This is the first part in a four-part series on “Legal Foundations for Starting and Operating a Nonprofit.”
Starting a new business is exciting for every founder. Founding a nonprofit adds the layer of creating positive change in the world which adds depth and meaning as well. Meeting the challenge of starting a nonprofit requires first understanding a series of intricate legal considerations and important strategic questions. This first entry in our series aims to guide aspiring nonprofit founders through the initial steps of laying a solid initial foundation for your organization’s future success.
What is Nonprofit?
At the most basic level, a nonprofit is an organization whose primary objective is to further a specific social cause or advocate for a shared point of view. Unlike for-profit businesses, nonprofits do not distribute their surplus funds generated by operations to the organization’s owners or shareholders. Instead, the plan is for the nonprofit to reinvest surplus funds to support the organization’s mission.
Distinguishing Between Nonprofit and For-Profit Entities
At the start, founders need to acknowledge key distinctions between nonprofit and for-profit organizations. Some primary differences include:
- Purpose: While both can generate surplus income from operations, a nonprofit’s primary goal is furthering its expression. In contrast, a for-profit organization is geared towards generating income for its owners.
- Income Distribution: Profits in nonprofits are typically reinvested into delivering the mission. In for-profit businesses, they’re typically distributed to owners or shareholders.
- Tax Benefits: Nonprofits can be eligible for tax-exempt status, meaning they might not pay federal corporate income taxes. With regards to some organizations, donations to the nonprofit may also be tax deductible expenses by donors. This depends on the type and structure of the nonprofit.
Before diving headfirst into starting a new nonprofit, it’s essential to ask yourself some key questions:
- What is Your Mission? This is the heart and soul of your organization. It should be concise, specific, and inspiring, summarizing the organization’s purpose and guiding its actions. If you cannot define this key point, you are not ready to begin.
- Is a New Organization Really Needed? Are there other organizations already doing what you aim to do? It’s beneficial to know the ecosystem to ensure you’re not reinventing the wheel or, if you are, that you’re doing so with a unique twist. The landscape is littered with many nonprofits performing overlapping services and thereby adding significant delivery expenses and competition as opposed to solving the problems described as the organization’s mission.
- Have You Fully Assessed the Landscape? Is your nonprofit idea feasible? Is there a genuine need for your services? Can you identify potential supporters and donors? Are there competing organizations? Should you simply support existing organization(s) in their effort to respond to the issues raised by your mission statement?
Selecting the Legal Structure
There are a few primary legal structures available for nonprofits:
- Trusts: Often used for charitable purposes like community projects.
- Associations: Membership-based groups where the membership might change, such as clubs or societies.
- Non-stock Corporations: The most common form of nonprofit, these are legal entities separate from their founders.
The choice depends on your organization’s objectives, potential size, and governance preferences. For most, the corporate form offers the best combination of flexibility, protection, and recognition.
Once you’ve settled on a structure, the next step is generally incorporation. This legal process provides your nonprofit with many of the rights and responsibilities of an individual:
- Steps to Incorporate: These generally involve selecting a unique name for your nonprofit, appointing directors, or trustees, and filing articles of incorporation with the relevant state agency.
- State-specific Requirements: Incorporation is typically a state-level process, and the requirements vary from state to state. You might need to designate a registered agent, declare a specific purpose, or detail how the nonprofit might dissolve in the future.
- Drafting Articles of Incorporation: This is the founding document of your nonprofit. It typically includes the organization’s name, purpose, initial directors, and other essential details. It’s akin to a birth certificate for your organization.
- Understanding the IRS Rules: If you plan to seek IRS approval of your organization for tax exemption, you will need to identify the key requirements in your initial formation documents to meet the IRS requirements.
Starting a nonprofit requires a clearly defined mission, backed by a solid understanding of the right initial steps for legal compliance to start things off on the right foot. By defining a clear mission, researching the landscape, selecting the right legal structure, and successfully navigating the incorporation process, you set a solid foundation for your nonprofit’s future endeavors.
In our next entry, we’ll delve deeper into the next stages, including securing tax-exempt status and navigating state requirements. For now, remember: every great nonprofit began with a passionate individual and an idea. With dedication, research, and a sound legal approach, that individual could be you.
If you have questions about nonprofit issues, please feel free to reach out Timothy Hughes at Bean, Kinney & Korman, P.C. at (703) 526-5582, firstname.lastname@example.org. Our firm practices in Virginia, Maryland, and the District of Columbia in addition to various other jurisdictions.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.