What Is a Nonprofit?

Most businesses are in it to make money. Usually, whenever a Business pulls in income, some of that money is leftover after all of the business expenses are accounted for. This money is a profit, and companies that take that profit home at the end of the day are known as for-profit companies.

For-profit businesses, like many companies, are interested in making money for the sake of anyone with a stake in the company. However, not every business operates in this way. Some companies, called Nonprofits, exist to satisfy a public good, like food for the needy, educational services, or medical aid to the underprivileged. Nonprofit companies don’t keep profits for themselves — instead, they use all of their income to support their chosen cause.

In recognition of the good that nonprofits do, the United States government gives nonprofit companies a break from taxes. This tax break allows them to devote themselves to their cause, without losing money to the government each year. However, in order to ensure that this tax status isn’t exploited, the IRS has strict requirements that all would-be nonprofits have to meet. Nonprofits that pass the government’s test are known as 501(c)(3) organizations and are exempt from federal taxes on any income related to their charitable activities.

501(c)(3) status is a powerful tool for companies. Whether you’re converting your small business to a nonprofit or starting a nonprofit from scratch, here’s what you need to know.

Research: Identify a Need and Define a Purpose

Half of all nonprofits lack a strategic plan, setting them up for failure. Without investors and shareholders to crack the whip, some nonprofits let their business savvy slip. Don’t let this describe your nonprofit — develop a plan to operate your nonprofit company by and stick to it. Start by asking yourself these questions:

Is There a Need for Your Nonprofit Mission?

Anyone who wants to start their own business must ask themselves: what niche will my company fill? A new sandwich shop must figure out what unique element it will bring to a city that already has many sandwich shops. Is it a convenient location? Local ingredients? Exciting new sandwich recipes? Unless the sandwich shop fills a distinct need, it’s chances of success are low.

Even though the sandwich shop is a for-profit business, its story is similar to that of a budding nonprofit — start your nonprofit just like you would start a small business. Your new nonprofit must fill a unique need, both to give you something to do and to attract donors who may already be interested in the work of other nonprofits in your area. If you want to replicate the work of another nonprofit in your area, then you’re going to have a tough time convincing potential donors to donate to you over your competitors.

Instead of trying to fight with other nonprofits, do your research and find a need that’s not being fulfilled. This way you’ll be able to partner with other nonprofits rather than pester them.

Cost Analysis: What Will it Take to Start and Operate?

No investor would look twice at a for-profit business that didn’t have a detailed and transparent budget, including details on the expected cost of office space, acquisition of company assets, the cost of your services, and expected wages.

Give donors to your nonprofit that same respect that you would give to any potential investor. Make sure that you can explain where every nickel and dime is going and why it needs to go there. Answers to these questions will attract donors, but they will also help you outline a spending plan to stick to throughout the year.

Financing: Do You Have a Plan to Fund Startup and Future Expenses?

Once you know how much money you’ll need, it’s time to work out a plan for how you’re going to get it. Wealthy donors can be very helpful for your cause, acting like angel investors in your nonprofit. However, they may have many other nonprofits that they’re interested in, so you should never count on receiving all of your support from just a few donors.

Instead, try to create a broad base of support. Market your nonprofit by throwing fundraising events — advertising is often just as important for nonprofits as it is for conventional businesses. Depending on the need that you’ve decided to cover, you may also find that there are grants available to cover some of your expenses. You should spend a lot of time researching grants that are available for your nonprofit and perfecting your grant applications.

Recruit Partners and Build a Leadership Team

As you can already tell, running a nonprofit is a lot of work. Fortunately, you don’t have to do it alone. With the right leadership team, you can ensure that your nonprofit has the guidance that it needs to get through difficult periods and complete its mission.

Create Your Board of Directors

A board of directors is required by the IRS for any nonprofit that wants to qualify for 501(c)(3) status. Their reasoning is that a well-governed organization is more likely to complete its mission than a disorganized one. However, assembling a qualified board of directors isn’t easy.

While there are no legal prerequisites for potential board members to satisfy, nonprofits who want to succeed should work to build a board of directors with business experience and good moral judgment. Since most board members are unpaid volunteers, it can be difficult to assemble a skillful and dedicated board.

Treat the task of creating your board of directors with as much care as you dedicate to fundraising. Seek out local business leaders who are interested in building their resumes or give back to the community. Appeal to potential members’ altruistic side and present a membership on the board as a non-monetary way of donating to your cause.

Identify Community Partners You Need

Creating a strong nonprofit isn’t just about building up a solid organization from within — as a nonprofit, a great deal of your support will come from partners in your community. Developing these partnerships will be essential to the success of your nonprofit.

Find local businesses that operate in or around the need that you’re looking to fill. For example, if you want to provide soup to the homeless, partner with local restaurants or grocers who might be willing to donate the ingredients and culinary skills necessary to make your soup a reality. Remember who you’ve partnered with in the past — don’t be afraid to come back to these people the next time that you need help.

File Paperwork and Apply for Nonprofit Status

Unfortunately, running a nonprofit isn’t just about getting your hands dirty and helping people. In order to receive your coveted 501(c)(3) status and avoid taxes on your charitable activities, you’ll need to fill out the required paperwork first, proving to local and federal governments that you’re organization really is doing not-for-profit work. Remember to report your financial information to the IRS each year so that you don’t lose your tax-exempt status later on.

Filing for Tax-Exempt Status at the Federal Level

Applying for tax-exempt status for your nonprofit should be done through the IRS. However, there is a $600 fee just for applying, so make sure that you’re committed to seeing your nonprofit through to the end before you apply.

Filing for Tax-Exempt Status at State and Local Levels

Federal taxes aren’t the only taxes that businesses have to pay. Since federal, state, and local taxes are operated by different agencies, you’ll have to apply more than once for tax-exempt status. Fortunately, the IRS has collected information on the tax-exemption process for each state. Don’t just file your nonprofit with the federal government — make sure that you apply for tax exemption with any governing body that you might usually pay taxes to.

Develop Your Marketing and Operations Plans

Once you’ve been cleared as a 501(c)(3) nonprofit, you’re just about to get rolling. Now it’s time to plan your marketing strategy and map out your operations — you need to figure out exactly what sorts of things you’re going to do to forward your mission and how you’re going to spread the word about what you’re doing.

Getting Your Name and Mission Out There

You should expect to spend a fair amount of time and money on advertising. However, there are ways to spread the word about your organization for free. Some ideas include:

• Sharing information about your organization and its mission on social media. Send this news to your friends and ask them to share it around as well. If your mission piques enough interest, you may end up going viral.
• Ask to post flyers on the wall at local meeting places like local coffee shops or gyms.
• Connect with other charities that are working on a similar — but not identical — mission. They may be willing to share the love and give you a shout out at their next event.

Demonstrating Your Impact

Ultimately, no one is likely going to want to support your mission unless you can prove that you’re making a difference. This is where the human impact of your work can be used to help you further your mission. Contact people who’ve been affected by your nonprofits activities and ask them to speak at your next event or provide testimonials that you can use in your advertising and grant applications. People are more likely to donate their time and money when they see that their support can make a real difference.

Nonprofits do great work for their communities. However, a nonprofit that collapses before it can get its feet off the ground doesn’t do anyone any good. Make sure that you outline an operations plan before you start your nonprofit. A solid strategy will inspire donors and make your nonprofit more successful in the long run.

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