How to Start a Nonprofit: Practical Steps and Pitfalls to Avoid

This updated guide explains the main reasons to form a nonprofit (charitable work, neutral third-party roles, cooperatives), then walks through key steps: mission and revenue planning, incorporation and bylaws, board duties, applying for IRS 501(c)(3) recognition, state charity registrations, financial controls, and ongoing compliance. It stresses donor restrictions, avoiding private inurement, accurate accounting, and consulting a lawyer or CPA.

Why start a nonprofit?

People start nonprofits for several reasons: to create a tax-exempt charitable organization donors can support, to serve as a neutral third party between businesses or associations, or to organize a cooperative or mutual enterprise. Credit unions and cooperatives can operate on a not-for-profit or mutual basis under different rules than charitable nonprofits.

Plan your mission and revenue

Begin with a clear mission and a realistic business plan. Identify funding sources: donations, grants, membership dues, program fees, earned income, or contracts. Decide which roles will be paid and which will be volunteer. Many new nonprofits underestimate ongoing operational costs and compliance requirements.

Governance and documents

Incorporate at the state level by filing articles of incorporation (often called a charter). Draft bylaws that define governance rules, board structure, meeting procedures, and officer duties (typical roles: president/board chair, vice chair, secretary, treasurer).

Adopt a conflict-of-interest policy and a document-retention policy. These reduce legal risk and help when applying for tax-exempt status.

Tax-exempt status and registrations

Apply for an Employer Identification Number (EIN) from the IRS. To request recognition as a 501(c)(3) charitable organization, file Form 1023 or, if eligible, the streamlined Form 1023-EZ. Approval makes you exempt from federal income tax and typically allows donors to deduct contributions.

Be aware of limits: 501(c)(3) organizations must avoid private inurement, limit partisan political activity, and track unrelated business income (which may be taxable). You will also likely need to register to solicit charitable contributions in the states where you fundraise and file annual information returns with the IRS (Form 990, 990-EZ, or 990-N, depending on size).

Financial controls and accounting

Open a separate bank account in the nonprofit's name and keep all funds segregated. Accurate bookkeeping, a budget, and basic internal controls (dual signers on large checks, regular reconciliations) reduce the risk of errors or misuse of funds.

Respect donor restrictions. If a donor designates funds for a specific program, you must use them for that purpose or get donor approval for a change.

Operations, compliance, and professional help

Maintain corporate minutes, up-to-date bylaws, and records of board decisions. Expect ongoing compliance: annual federal and state filings, payroll taxes for employees, and possible licensing or permits for programs.

Consult an attorney and a CPA experienced in nonprofit law before you sign property deeds, begin large fundraising campaigns, or apply for complex grants. Professional advice helps you avoid common pitfalls such as commingling funds or creating arrangements that could be treated as private benefit.

Final notes

Starting a nonprofit can be rewarding but it carries legal and financial responsibilities different from for-profit startups. Careful planning, transparent governance, and disciplined accounting are the foundation of a sustainable nonprofit.