Support your cause by starting a public nonprofit charitable organization

August 5, 2014

What causes are you most passionate about? The environment, children, animals, education, health? Have you ever thought about turning your passion into a business? What would it take to start a nonprofit organization to support the cause you are passionate about? To create and run a public nonprofit charitable organization requires a fair amount of planning, not to mention some dollars.

The steps outlined here will help you start the process, along with the discussion below examining each step in detail. For state requirements and concerns, each state has different laws governing charitable organizations, so contact us for assistance.

While this is not meant to be a complete “to do” list to start a successful nonprofit, the following steps should help you get started:

  1. Find at least two other people who share your passion.
  2. Create a three year budget.
  3. Apply for a federal identification number, establish articles of incorporation and bylaws, and file Form 1023 or 1023-EZ.
  4. Register with your state as a charitable organization.
  5. Apply for exemption from state sales tax.
  6. Establish best practices and policies.
  7. Determine what you will need to get your organization up and running.

Find at least two other people

Define the mission of your nonprofit organization and your vision for its future. Then find at least two other people who share this passion and are on board with your mission statement and vision. It will be a lot of work for just one person to handle, so if you don’t have others on the train with you, you may find yourself not moving forward at the fast and furious pace you intend to maintain. Also, a nonprofit organization needs a Board of Directors to lead and govern it throughout its life. These people will most likely serve as your opening Board of Directors. If you find that you are standing alone in your passion, maybe you can explore other ways to support your cause, such as starting a fund at your local community foundation.

Create your first three year budget

Creating a budget can be a daunting task; however, it is a very important tool especially when you are in the beginning stages of starting a new nonprofit organization. It sharpens your understanding of your goals and helps you understand the priorities of your organization at its early stage of development. Begin by asking yourself these questions about your expenses:

  • What activities or programs will do the most to advance the cause I am passionate about with the income and resources I have now or can foresee in the immediate future?
  • Will I need to hire positions to run those programs or activities?
  • What else is needed to run the organization and its activities?

Once you have documented your understanding of what expenses your organization will incur, you need to ask yourself where you will get the funds to operate. Will you charge a fee for your program? Will you charge a membership fee for your organization? Will you hold a special fundraising event to raise money? Will you solicit funding by applying for federal, state or private grants? Remember, if you are planning to be a publicly supported charity, you will want to be sure that you are receiving more than one-third of your support from the public, not from a small group of supporters.

Estimate conservatively, rather than being too optimistic and possibly setting yourself up for disappointment. Keep in mind, the larger your organization is in terms of annual gross receipts and total assets, the larger the annual reporting requirements it has. Organizations with annual gross receipts less than or equal to $50,000 are usually eligible to file the e-Postcard, 990-N. Organizations with gross receipts less than $200,000 and total assets less than $500,000 can file the 990-EZ. Organizations with gross receipts greater than or equal to $200,000 and total assets greater than or equal to $500,000 need to file Form 990.

File Form 1023 or the new streamlined Form 1023-EZ

After you have people on board, set your expected budget, apply for a federal identification number, and establish articles of incorporation and bylaws, you may be ready to prepare and file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

If your organization expects to receive more than $50,000 in gross receipts annually in its first 3 years, you will need to file the standard 26-page Form 1023. However, if you expect gross receipts of $50,000 or less and assets of $250,000 or less, you most likely would qualify for the NEW streamlined application using Form 1023-EZ. The instructions for Form 1023-EZ include an eligibility checklist that organizations must complete before filing the form. The IRS recently designed this new form to make applying for tax exempt status easier both for charitable groups and the IRS. It is only three pages long and must be filed online. Consider engaging the help of a professional to accurately complete Form 1023 or 1023-EZ. If not completed accurately, the process of getting approved by the IRS can drag out for months.

Please note that you will not need to file either form if your organization does not normally generate more than $5,000 in gross receipts annually. If you are able to support your cause at this level of income, your organization will not be required to seek exemption from federal income tax under Section 501(c)(3). You may still want to apply for exempt status anyway if you expect your nonprofit to grow and no longer pass the gross receipts test.

Register in your state and apply for exemption from sales tax

Register as a charitable organization with your state. For example, if you will be soliciting more than $5,000 of contributions in Wisconsin, you are required to register as a charitable organization using Wisconsin Form 296. Note that each state has different laws governing charitable organizations. If your organization plans to solicit contributions in states other than your home state, you may or may not need to register in those states as well.

Apply for exemption from sales tax on purchases in your state. In Wisconsin, nonprofit organizations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, are exempt from sales and use tax on all purchases of tangible personal property or taxable services. Contact us for help with regard to state requirements and concerns and stretch all the dollars you raise as far as they can go!

Put your best practices and policies in writing

Establish best practices and policies for your organization. This would include a conflict of interest policy for your Board of Directors and employees (if any), a document retention and destruction policy, and a whistleblower policy. For organizations required to file Form 990, the governance section of this form specifically asks whether the organization has written policies on these subjects. (See Section B on page 6 of Form 990.)

Other policies to consider immediately would be internal control relating to your organization’s cash receipts and cash disbursements processes. Get these written down on paper with the goal of creating segregation of duties wherever possible.

Your immediate needs may include accounting software, a website, and volunteers

There are many other aspects of running a nonprofit organization that you will need to address right away, such as the following:

  1. Invest some dollars in an accounting package and a donor database program. Your organization may have annual reporting requirements with the IRS (Form 990 or Form 990-EZ) and the State of Wisconsin (Form 308 or Form 1952) that will include – at a minimum – financial summaries, and may include larger financial details such as donor history. Many nonprofits are able to meet these needs with a user-friendly program such as QuickBooks.
  2. Invest in setting up and maintaining a website. This may serve as your only marketing tool in the beginning of your organization’s life. It can also serve as a place to encourage online giving, and as your portal for federal disclosure requirements if you file Form 990.
  3. Recruit volunteers whenever and wherever possible. Your community will most likely have others who share your passion. They may not possess it at the same level, but will make themselves available to help if you provide a door for them to open. If you find that you are in a situation to hire employees, you will have more reporting and compliance requirements to handle. See the information for business owners new to wage and human resource issues in our New Employer Guide. The guide also discusses and includes a copy of Form SS-4, Application for Federal Employer Identification Number.

If you have questions regarding any of the points in this article or other questions about starting and operating a nonprofit organization, please contact your account director or any member of our not-for-profit team.