How to Start a Nonprofit: A Practical Guide for Nonprofit Founders

If you’re here, I’m guessing you have the vision and passion to make a difference. Maybe it's the lack of after-school programs, gaps in mental health services, or disappearing green spaces in your community. You're ready to move beyond volunteering and create something permanent: a nonprofit organization that can accept tax-deductible donations, apply for grants, and build the infrastructure needed for lasting impact.

But turning your vision into a real nonprofit means navigating tricky legal requirements, building governance structures, and establishing financial systems that can last. This guide provides the roadmap you need, from choosing the right tax-exempt status through building your board and securing sustainable funding.

Quick Summary

Starting a nonprofit is more complex than most founders expect. You'll need to prepare a series of legal filings, set up your board governance, and put together a funding plan before you'll be up and running.

• Choose the RIGHT tax-exempt status for your activities and funding plan (not just the one you've heard of!)
• Build a board of directors with strong governance, since you as the founder won't have sole control
• You'll have to apply for your IRS status, and it can take up to a year for approval (and that's not the end of the compliance!)
• Decide your role as a founder and whether you plan to get paid for your work

What is a Nonprofit, Really?

Before we get into the “how,” let’s make sure we’re all on the same page about what a nonprofit really is. A nonprofit is a business that is organized for a particular mission (or an IRS “exempt purpose”). Nonprofits still need to care about regular business stuff like accounting, legal compliance, and their bottom line – but the ultimate goal is to pursue that mission or exempt purpose. For-profits might also have a mission and do good work, but they are also trying to make money for the owners or shareholders.

Another key difference is that nonprofits do not have an “owner.” So while you may be founding this organization, you do not have all the power a for-profit business owner would have. You cannot make all the decisions by yourself; nonprofits are governed by a board of directors. You also cannot simply withdraw the profits from the organization for yourself. If you do get paid from the nonprofit, it’s because you’re a paid employee of the org.

Learn more about the board in Nonprofit Boards, Bylaws, and Policies.

Ultimately, a nonprofit is a business. Yes, nonprofits are exempt from paying certain kinds of taxes and are organized around doing good. But it’s important for founders to understand that nonprofits are businesses with a whole lot of extra rules.

Understanding IRS Tax Exempt Statuses: 501(c)(3), 501(c)(4), and Others

Did you know that there are LOTS of different tax-exempt statuses for nonprofits? All these 501(c) statuses provide exemption from federal income tax, but the different statuses come with different benefits and compliance obligations.

Choosing your tax-exempt designation shapes everything from how you’ll make money to what kind of day-to-day work you can do. Each of these statuses have a set of benefits, but they each come with a set of rules and regulations to follow, too. Remember – nonprofits aren’t a buffet! When you choose a status, you’ll have to accept some restrictions on your activities.

For a deeper breakdown of nonprofit legal steps, see The Legal Steps to Forming a Nonprofit and Securing 501(c)(3) Status.

Most nonprofit founders are looking to start a 501(c)(3) public charity. This status gives you donor deductibility, and many grant programs require you to be a public charity to apply. But these benefits come with restrictions—501(c)(3) organizations must limit lobbying activities and cannot engage in political campaigning.

If you’re forming an advocacy group, there’s the 501(c)(4) social welfare status. These organizations can engage in unlimited lobbying on issues related to their mission. They can do some political work, but it can’t be their primary activity. But unlike the public charity, donations to a (c)(4) aren’t deductible.

There are many more tax-exempt statuses that may be a fit for your nonprofit idea, too. Trade associations and professional societies often organize as 501(c)(6) organizations. Social clubs choose 501(c)(7) status. You’ll want to figure out what kind of nonprofit you’re starting before you begin the formation process.

Step-by-Step Formation Process

Starting a nonprofit isn’t a quick process. It takes several steps done in the right order to get everything set up, and many founders get sidetracked by some of the more difficult phases.  This article won’t cover everything you may need to do – including the important work of defining your mission and setting up your programs! But these are the legal steps you’ll need to follow to set up a IRS tax-exempt charity.

Building Your Board

The board of directors carries ultimate legal responsibility for the nonprofit. Directors are volunteers governing the nonprofit. The board shapes strategy, ensures compliance, and often provides major funding. In the beginning, the board is often the group to roll their sleeves up and do the work of the nonprofit.

Learn more about board roles, bylaws, and policies in Nonprofit Boards, Bylaws, and Policies.

You’ll need a minimum of three people ready to serve on the board before you can file the paperwork. Resist filling seats quickly with friends and family. Instead, identify what kinds of expertise you’ll need, and recruit people with those skills.

Incorporating a Nonprofit in Your State

Once you have a board, you can incorporate the nonprofit entity. You’ll draft articles of incorporation, which serve as the founding document and establish your organization's legal existence.

Your state may have a free form to file, but be wary! Those forms often don’t include the specific language required by the IRS for tax exemption. Incorporating with generic or noncompliant Articles of Incorporation can slow down or derail the startup process.

For required IRS clauses, see What to Include in Your Nonprofit’s Articles of Incorporation.

Once you’re incorporated, you can apply for an Employer Identification Number (EIN) through the IRS website. This tax ID number is required for banking and tax exemption applications.

Drafting and Adopting Bylaws

Now that you’re incorporated, the nonprofit needs to establish its governance structure with the bylaws. Think of this document like the organization’s playbook, describing how the board will operate. This document is not filed with your state; the board of directors votes to adopt a set of bylaws and keeps them internally.

Learn more about board roles, bylaws, and policies in Nonprofit Boards, Bylaws, and Policies.

But just because you don’t have to file it doesn’t mean this document should be overlooked! It’s tempting to grab a generic set of bylaws off the internet or from another organization, but it’s easy to make mistakes that way. Your bylaws need to comply with your state laws and the IRS regulations for nonprofits. Plus, you’ll want them to follow nonprofit best practices so they are actually useful as you are governing this new organization.

Applying for Federal Tax Exemption

Next comes the big step – applying for tax exemption from the IRS. Most nonprofit founders are looking to get 501(c)(3) public charity status, which means they will need to file either Form 1023 or Form 1023-EZ. Form 1023-EZ is designed for smaller organizations for an easier and quicker application process, but not everyone qualifies. Make sure to file the correct application for your unique situation.

Depending on the application you choose, the IRS can take anywhere from 2 months to a full year to make a decision. If you are granted tax-exempt status, you will receive a determination letter in the mail. Sometimes, the IRS will ask for more information on your application, and that may extend the processing time even further.

I’m sure I don’t need to tell you this, but remember: working with the IRS isn’t easy. They are not giving tax-exempt status out like candy. This application is your opportunity to prove to the IRS that you are doing charitable work and the organization deserves to not pay income tax.

Other Nonprofit Filings and Compliance

Receiving your IRS determination letter marks the beginning, not the end, of your compliance obligations. Many nonprofits will need to register for charitable solicitation in any state they plan to fundraise in. The state rules vary a LOT, so you’ll need to do some research and figure out where you’ll need to be registered.

Most tax-exempt nonprofits will need to file a Form 990 each year, which is a public financial document. These filings are what keep your tax-exempt status in good standing, and funders often look to your 990s to assess the organization’s health.

Build compliance tracking into your operations from day one. Calendar annual report deadlines, board meeting requirements, and registration renewals. Small oversights can snowball into major problems, potentially resulting in automatic revocation of tax-exempt status.

Finding Funding for New Nonprofits

Starting a nonprofit is one thing. But what about what happens after you’ve done all the legal paperwork? Most founders know that the next big problem to tackle is where their funding will come from. There are several different ways nonprofits bring in revenue to fund their activities.

For a detailed discussion of nonprofit revenue and founder compensation, see How to Fund a Nonprofit Startup and Pay Yourself the Right Way.

Individual giving is a major source of funding for many organizations. Learn to tell your story and bring others in on your vision. Founders will often start with their own social circles and expand from there.

Grants, from the government or private foundations, are another popular source of funding. But remember, many other orgs are competing for the same programs.

Some nonprofits make money with earned revenue programs.  Fee-for-service programs, social enterprises, and membership models can generate unrestricted funds while advancing your mission.

There’s not one “right” way to fund a nonprofit. The most successful organizations have a diverse source of their revenue. As the founder, you can set the organization up for success by seriously planning for its financial outlook.

Can You Make a Salary as the Founder?

Once money starts coming into a new nonprofit, that brings up the question – can you as the founder make a living off your nonprofit work? The answer to that gets a little bit complicated.

As we’ve already covered, nonprofits do not have owners. In a for-profit business, you could choose to pay yourself from the business’s profits as they come in. But nonprofit founders aren’t owners, you aren’t entitled to any of the money that comes into the nonprofit.

If you need to make a salary, it is possible but there are tradeoffs. You’d do that by becoming a paid staff member of the nonprofit. The board of directors (not including you, if you’re going to be staff!) must vote to hire you and vote on the salary. The board would have hiring and firing power over you. Plus, the IRS requires that you take extra steps to prove that the compensation is “reasonable.”

This decision is explored further in Can You Take a Salary as a Nonprofit Founder?.

Whatever you choose, you’ll need to think carefully about the role you’ll play in the nonprofit as founder.

Common Nonprofit Founder Mistakes and How to Avoid Them

As a lawyer for nonprofits, I’ve worked with many different founders over the years in all kinds of mission areas. Here are some of the most common missteps I see and YOU can avoid them!

Incorporating before you’re ready.

It can seem tempting to quickly file your state’s Articles of Incorporation form to get yourself started. But remember! Your Articles are an important foundational document that needs to comply with IRS regulations. Filing an incomplete document can slow you down and make you redo work.

For required IRS clauses, see What to Include in Your Nonprofit’s Articles of Incorporation.

Burning yourself out.

I know you have a strong vision for this nonprofit – but that doesn’t mean you can (or should!) do everything yourself. Take the time to bring others in on your dreams now so you can build a strong, sustainable organization that doesn’t depend only on you.

Learn more about the risks of hoarding the work at Founder’s Syndrome: How to Avoid the Trap of Doing It All

Falling into the “because we’re a nonprofit…” trap.

Remember, nonprofits are businesses! You’re doing good deeds, but that doesn’t mean you can avoid all the other things that come with running a business. You need to follow the laws, keep up with compliance, and follow good business practices like any other business.

Operating Without Insurance.

Being a nonprofit doesn’t absolve you of all liability. Make sure you get directors and officers insurance to protect your board, and contact a broker to help figure out what other insurance you may need.

Refusing to hire help.

Nonprofits are complicated. There are special nonprofit rules for everything from bookkeeping to hiring staff, fundraising compliance to conflicts of interest. Find some experienced professionals to help.

Missing important filings.

Every nonprofit will have multiple annual compliance obligations: corporate renewals, charitable reports, Form 990, etc. Be sure to calendar important dates now so you don’t blow those deadlines and get into trouble.

Why You Should (Or Shouldn’t) Start a Nonprofit

No one starts a nonprofit because they really want to spend their time reading IRS regulations, right? You have a mission you want to accomplish, and now you need to figure out the best way to pursue it. Most people think that if they want to do good deeds, the only way to do that is to with a nonprofit organization with IRS public charity status.  For some founders, that is the right route. But other ideas just don’t work if they’re set up as a charity.

Before you rush toward the paperwork, ask yourself – does this idea need to be a nonprofit? Are there other organizations out there doing this work? Could you partner with them? Do you need a formal entity, or can you do this work on your own?

You might be surprised to find a lawyer for nonprofits encouraging you to consider not going the nonprofit route. But here’s the thing – starting a nonprofit is complicated, time-consuming, and expensive. You shouldn’t start a nonprofit just because you think it’s the only option.

Think carefully about the BEST route for your idea, not just the one you assume you need. Now is a great time to consult with professionals (even if it's not me!) to understand the pros and cons of starting a nonprofit.

FAQ

How long does it take to start a nonprofit?

The timeline can vary, but most founders should expect at least 6–12 months from incorporation to receiving IRS tax-exempt status. The IRS alone can take anywhere from 2 months to a full year to process your application.

Do I need a lawyer to start a nonprofit?

You’re not legally required to hire one, but nonprofits have a lot of moving parts with real legal consequences for mistakes. An experienced attorney can help you avoid costly errors in your articles of incorporation, bylaws, and IRS application.

Can I start a nonprofit by myself?

You’ll need at least three people to serve on your board of directors before you can file your paperwork. Plus, building a strong team early is one of the best things you can do for your organization’s long-term health.

If you'd like to learn more about how we can help, schedule a free call with a New Client Guide today!