In my work, I come across people all the time who are driven to take action in support of their passion — that overwhelming emotion that can feel almost uncontrollable. This philanthropic drive, this love for humanity, is wonderful and it can be incredibly energizing. It can even move some people to make their passion their career, their life’s work. Many people seek us out at the Johnson Center to find out how to start a nonprofit for just this reason.
As Christine Mwangi, founder of Be a Rose, recently shared with me, “I did not pick my nonprofit, my nonprofit picked me.” Christine had been on a career path to becoming a pharmacist when she learned of “period poverty,” a global health issue that impacts women and girls everywhere, including in the United States. Women and girls experiencing period poverty don’t have access to safe, hygienic sanitary products, or may struggle with managing menstruation without shame or stigma.
For Mwangi, it was her strong desire to help others, combined with a deep passion to address the health inequities that surround period poverty that drove her decision to start a nonprofit. It’s a common story. An individual, or sometimes a small group of people, sees a need and because of experience or education, develops a passion to fill that gap. This is how thousands of nonprofits are born every year.
The name can be a bit deceiving, as nonprofit corporations can earn a profit. What sets a nonprofit, or charitable organization apart is how that profit can be used. In a for-profit corporation, investors, shareholders, or owners are the beneficiaries of any profits. In a charitable organization, profits cannot be paid out to individuals. They can only be used to serve the community — what the Internal Revenue Service (IRS) defines as “public benefit.”
That public benefit can take a variety of forms, including organized religious practice, programs aimed at alleviating the impacts of poverty, providing education, or a host of other things that make our communities better places to live. The key is that these actions, according to the IRS, “must not be organized or operated for the benefit of private interests … and no part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual.”
Not only must a charitable organization create some public benefit, but it must also be supported by the community. This is where it can get a bit tricky. For most of us, when we hear the term nonprofit, we think of the community food pantry, the museum downtown, the local symphony, or the favorite charity we support.
“[P]ublic charities are required to pass the IRS’ public support test, which stipulates that at least one-third of its operating support comes from the community.”
Under the IRS code, these would be classified as 501(c)(3) public charities, which is the most common of the more than 28 types of charitable organizations noted in the federal statute. There are many complexities in the IRS code, and if you’re struggling with insomnia you can read all about it in Publication 557, Tax-Exempt Status for Your Organization. But for our purposes, it’s important to understand that in addition to creating some community value, public charities are required to pass the IRS’ public support test which stipulates that at least one-third of its operating support comes from the community. That usually means that public charities have to engage in fundraising activities.
Fundraising is a word that can strike fear in the best of us, yet it’s a reality of operating a public charity. So, if your palms are sweating at the thought of raising money, or if your stomach is a little queasy as you read about that public support test, you may want to think twice about starting a nonprofit. As Mwangi noted in our conversation, “we are all philanthropists in our own right and we can be the good we want to see in the world right where we are, with what we have.” That good can often come through volunteer service or providing financial support to a public charity whose mission aligns with your personal values.
For some, that good leads them to ask if starting a nonprofit organization is the best way to respond to a need they see or a passion that won’t let go. In pondering the question of whether or not to start a nonprofit, there are many things to consider.
First and foremost, look around your community. When passion strikes, we may feel like we have the unique knowledge and drive to address an issue. Yet chances are good that there is at least one organization in the community already working on the issue that has ignited your passion. With nearly 1.6 million nonprofit organizations in the country, it’s helpful to do some market research to not only understand the needs of your community but to learn more about organizations that may already be actively working to meet those needs.
“Donating to, volunteering, or looking for a staff position with an existing nonprofit that is working toward your same passion comes with a host of benefits — likely the biggest one is that you won’t be going it alone.”
Donating to, volunteering, or looking for a staff position with an existing nonprofit that is working toward your same passion comes with a host of benefits — likely the biggest one is that you won’t be going it alone. Existing organizations will likely already have many of the critical operating functions in place — like systems for payroll, benefits, a base of donors and partners, and a presence in the community.
Next, as you consider the needs of the community and your big idea, it’s good to consider all the options you have for setting up a corporation that can provide some public benefit. As my colleague Michael Moody observed, the boundaries between business and philanthropy are increasingly hazy as more consumers and entrepreneurs look to use their economic choices to support public good outcomes. You may have more choices than you think.
Many traditional for-profit corporations offer financial support to nonprofits or directly to communities as part of doing business. There are also opportunities for business formation that include a Low-Profit Limited Liability Company (L3C), Benefit Corporation (available in 35 states), or certifying an existing business as a B Corp. Each of these structures comes with different requirements that an attorney and accountant can help you understand.
If you’ve done your research — maybe even fallen asleep reading IRS Publication 557 — and are still convinced that your passion is best lived out by starting a nonprofit, the process itself is not arduous, all things considered. It’s the easy part. Much like having a child, the real work begins once you give birth!
Please be advised that I am not an attorney or accountant, and neither does the Johnson Center act in these capacities or provide these services. We encourage you to seek advice and guidance from the appropriate professionals if setting out on this process.
Step One: Incorporation
Starting a nonprofit begins with forming a legal nonprofit corporation in your state. In most states, it can be as simple as filing articles of incorporation with the Office of the Attorney General or the Secretary of State. To help you determine which office to approach, the National Association of State Charity Officials provides a complete list of contact information by state.
In most states, you can download the necessary forms and complete them without the assistance of an attorney, although it is helpful to seek legal advice to ensure that you don’t miss any details. To better understand what is required in your state, you may want to consult the interactive map of state registration and compliance information compiled by Hurwit & Associates, a legal firm based in Massachusetts that specializes in philanthropic law.
When you incorporate, most states will ask for officers of the nonprofit corporation to be named. While some states have no minimum requirements for the number of board members, many states comply with the IRS minimum of three, which typically includes naming a board president (or chairperson), a treasurer, and a secretary. It’s important to read the fine print in your state’s incorporation paperwork to make sure that the board complies with the law.
Many passionate founders will name those closest to them as their first board members. However, it’s important to consider that if you want to set your organization on a path to sustainability, broad community representation will be key to good decision-making.
Step Two: Securing Tax Exemption
Once your organization is legally formed in your state, the next step involves applying to the IRS for your charitable status. The IRS allows nonprofit corporations up to 27 months after the legal entity is created to file under section 501(c)(3). The paperwork itself is rather self-explanatory. While legal counsel can be helpful, the IRS provides a wide variety of resources, including a video tutorial on the application process (2020).
Step Three: Charitable Solicitation License
As you begin serving the community, the need for resources will increase. Many nonprofit founders will donate their own funds to get an organization off the ground. Often family and friends of the founder will offer support. At some point, the majority of charitable organizations will begin raising funds from the community. Remember that IRS “public support test” I noted earlier?
Currently, 37 states require organizations to register for charitable solicitation. You can refer to your state office for further details to ensure proper compliance.
Now the fun — and hard work — begins! Like many practitioners who enter the nonprofit sector, Mwangi had never worked for a nonprofit before starting Be A Rose. As she began working to eliminate period poverty through her organization, she also became a student, learning all that she could about how to effectively run a charitable organization.
Passion for the mission often drives leaders to create great change in their communities. Thousands of resources exist to help founders understand how to work with a board, develop bylaws, raise funds, and so much more. One of those resources is the Johnson Center; we offer a wide variety of trainings and thought leadership to advance the sector.
The work of an executive director is challenging and, at times, lonely. The Johnson Center’s peer coaching cohort provides a place for thought-provoking partnership and strategic advising to help nonprofit leaders do their best work. This is the best program for you if you’re looking for support as an individual.
If you are looking for strategic advising, customized capacity building, or technical assistance support for your organization, please don’t hesitate to reach out to our team. We offer a broad range of services to help you and your organization build a practical path forward.
In the meantime, here’s a list of some of our go-to resources for those considering starting a nonprofit: