and keep the organization running.
What Are the Benefits of a Nonprofit Organization?
Perhaps you’re wondering whether or not you should formalize your group as a charity or nonprofit organization. If that’s the case, you should know there are multiple benefits to turning your group into an NPO. The process itself is not daunting, and if you’re looking to create the change you want to see in the world with your group, it’s well worth the trouble.
The Credibility You Need
Being part of an enthusiastic group of people busting their backs for a cause is amazing, period. However, at some point you’ll need a business address and a bank account. Making your organization last without funding can be challenging, and while there are plenty of benefits of working for nonprofit organizations, not everyone is going to be dedicated enough to stay true in the long term. Getting donors to invest in an unofficial group could be a futile effort, too.
By incorporating your group into a nonprofit organization, you’ll gain the credibility you need to approach donors with the confidence your goal deserves.
Access to Funds
Once you turn your group into a nonprofit organization, it will open up many doors leading to public and private grants that could help you pursue your goals. There are many benefits of nonprofit organizations for the welfare of society, so naturally there are plenty of grants available. After all, if you’re registered as a 501(c)(3) nonprofit organization, donations are usually tax-exempt, which will make your group more appealing to donors.
Chasing donors can be a hassle, but it’s likely the best way to keep your organization afloat. However, even if you simply rely on small donations from the general public, you need to make sure you’re adhering to state laws. Some states require that you register as a nonprofit to receive donations from the general public. If not, you could get in serious trouble.
Limited Personal Liability
Speaking of trouble, once you’re registered, you’ll only have limited personal liability; it’s one of the advantages of nonprofit organizations. Unlike with non-incorporated groups, if your NPO gets sued or is struggling with debt, your personal assets are protected.
That’s not to say that once you have nonprofit status, you can do whatever you want and not be liable for your actions. There are certain cases in which limited liability can be revoked, such as board members mingling nonprofit and personal funds or engaging in dodgy practices. Still, in case of a dispute, board members are generally protected if they follow the relevant rules and regulations that apply to nonprofits.
Advice from a Professional Registered Agent
Once you decide to incorporate a nonprofit corporation, it’s mandatory by law to have a registered agent. That could be you or one of your team members, but it’s not a good idea; we strongly advise you to hire a professional registered agent.
It might seem like an annoying cost you could live without, but there’s a good reason for acquiring these services; you want to have a professional handling your legal paperwork in a proper and timely manner. These services typically cost between $100 and $300 per year, and in some cases NPOs qualify for a discount. For that amount of money, a registered agent is well worth it.
What Are the Disadvantages?
There are, of course, some disadvantages. Consider these carefully to make sure you understand the pros and cons of a nonprofit organization.
Access to grants does not come for free, so you might find yourself in a pay-to-play situation. If you’re looking to establish your group as a nonprofit organization, you’ll need to dedicate some startup funds, as you would with a business.
The first major expense you’ll have to deal with is filing all the paperwork. Forming a statutory nonprofit company requires you to submit documents to your state’s business entity filing office. Some states also require an annual fee as part of the nonprofit’s cost of operation.
After that, you might need some legal assistance to ensure you’re working within the laws of the state in which you’re operating. Of course, if you opt for online legal services, these costs will be trivial compared to having an actual lawyer on retainer, but it’s still worth factoring them in when you plan your budget.
Unavoidable Ongoing Obligations
Even though it might feel like it, you’re still by no means exempt from your compliance obligations once you establish your NPO. Make sure you check what these are within the nonprofit statute under which you form your nonprofit business. It might require you to draft bylaws or operating agreements, keep records or specific books, or file an annual report.
Keep in mind that every nonprofit is closely regulated by a particular nonprofit statute, so you need to ensure your management team is up to par. This is mandatory if you’d like to retain your nonprofit status and avoid public scrutiny.
This can encompass many things, but primarily it will require you to have a board of directors, which must gather for periodic meetings. You’ll usually need to keep notes of those meetings, organize quora, and much more.
Wondering How To Set Up a Nonprofit Organization?
There is no such thing as a foolproof method for starting an NPO, as each one is subject to different regulations. The best approach is probably to hire an LLC service company to do the job of founding the nonprofit for you. You’ll have to pay a reasonably small fee, for which you’ll get the peace of mind that a professional is on the job.
If, however, you’re determined to do it yourself, here are some general steps to help you through the process.
- Step 1: Do your research.
- Step 2: Form your NPO’s team.
- Step 3: Develop a strategy and an operating plan for starting a non-profit.
- Step 4: Select the NPO’s name, board of directors, and legal structure.
- Step 5: File a non-profit certificate of formation.
- Step 6: Apply for federal employer certification.
- Step 7: Prepare a 1023 federal tax-exemption application to get 501(c)(3) status.
Starting and running a 501(c)(3) organization is a major undertaking. It takes a lot of research, determination, and a group of exceptional people who are all united with the purpose of achieving a common goal.
Hopefully we’ve answered the most basic question: What are nonprofit organizations? Now it’s your turn to establish the NPO that will bring about the next great change!