Nonprofit Startup Checklist
Nonprofit corporations act as a force of good in society. While many businesses start with the goal of making money, nonprofits start with the goal of benefiting the public. According to the National Center for Charitable Statistics, there are more than one million nonprofits operating in the United States contributing more than $1 trillion annually to the country’s gross domestic product.
In light of a growing trend of nonprofit startups and the unique legal issues these entities face, we have developed the Nonprofit Startup Checklist for entrepreneurs and founders looking to start their nonprofit on the right foot. In this checklist, we will talk about what a nonprofit corporation fundamentally is, and then take you through the steps associated with forming a nonprofit corporation.
What is a Nonprofit?
A nonprofit is a business entity formed for purposes other than profit. Generally, nonprofits are formed as traditional corporations, but they are different because they are organized to carry out one or more charitable, civic, educational, social, political, fraternal, religious, or scientific purposes. The most important characteristic of a nonprofit is that its profits and assets must be used to further its stated purpose and cannot be distributed to its members, directors, or officers.
1) Nonprofit Name
The first step in starting a nonprofit is picking an appropriate name for the organization. The law generally requires that the name conforms with specific requirements so it is important to research relevant state law to ensure your nonprofit’s name is okay. The most common mistake I see founders make is in trying to register a name that is already taken. Because most government filing fees are non-refundable, it is important to do the research on the front-end to ensure your name is available. Coming up with a distinct business name is best because it maximizes your trademark rights, and this will benefit you when it comes to growing and protecting your nonprofit. To learn more about maximizing your brand value via trademark law, read our blog on brand protection.
2) Incorporation
To start a nonprofit, you need to form a business entity within the state you are operating in. Generally, this is done by filing articles of incorporation or a charter for a nonprofit corporation with the secretary of state’s office in your state. This corporate charter must state the following things:
The name of the nonprofit;
Whether the nonprofit is a public benefit or mutual benefit corporation;
Whether the nonprofit is a religious corporation;
The name of the initial registered agent and address for the initial registered office;
The name and address of each incorporator;
The address of the principal office of the nonprofit;
A statement that the corporation is nonprofit;
Whether the nonprofit will have members; and
Provisions not inconsistent with law for the distribution of assets upon dissolution.
Importantly, if the nonprofit plans to apply for federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, the corporate charter must also include specific language limiting the purposes of the corporation and the distribution of its assets.
3) Filing
When the nonprofit’s corporate charter is ready to go, someone will need to file it with your state’s secretary of state. The person who does this is known as the “incorporator.” Typically, the incorporator signs the charter, delivers it to the Secretary of State for filing, and pays the associated filing fee. Once the charter is filed, your nonprofit legally comes into existence. Congratulations on making it to this step!
4) Organizational Matters
Now that your nonprofit officially exists, it is time to get down to business. The first matter of business should always be to hold an organizational meeting. In the legal realm we refer to this as “corporate housekeeping” and this is where you typically do the following actions:
Elect directors to the board;
Adopt bylaws of the corporation; and
Hold the initial board of directors meeting;
Bylaws are incredibly important because they speak to a number of rules that the nonprofit is bound to. Think of bylaws as the rules of a board game. These rules will speak to when meetings are held, how directors are to be elected, how voting is to take place, and various other things.
5) Financial Matters
Once you have held your organizational meeting and taken care of your corporate housekeeping it is time to turn to the nonprofit’s financial matters. It is important to obtain a federal Employer Identification Number (EIN) from the IRS. This number is required for tax purposes, but it is also necessary for purposes of setting up a bank account in the nonprofit’s name. A nonprofit can obtain an EIN by completing form SS-4.
Next, the nonprofit will want to apply for tax-exempt status with the IRS. There are a number of tax code provisions under which you may apply for tax-exempt status, but the most commonly recognized one is Section 501(c)(3). Organizations described in Section 501(c)(3) are commonly referred to as charitable organizations. Many nonprofits wish to apply for tax-exempt status under this section of the tax code because it allows them to receive tax-deductible contributions in accordance with Section 170 of the Internal Revenue Code.
6) Nonprofit Registration and Licensing
The final step in our Nonprofit Startup Checklist deals with local registration and licensing. With your nonprofit up and running, it is important to research state and local law to determine what registrations and/or licenses your company is required to obtain. For example, depending on your state and the size of your nonprofit, you may need to register with your state’s department of labor, unemployment insurance agency, and workers’ compensation agency. Besides that, you may need to obtain a local business license in the city you operate in.
Putting It All Together
This checklist is a great reference for every entrepreneur or founder looking to start a nonprofit and ensure they follow the necessary legal steps associated with getting up and running. However, given the unique regulations that nonprofits face, and the difficulty in complying with complex legal requirements it is always best to retain legal counsel who can personally guide you through the process. Having an attorney handle things for you will make sure you can focus on other aspects of the nonprofit’s operations and position yourself for success.
If you any questions about forming your nonprofit or what to do in response to the legal issues your nonprofit is facing, please contact us. Our attorneys are ready to assist you with your legal needs.
If you are interested in learning more about running an effective business, see our blog series titled Avoiding Key Legal Mistakes in Startup Companies.
Photo by Katt Yukawa on Unsplash
*The material and information in this blog is for general informational purposes only. In no way is this information to be construed as legal advice for a particular situation*