Five Fundamental Phases of Founding a Nonprofit

There are so many pieces to keep track of when establishing a nonprofit organization that it can overwhelm the would-be founder. Most folks who are inspired to change the world have a great idea and just want to get to work. But then they learn about the rules and regulations required when hiring staff, and about the bureaucracy involved when establishing policies and support systems, as well as the complexity of budgeting, and it goes on and on. At first, they might recoil in disgust, but then they bolster their fortitude and take another crack at it only to see all the requirements for filing for their tax-exempt status.

At this point they retreat to the bedroom and scream into their pillows before curling up into a ball and sobbing. They think maybe it’s easier to just keep drudging through whatever it is they were doing before they came up with this great idea. Maybe it’s easier to just let the world stay broken. How can any reasonably sensible person with a life and time constraints work through these tasks without getting overwhelmed along the way?

I’m a list maker. When I find myself stymied with too many tasks, I write them all down in a list, and I get satisfaction checking them off one by one as I see the progress I’m making. But even for me the list of items here is just too long. Off the top of my head I came up with 42 items that are usually needed to establish a sustainable and legitimate nonprofit organization, and I’m certain I could add a few more with a little more concentrated thought.

My backup strategy is to group related items in a long list like this into more abstract topics. This create a shorter and less intimidating todo list. Looking at how to establish a nonprofit tax-exempt organization, these myriad tasks seem to fall into five broad categories or phases. The number five isn’t too intimidating. I can handle that. Each of these five phases involves its own sublist of course, but the largest one only has twelve items on it, so that seems better as long as I can work through the system one chunk at a time.

Here are the five fundamental phases I found:

1. Prove my nonprofit will be of benefit to the community
2. Determine if it’s a viable concept
3. Grow the group (attract more people)
4. Formalize and legalize the organization
5. Set up the supporting systems the nonprofit will need to provide its services

I can now focus on each stage one at a time, ignoring the others for the time being. It doesn’t change the numbers, but it does calm me down a bit.

These are five important aspects to consider when starting a nonprofit organization. Click To TweetNow let’s look at each phase and work from there.

The benefit phase

This is where you determine if your organization will benefit the community. You do this by breaking down your idea into the problem you see in the world and the solution you have in mind for addressing that problem. If the problem isn’t significant or your solution won’t make any difference, you can stop here. But more likely, you’ll spend some time thinking through how you’ll create programs to implement your solutions, and drill down into your theories and assumptions about how your programs will actually create the change you want to realize. It’s also where you define the basic mission of your organization and what values your group will hold.

The viability phase

Even if your idea is amazingly great it won’t matter unless you can actually carry it out. This phase is where you figure out what it will take to make your idea real. So you’ll flesh out your business model and budget, figure out how to measure your impact on society, and assess where your money will come from. You’ll think through what non-program activities you’ll need to engage in in order to support the real work. The work in this phase is best done after reaching out to community leaders and getting their input.

The growth phase

If your idea benefits the community and is viable it’s likely you will be able to attract other people to your cause. There’s work involved here as you reach out to the community to find volunteers and co-founders. This phase also tests your assumptions so far. If people won’t step up then maybe your idea doesn’t benefit society as much as you thought, or maybe there’s still some work to do before it seems viable to people.

The formalization phase

This is where the organization is incorporated, a board of directors is formed, and the group applies for tax-exempt status from the IRS. All the legalities are explicated, and the organization attains its legal status. All too many founders gloss over the first three phases and start digging in here. At the same time, they treat this phase like a complicated recipe they need to follow, because that approach works cheaply and efficiently for a lot of situations. But decisions made here are more difficult to change later on, and working through this phase too haphazardly can result in an nonprofit filled with landmines. So be careful!

The supporting systems phase

When you make it to this fifth phase your organization will need to establish all the systems needed to support the work your group was created to do. You will create bookkeeping systems, HR and volunteer manuals, fundraising systems, and more. Researching and purchasing proper insurance and establishing financial controls isn’t the most exciting work, but getting it right before starting up operations can save your hide in the long run.
There’s an actual logic to the order of these five phases, and taking them in order can save time. If I determine the idea doesn’t provide enough benefit to the community, I don’t have to waste any time figuring out if it will be viable. If it’s not viable, I don’t need to attract people or formalize it.

On the flip side, that doesn’t mean that once you’ve completed an early stage, you can forget about it. The work involved in completing one phase tends to help make the next phase easier, but only if you can go back and examine the outcomes of that earlier work.

Remember to the point of this is to organize the work so it’s more effective and less overwhelming. If you take these phases one at a time and work your way through systematically, you will be surprised at the progress you can make.