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How do I start a nonprofit organization?

By M. Melanie Beene

Last week, we provided a little history on the nonprofit sector and fiscal sponsorship. This week, we tackle the question: how do you start a nonprofit?

Once you have an idea for your project, there are two ways to start your organization. You could file to become a nonprofit corporation in the state where you and your activities are located, and then file an IRS 1023 application to become exempt from taxation under 501(c)(3) of the Internal Revenue Code. Or you could become a fiscally sponsored project of another nonprofit that already has its own 501(c)(3) designation and whose mission is in alignment with your goals.

Let’s start with comparative costs. Unless you have a pro bono attorney or apply on your own with the assistance of a how-to book, plan on spending up to $10,000 to get a lawyer to set up your corporation and file your 1023 application. And you’ll probably have to retain legal counsel and incur office/project start up costs once your nonprofit becomes operational.

Becoming a fiscally sponsored project may require an application process, but most sponsors charge no fee – or a minimal one – to apply. Once accepted as a fiscally sponsored project, you pay a fee (the average is 10% of revenues) but that typically also covers a suite of back-office services (accounting, HR, insurance, grants management) in addition to the use of the tax-exempt status of the fiscal sponsor.

The first option is more costly and time consuming than the second and exposes you to greater potential liability. Once you have your own corporation you have filing duties and responsibilities to the state.  With option two, government compliance is, in most cases, handled by the fiscal sponsor.

Stay tuned for next week, when we’ll examine the time it takes to get a nonprofit organization up and running.

Posted April 4, 2014 in Fiscal sponsorship

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