How To Start a Non-Profit Organization

Some Simple Guidelines – Understanding How to Start a Non-Profit Organization

By Sarah R. Duncan


Forming a nonprofit corporation is very similar to forming a regular corporation. Tax-exemption,

grants & personal liability protection are the most important reasons to incorporate a nonprofit group. There are many more benefits to being a nonprofit.

There are two important benefits for forming a nonprofit, tax-exempt status and personal liability protection.


Obtaining nonprofit status is usually a requirement for obtaining funds from government granting agencies.

Some key steps just prior to formation to keep in mind,

Begin with a broad charitable purpose that motivates yourself or your group of concerned citizens.

Recruit members who support the charitable purpose that will help develop a body of individuals with diverse qualities and resources that can aid you or your group in satisfying this purpose.

Draft a mission statement that further refines your broad charitable purpose while providing your founding body of individuals with some realistic and concrete objectives toward which they may direct its collective energies. This mission statement is the first step toward the implementation of a nonprofit organization to achieve the goals of the founding body.

Survey potential funding sources (including

local, state, and federal government sources, private foundations and other grant providers) to determine the availability of funds to conduct the mission statement of the new nonprofit organization.

Obtain some “startup finances” to enable your new nonprofit organization to obtain some professional services (e.g., legal, accounting, etc.).

Solicit a list of interested individuals from within your founding body interested in becoming the initial Board of Directors of the new nonprofit organization.

Seek assistance to incorporate the founding body into a nonprofit corporation by drafting a Certificate of Incorporation.

Draft a set of corporate bylaws, which will serve as the procedure that the Board of Directors will utilize to make decisions on behalf of the corporation.

Hold an organizational meeting. You must hold an organizational meeting to formally create the nonprofit corporation. At this meeting the bylaws should be adopted, the Board of Directors should be elected, and all other relevant business should be conducted

General guideline for nonprofit incorporation and tax exemption status:

(Optional) Clear and reserve the name of the corporation with the Secretary of State’s office.

Draft articles of incorporation and file them with the Secretary of State’s office. The articles of incorporation announce the formation of the corporation and give its broad purposes. Note: It’s best to correlate the language regarding tax exemption status herein the articles of incorporation to match the language later when filing the forms for tax exemption.

Register your nonprofit’s name (including a “fictitious business name”).

Draft and adopt bylaws for the corporation. The bylaws are the “constitution” of the organization setting the ground rules and operating procedures for the activities and conduct of the corporation. Actions taken in violation of the bylaws also may be declared invalid or challenged, which could hurt the organization. It is very important for organizations to comply with their bylaws in order to protect their corporate status and the limitation of liability that comes with it.

Apply for tax-exempt status from the federal and state government.

Obtain business licenses and permits for your corporation from federal, State & local governments.

Hold the first meeting of the board. The directors must approve certain activities necessary to set up and run the nonprofit’s operations. Giving specified people (“officers”) the authority to do those things.
Other alternatives to accomplishing your vision and goals:

Study a list of nonprofits already active in the same area. Consider joining their efforts as a volunteer, a board member or even as staff.

Analyze a list of nonprofits already active in the area, identify the three most compatible with your ideas, and explore creating a special project or initiative & negotiate your involvement.

If your goals will be quite local and small, consider forming an unincorporated association or club, have meetings & activities skipping the reporting requirements (an option for groups with annual budgets under $25,000).

If you are considering creation of a group to finance activities or needs of others (scholarships, family emergency funds for a specific population, etc.), explore sponsorship of the fund by a community foundation or other organization. (To utilize the tax exemption status under a sponsorship, that company must already have tax exemption status).

A nonprofit corporation requires some attention to detail, it requires some paperwork, but the benefits are worth it. You will do fine just by understanding and following some of the basic rules.

First few rules are to,

Hold required meetings of directors and members.

Keep minutes of these meetings in a corporate records book.

Directors should;

Accept their election as directors.

Approve the bylaws.

Elect officers to run the corporation’s day-to-day operations.

Authorize officers to prepare and present to the board a budget.

Authorize officers to set up bank accounts for the corporation.

Purchase insurance, lease office space, etc…

Create a committee of the board to research and recommend appropriate compensation amounts (wages or salary) for the officers.

Adopt a policy regarding conflicts of interest, if not already included in the bylaws.

Determine the exact location of the principal office.

Create a minutes book in which you will keep the minutes of your Board of Directors’ meetings and enclose copies of the bylaws, articles of incorporation and the minutes of the board’s first meeting.

Apply for federal tax exemption under IRC Section 501(c) (3) or 501(c) (4), using IRS Form 1023 for (3) exemption or Form 1024 for 501(c) (4) exemption.

Apply for California franchise tax exemption, using FTB Form 3500. Accomplishing all these steps can take from two to nine months or more (especially depending how long the IRS and California Franchise Tax Board take to review your applications for tax Exemption) and can cost $555 or more in filing fees,

Nonprofit corporations work well for all sorts of groups, artists & musicians. To people active in education, health, and community services

Types of groups that seek nonprofit status and may be eligible for tax exempt status:

Childcare centers.

Shelters for the homeless.

Community health care clinics and hospitals.


Churches, synagogues, mosques, and other places of worship.


Performing arts groups.

Conservation groups.

Section 501(c) (3) of the Internal Revenue Code:

Nonprofit corporations qualifying under this section enjoy exemptions from federal, state, and local taxes. The Internal Revenue Service allows organizations to file for tax-exempt status under section 501(c) (3) if they fit within one of five identified categories.

Organization must have a “Charitable Purpose” and:

Qualify as a “Religious Group” or

Be considered a “Scientific Organization”

Serve a “Literary Purpose”

Qualify as an “Educational Organization”.

The IRS has a thing to say about what a nonprofit can and cannot do:

Nonprofits cannot make political lobbying (influencing legislation) a substantial part of its total activities.

A nonprofit must make sure that its activities don’t personally benefit its directors, officers, or members.

Additional information:

Nonprofit corporations must observe most of the same formalities as regular corporations. These include, keeping good corporate records, holding and preparing minutes of directors’ (and possibly members’) meetings & maintaining a separate bank account.

If your group will make a profit from its activities, becoming a nonprofit corporation can yield a great benefit, just as long as the money you make is related to your charitable activities, and then your nonprofit corporation won’t pay income tax on it. Without tax-exempt status your group is unlikely to qualify for many public and private grants.

As a tax-exempt nonprofit corporation, donors can deduct their gifts to your group on their federal and state tax income returns.

The procedure for gaining tax-exempt status can be lengthy and complex requiring time, money, and a certain level of professional expertise in the legal, financial and tax implications involved.

As long as your group’s activity is charitable, educational, literary, religious, or scientific, you are able to incorporate nonprofit status and get tax exemption. Once the IRS grants tax-exempt status, the organization must follow specific rules, which require careful oversight and ongoing professional assistance. Despite these obstacles, the result can make a phenomenal difference to achievement of organizational goals.

Record any financial transactions in a double-entry bookkeeping system and keep other financial records in order to file an annual corporate tax return. Even with tax exemption status, a nonprofit is still required to file particular forms even though they pay no tax.

Nonprofit corporations with a 501(c) (3) tax exemption are not allowed to participate in political campaigns or contribute money to them. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.

Nonprofits must not distribute profits to members, officers, or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers, or directors. However, reasonable salaries and expense reimbursements are permitted.

Nonprofit corporations must pay taxes on income from “unrelated activities.” Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate “substantial” income, the group’s nonprofit status may be jeopardized.

This is a general introduction on organizing and forming a nonprofit corporation. There is a lot more I could discuss, however there is plethora of good information I could discuss with you. I hope this helps aid you in achieving your vision & decision making process of starting a nonprofit organization. I am available, if at any time you choose to start your nonprofit group. If you have any questions, don’t hesitate to call.

Kindest regards,

Author – Sarah R. Duncan

Elite Financial Services

P.O. Box 27434

Fresno, CA 93729

(559) 801-3538

Author – Sarah Rachel Duncan