The proliferation of non-profit organizations across the United States has been well documented for years. According to the National Center for Charitable Statistics at the Urban Institute, in the ten-year period from 1999 to 2009, the U.S. saw a 31.5 percent increase in the number of registered 501(c)3 public charities, totaling more than 1.5 million nationwide (2010). That percentage increase excludes foreign and government organizations. In my state of Pennsylvania alone, Non-Profit Stats reports a whopping 72,725 registered charitable organizations (2013).
The numbers are even more significant today because many non-profit organizations in communities throughout the country are often trying to carve out their existence in fierce competition with one another for stagnant pools of local monies as well as they are facing reduced if not eliminated private and public funding in a poor economy.
My recent introduction to a very worthwhile start-up non-profit in the Lehigh Valley, PA community reminded me of the rigors of starting a new non-profit organization. The following are just a few highlights of the many, many “hoops” through which a fledgling non-profit is required to jump:
- Determine the need and sustainability. Before hanging a sign on the door and printing business cards, determine the need for a non-profit serving the proposed mission or purpose in the community. Are there other organizations already established in the local community that serve the same purpose, goals, population or issues? If so, there may not be a strong commitment to a “duplicate” organization starting up. More important, determine the sustainability of the proposed non-profit among the community. Who will fund it? Is there enough interest and money in the community to support the organization on an ongoing basis? Research corporate and government funding opportunities that are good matches with the mission of the organization and visit with local, private foundations in order to introduce the idea of a start-up non-profit, gauge their interest, and get to know them.
- Determine the type of tax exempt status needed. Perhaps the most widely known, the 501(c)3 non-profit is an IRS tax code that permits certain tax exemptions to charitable, educational, scientific, religious, etc. organizations. Other tax exempt codes have been established for civic leagues, child care and social welfare organizations; for example, that have varying disclosure requirements and contribution allowances. Currently, I count 34 different IRS tax exempt codes!
- Establish by-laws. The by-laws of a non-profit define how the organization will function and conduct its business in the community and typically address issues like board governance, terms of service and lines of authority within the organization. Consultation with legal counsel – or at least review of the by-laws – is highly recommended at this stage of the process.
- Select a board of directors. What does this particular non-profit need in terms of the community representation on the board of directors? In general, organizations usually need financial, legal and human resource experience. Additionally, people tend to gravitate to what they know best so it is typical; for example, to see organizations with an educational purpose with teachers and school district administrators on the board. Make it a goal to diversify the board of directors as much as possible. While there is obvious value in keeping similar people together, diversification in the board increases the richness of experience and expertise that a board of directors can provide to a non-profit.
- Develop strategic and fundraising goals. The management and board of start-up non-profit organizations are strongly encouraged to engage in some level of strategic and fundraising planning. How will the organization be funded? Where do management and board members expect the organization to be financially and programmatically in a year? In three years? In five years? A strategic plan is even more important to start-up non-profits especially because in the absence of a proven, successful track record of results it is one of the key items to be shared with potential funders to demonstrate that the organization has been formed with forethought, expertise and a business plan.
- Request tax exempt status from the IRS. This is really the “big kahuna” in forming a non-profit organization. An organization is not considered not-for-profit until the IRS deems it so with a “Letter of Determination” (see bullet above about types of tax exemption). Without it, an organization may not legitimately solicit funds as a non-profit and donors can not make tax deductible contributions.
- File state articles of incorporation. Typically granted from a Department of State, incorporation refers to the absorption of state law under the specific protections of the U.S. Constitution. That is, the U.S. Constitution shall override all state constitutions and state laws. For organizations that plan to incorporate, this is a key step that may occur in conjunction with filing for tax exempt status with the IRS.
- Establish record keeping and financial accounting systems. Establishing board approved, financial and internal management procedures and protocols early in the game; for example, financial statements and reports as well as board meeting minutes, is advisable. Who will be responsible for maintaining records and financial accounting?
- Obtain liability insurance. Like any other business, non-profit organizations are susceptible to legal risks and start-up organizations are advised to obtain liability insurances. Again, consultation with an attorney familiar with non-profit organizations can be very valuable in selecting Directors’ and Officers’ liability insurance as well as general professional liability coverage.
The bulleted items above are only some of the issues that need to be addressed by a start-up non-profit organization. Depending on the organization, additional items that may need to be addressed at start-up include: personnel policies, unemployment compensation, withholding taxes for the IRS, filing for state sales tax exemption status, and registering with state Bureaus of Charitable Organizations.
- The National Center for Charitable Statistics at The Urban Institute; Quick Facts About Nonprofits, Custom Report Builder (2013). Retrieved from:
- Nonprofit Stats; Distribution of Charities in the U.S. (2013). Retrieved from:
- Pennsylvania Association of Nonprofit Organizations (PANO); Nonprofit Resources, Forming a Nonprofit (2013). Retrieved from: