How to Start a Nonprofit

Neel HajraPresident/CEO, NEW

November 11, 2009

Goal

• General familiarity with nine basic steps for starting a nonprofit corporation

What is a Nonprofit?What is a Nonprofit? Why? Preparations Articles of Incorporation Board of Directors Bylaws Tax-Exempt Status Registrations Ongoing Operations

STEP ONESTEP ONE

What is a nonprofit?

• “Nonprofit” is a type of corporation

• Key distinctions No dividends Public good Governed by board

• Keystone of civil society

Board

ExecutiveDirector

Staff/Volunteers

Public

“Nonprofit” combines 2 meanings

• State nonprofit corporation

• Federal tax exempt status: “501(c)(3)”

What is a Nonprofit?

Why?Why? Preparations Articles of Incorporation Board of Directors Bylaws Tax-Exempt Status Registrations Ongoing Operations

STEP TWOSTEP TWO

Advantages

• Nonprofit corporation Limited liability Perpetual existence Employee benefits Formality and structure

• 501(c)(3) tax exemption State and federal income tax exemption Tax deductible donations Eligibility for public funds Lower rates on postal and other services Estate tax benefits

Disadvantages

• Proliferation

• Potential redundancy

• Loss of control

• Administrative burden

• Political activity restricted

• Dedicated assets

• Asking for $$$

General considerations

• Need?

• Core support?

• Funding?

• Duplicative?

• Is forming a nonprofit the best approach?

• For more info: Drucker Self-Assessment (www.drucker.org)

What is a Nonprofit? Why?

PreparationsPreparations Articles of Incorporation Board of Directors Bylaws Tax-Exempt Status Registrations Ongoing Operations

STEP THREESTEP THREE

Important preparations

• Vision and clear mission

• Planning Strategic Business (including budget)

• Start convening board & supporters

• Strong Executive Director

What is a Nonprofit? Why? Preparations

Articles of IncorporationArticles of Incorporation Board of Directors Bylaws Tax-Exempt Status Registrations Ongoing Operations

STEP FOURSTEP FOUR

Articles of Incorporation

• Basic characteristics

• Filed Articles = corporation created

• Standard Articles for Michigan

Articles of Incorporation

1. Name Not misleading Not existing

2. Mission Somewhat broad scope Benefits public good Concise language

3. Basis, Assets, Budget, Governance Non-stock Simple assets & budget Directorship vs. Membership

Articles of Incorporation

1. Location of Office2. Incorporators

One or more Fiduciary Names initial board

3. (extra) Include IRS restrictions4. (extra) Protect trustees and volunteers

What is a Nonprofit? Why? Preparations Articles of Incorporation

Board of DirectorsBoard of Directors Bylaws Tax-Exempt Status Registrations Ongoing Operations

STEP FIVESTEP FIVE

Board of Directors

• Initial Board is named at first meeting of incorporators, elected thereafter

• Interests of corporation AND society

• Duty of care, loyalty, and obedience

Board responsibilities

• Oversees everything!

Board Composition

• Consider: Passion / Interest / Commitment Expertise Connections / Resources Diversity Customers

• Local resource: www.boardconnect.org

• More info: www.boardsource.org

What is a Nonprofit? Why? Preparations Articles of Incorporation Board of Directors

BylawsBylaws Tax-Exempt Status Registrations Ongoing Operations

STEP SIXSTEP SIX

Bylaws

• Internal regulation and management

• Adopted at first meeting by the new board

Bylaw provisions

• Purpose: “As stated in the Articles of Incorporation.”

• Number of Directors: Must have three. Recommend at least five.

• Term for Directors: Must be at least one year. Recommend at least two years and staggered terms.

• Board Meetings: Must be at least annual, recommend monthly during first year.

Bylaw provisions continued

• Officers: Must have President, Secretary, and Treasurer. Recommend Vice-President as well.

• Quorum Must have at least a majority when Board is < 7 Must have at least 1/3 when Board is seven+ Recommend majority

Side Note: First Meeting

• Name board & elect officers

• Adopt documents

• Approve activities

• Good Template: Use the “Minutes of First Meeting” appendix from How to Form a Nonprofit Corporation, by Anthony Mancuso

What is a Nonprofit? Why? Preparations Articles of Incorporation Board of Directors Bylaws

Tax-Exempt StatusTax-Exempt Status Registrations Ongoing Operations

STEP SEVENSTEP SEVEN

Federal tax exemption forms

• Form SS-4 Employer Identification Number (EIN)

• Form 1023 Primary form 501(c)(3)

501(c)(3) main requirements

• Formed exclusively for benefit of the public good: Charitable Educational Religious Literary Scientific Testing for public safety Prevention of cruelty to children or animals Fostering national or international amateur sports

competition

501(c)(3) requirements cont.

• Must be operated for exempt purpose “UBIT”

• No private inurement Cannot distribute gains Assets irrevocably dedicated

• Cannot substantially engage in the influence of legislation

• No partisan politics

IRS Form 1023 Exceptions

• Not required for: Churches and related associations/schools Branch of national exempt organization Organizations with gross receipts < $5,000

annual

Form 1023 Main Themes

• Activities and Operational Information

• Personnel and business relationships

• Technical Matters

• Financial Information

Other 501(c)(3) information

• Most applications are accepted

• Turnaround time is several months, and going up!

• Good Form 1023 walkthroughs: How to Form a Nonprofit Corporation, by

Anthony Mancuso Prepare Your Own 501(c)(3) Application, by

Sandy Deja

What is a Nonprofit? Why? Preparations Articles of Incorporation Board of Directors Bylaws Tax-Exempt Status

RegistrationsRegistrations Ongoing Operations

STEP EIGHTSTEP EIGHT

Common registrations

• Charitable Trust (Dept. of Attorney General)• Charitable solicitation registration (Dept. of Attorney General)

Required if asking for more than $8,000 annually• Lobbying registration (Dept. of State)

Required if direct spending exceeds $1675 total or $425 for individual

• State and local withholding (Dept. of Treasury) Form 518 is required if organization has employees

• Sales Tax (Dept. of Treasury)• Property Tax (local assessor)• Nonprofit postage rates (U.S. Post Office)

See www.mnaonline.org

What is a Nonprofit? Why? Preparations Articles of Incorporation Board of Directors Bylaws Tax-Exempt Status Registrations

Ongoing OperationsOngoing Operations

STEP NINESTEP NINE

Ongoing Considerations

• Annual filings

• Insurance

• Financials & Audits

• Employment Administration

RECAP

1. What is a Nonprofit?

2. Why?

3. Preparations

4. Articles of Incorporation

5. Board of Directors

6. Bylaws

7. Tax-Exempt Status

8. Registrations

9. Ongoing Operations

Resources

• www.new.org/resourceconnect/resources• Getting started & templates:

How to Form a Nonprofit Corporation,by Anthony Mancuso

Longer Workshop: Forming a 501(c)(3)Three part series by Michigan Nonprofit Association

www.StayingLegalMI.Org

• Ongoing Operations Michigan Nonprofit Management Manual,

by Michigan Nonprofit Association

How Can NEW Help You?

• ResourceConnect®

• BoardConnect®

• npServTM

• The NEW Center

Good Luck!