How to Start a Nonprofit
Background & Resources
The Alabama Association of Nonprofits is a membership organization that focuses on nonprofits who have received their 501(c)(3) status. To help you achieve that status, here’s some background information and the steps of starting a nonprofit.
What is a 501(c)(3)?
It is a definition in the Internal Revenue Code and describes a tax category. While similar to a business entity, nonprofits do have different tax implications. There are three types of 501(c)(3)’s: charitable organizations, churches and religious organizations, and private foundations.
Advantages of creating a nonprofit.
- Nonprofit organizations do not pay income tax. This is different than a for-profit business.
- Donors can provide contributions that may be eligible for a charitable deduction on their income taxes (depending on the standard deduction and other current laws regarding charitable contributions).
- Forming a nonprofit entity provides some protection to the board of directors and employees.
Disadvantages of creating a nonprofit.
- There is a cost of both time and money. The average cost of starting a nonprofit is about $2,000. You will need volunteer hours and paid or pro-bono professional services to start your nonprofit.
- Both the State of Alabama and the federal government (Internal Revenue Service) require many forms before you receive your official status, as well as annual updates.
- A nonprofit is not owned by any one individual. Your lead executive may be called the Executive Director or CEO but that person answers to a board of directors. This board holds the organization in trust for the public. It is their fiduciary duty.
- A nonprofit organization is always under public scrutiny. Your annual Form 990 (submitted to the IRS) is a public document and available on the internet. This describes the mission of your organization, how much money you spend towards it through your various programs, and other financial details such as the ED’s/CEO’s salary.
Do your research.
- There are over one million nonprofits in the United States and roughly 7,500 in the state of Alabama.
- There is a lot of competition for charitable donations, grant funding, and corporate sponsorships as well as competition for volunteer board members.
- If there is already a nonprofit that is similar to the one you are wanting to create, consider working alongside that nonprofit to expand their reach, rather than creating a new organization. Starting a new nonprofit may not be the best solution to the problem you’re seeking to solve.
Define your Mission.
- Having a clear purpose is vital when starting a nonprofit with your board of directors.
- Defining the Who, What, Where, When, How, and Why is the first step.
- Who is the target market we are serving?
- What is our mission and goal when starting this?
- Where is this going to take place? (Locally/Statewide)
- When are we going to start?
- How are we going to accomplish the goals we put into place?
- Why are we wanting to start this nonprofit?
More facts about starting nonprofit.
- The state of Alabama requires at least three board members for a nonprofit. The Alabama Association of Nonprofit and our partner, the Standards for Excellence Institute, recommend a minimum of 5-7 unrelated board members for every nonprofit.
- You do not own a nonprofit; a nonprofit is a public organization that is governed by a board of directors.
- While nonprofits do not pay income tax, they do pay state sales tax and employment tax.
- Nonprofits must file Form 990 every year with the Internal Revenue Service.
- Many foundations require nonprofits to complete a financial review or audit every year. An accountant (separate from your day-to-day accountant) can provide the review/audit and they often complete your 990 at the same time. The cost for the review/audit and 990 is $2,000 at the low end and in the tens of thousands at the top end.
Steps to start a Nonprofit
Name Reservation – Alabama Secretary of State’s Office
File the Certificate of Formation – Alabama Secretary of State’s Office ($200)
File Form 1023 – Internal Revenue Service (fees required and it takes about a year on average to get your certification)
Register as a nonprofit to be able to fundraise – Alabama Attorney General's Office
File Form 990 annually – Internal Revenue Service
Starting a Nonprofit? Do you really want to? (BoardSource)
What are the advantages/disadvantages of becoming a nonprofit organization? (Candid)
The Challenges of New Nonprofits (Nonprofit Quarterly)
8 Alternatives to Starting a Nonprofit
Making the Choice Between For-Profit and Nonprofit
Successfully Starting a New Nonprofit