Starting a nonprofit organization properly has many steps, and there are several variations on how to do this right. This complexity scares many people away from trying, and more problematically, encourages many to simplify the process and skip steps. I find it helpful to look at the whole process from a 10,000 foot perspective in a visual way, so I’ve created this high level flowchart that outlines the basics. Work through it, and your chances of starting a sustainable nonprofit organization will increase, or perhaps you’ll decide not to start the nonprofit saving time and maybe even avoiding some damage to the community.
Here goes. Explanations below.
Who benefits and who is burdened?*
The flow chart outlines several steps, many of which you’ll repeat long after your organization has been founded. At each step, there are common questions you should ask, and the most important one is probably “Who benefits from this, and who will be burdened by it?”
For example, when you establish an animal shelter, the animals and the community would benefit, but other animal shelters may find themselves competing with you for grant money or other resources. Establishing a homeless shelter or a drug rehabilitation center will benefit your program participants, but can be seen by your neighbors as a problem. Not understanding these realities will mean you could be blindsided by unexpected resistance to your work.
Is your idea beneficial?
Work through who in the community your organization will benefit. What service will you be offering them? Clarify this by stating the problem you are trying to solve or address and then state your solution to that problem in a very basic way. This should help you generate a short list of programs you intend to run. Articulate why these programs will create the change you want to see in the world by drafting a theory of change. Describe your vision of the organization and your community once it is up and running. Examine all this work to uncover your values and put them in writing. Step back and examine all the above, and draft your mission statement.
That’s a lot of work, but at its end, you should be able to answer the question “Does my idea clearly and significantly benefit society?” If the answer is no, don’t start a nonprofit.
Many for-profit businesses benefit society. For example, a grocery store distributes food to the people in a neighborhood. A nonprofit has to demonstrate that the benefit it offers is above and beyond what a typical for-profit business provides. The grocery store may not be affordable to the poorest in the community, but a food pantry might fill in that gap. You are looking for a clear and significant benefit, not just a common one.
Is your idea viable?
For a nonprofit organization to do its job, it needs to actually work. Having an idea that is good for society doesn’t automatically mean the idea will attract the resources necessary to function in a sustainable way.
How will you provide your services to the community? Write down a list of the activities you need to perform in order to support these main services. This tells you what support systems you need in place to provide those activities. What other resources will you need to do all the work? How much will your resources, programs, and support activities cost? Where will the money come from in order to pay for that? Will you need volunteers? Where will these people be recruited? How will you train them? Which work will your organization do, and which will be outsourced to other organizations? Those other organizations are your partners. Who are they, and why will they work with you? Once you’ve got a solid understanding of all that, you can sketch out your business model.
If your business model is viable, you’re ready to move on. If it’s not, you’re not ready to start a nonprofit.
Get feedback from other nonprofits*
Meeting with nonprofit leaders already established in your community will help you assess if your idea is realistic or not. It’s extremely important to take the time to meet with people already working in the nonprofit space. These folks can give you a valuable reality check about your idea, and help you figure out how much work is involved. You may also learn how tight resources are in your particular field. A new nonprofit entering the picture can be seen as a collaborative partner, or someone who is competing for grant money, volunteers, and clients. You need to understand how the presence of you nonprofit organization will fit into the ecosystem.
Is this an unfilled niche?
If another nonprofit is already serving the community by offering the same or very similar services, your nonprofit might cause more problems in the community than it solves. You might find yourself competing with the established nonprofit for resources (typically volunteers and funding). This dynamic can undermine your efforts as well as the efforts of the established group.
Meeting with nonprofit leaders already established in your community will help you survey the nonprofit environment you will be working in. Pay close attention to the value you are offering and to the segment of the community you are serving. If both these pieces match what another organization is already doing, you are not in a unique niche.
You should identify a community segment that is not being served and/or identify a service that is not being offered to them. If you can’t do that, do not proceed. Work with an existing organization instead.
Will others sign on? If not, find out why not and rework your idea
If you’ve gotten this far, your idea is well thought out, and your services are needed, but isn’t it possible that you might be a bit biased? The real test is whether other people agree with you enough to actually sign on and start contributing.
You need to begin recruiting people to your cause. You’re looking for a variety of people: volunteers, advisors, experts in your service area, those familiar with the segment of the community you will serve, people who will complement your own strengths, and more.
If people are not willing to step up and help, then it’s possible your idea doesn’t resonate with them. It’s also possible that the first person you need to recruit is someone who can communicate your idea better than you can.
If people are not interested in helping, ask them why? Tactfully determine whether they think the idea is faulty or impractical. Sometimes people are already over-committed. (Ask them for others who might be good recruits.) Don’t jump to conclusions based on a single person’s response. Rather, look for patterns after you’ve reached out to a large number of people.
In the end, if you can’t get people involved, you need to go back to your original idea and start reworking it. Either your idea is not as beneficial as you thought, you’d be competing for resources against existing organizations, or something about your idea is unrealistic.
If you’ve attracted a few people, but not a critical mass to move forward, get your supporters together and analyze the issues together.
It’s critical that you understand that starting a nonprofit is a group effort, and that the organization you’re creating belongs to the whole community. It’s not your baby, and you are giving up control over it. If you can’t let go, start a for-profit organization instead. That will allow you to do things the way you want to. If you can step back and share the organization, you might find that more people want to help out.
But when there is a problem, take a long, hard look at it, fix it, and start again from the top.
Get a fiscal sponsor
Sometimes you won’t know if your idea is viable or not. Other times, you’ve attracted a few people, but not enough of them, maybe because your idea is difficult to grasp in the abstract. If only they could see the idea in action, maybe then they’d sign on.
Finding a fiscal sponsor is a great way to start your work and figure out if it’s viable before committing to legally forming a corporation and seeking tax exemption. It’s like being able to test out versions of your idea to see what works.
In this option, the fiscal sponsor acts as the main organization (and all the resources belong to that sponsor). Your idea is played out as a project of that parent group. You will discover if your idea works out through experimentation. The fiscal sponsor takes a small percentage of any cash donations in exchange for managing the books and dealing with the IRS for you. It’s a way for you to get to work without tackling a large chunk of the bureaucracy up front.
Can you give up control?*
A nonprofit organization is a group effort. It requires the cooperation of many people. It is specifically required to benefit the community rather than any owner. This means you are not entitled to anything even though you put in a great deal of effort to make everything work.
For example, you will need to set up a board of directors to govern the organization. If you move forward into a staff position, usually filling the role of executive director, this group will be your boss. The board has the power to set goals for you, discipline you, and even fire you. If you are not willing to give up this kind of control, you should consider setting up a for-profit business instead. A for-profit organization allows you more control over how you run things, and there’s no rule that a for-profit can’t benefit society.
If you do give up this control, you’re faced with a paradox. Even though the board is your supervisor, you will likely find yourself managing them. In a way, they are like any other group of volunteers doing a specific job for the organization. They’ll need to be reminded of commitments, educated, rewarded, etc., and doing that will be your job. Can you live with this paradox?
Fish or cut bait
Moving forward from this point, you’re about to cross a line and commit to things that will be hard to undo. It’s important to assess your own stamina and be realistic about your personal energy level.
Look at your vision of the future, and think about what a typical day, week, and month would look like when your organization is up and running. What’s your role in all that, and are you still willing to do it? Also, take a second look at all the work that needs to be done in order to get that far. What’s your personal role in that work?
If you find you don’t have the wherewithal to move forward, touch base with the folks you’ve started talking to, and back out before you make extra work for yourself and for all of them.
Establish a board & policies
A nonprofit has no owners. Rather, it operates on behalf of the community at large. It’s therefore necessary to establish a group that oversees the organization in the public’s interest. This is the board of directors, and its members need to understand what they are signing up for. At the most basic level, every board member has to understand the three main duties of loyalty, care, and obedience they need to fulfill.
The first order of business for the board will be to meet, elect officers, and establish the basic policies for running the organization. Creating these policies is an important foundation for the group, but learning how to discuss the issues and make decisions is also crucial. Establishing your board of directors and these policies is the first step in formalizing your organization.
Form a legal structure
If you don’t have a fiscal sponsor you will need to establish your legal structure. Nonprofits start out as some sort of corporation established by a state government. This structure establishes the group as an artificial person in the eyes of the law, offering some protection to those involved. The corporation is allowed to open bank accounts in its name, and do other business independently from any individual.
There are different types of corporation that vary from state to state, and you need to establish the one that’s compatible with your nonprofit’s purpose.
An easy and important first step is to get an Employer Identification Number (EIN) from the IRS, which works like a social security number for your corporate entity.
Seek tax exempt status
If you don’t have a fiscal sponsor you will want to seek a proper tax exempt status from the IRS. The rules here are national in scope, rather than state by state. While there are other options, most people think of a 501(c)(3) which is IRS-speak for a charitable, educational, or religious organization. When your organization gets this status, it no longer needs to pay many of the taxes that a for-profit business would have to. Additionally, contributions made to your organization are generally tax deductible for the donor, and having this status opens the doors to some foundation or government grants, which could be an important part of your income strategy.
Establish support systems
Back when you were determining if your idea was viable or not, you listed out the work you would need to do, and what support systems you needed in place to do that work. Now is the time to actually establish those support systems.
If you don’t have a fiscal sponsor, you’ll need a bank account and an accounting system. Depending on your organization’s needs you may also need to invest in information technology, volunteer management systems, fundraising platforms, and other common systems. Without forecasting which of these are essential, you’ll find yourself scrambling once you try to deliver services while unprepared. If you do have a fiscal sponsor, they may be able to help with some of this.
Get to work!
Once all the above is done, it’s time to move forward. Go back and read your mission statement. Review your values and vision. Get re-inspired to start the real work, now that you know you’re ready to start.
Good luck! I hope this tool is helpful in your quest.
*Note: This post was updated on September 30, 2017. A new image of the flow chart was added, and the steps were rearranged to match it. New steps and corresponding paragraphs were added, and are marked with an asterisk.
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