How to Start a Nonprofit

Neel HajraChief Operating Officer, NEW

October 10, 2007

Goal

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

1.1. What is a Nonprofit?What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status8. Registrations9. 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)”

1. What is a Nonprofit?

2.2. Why?Why?3. Preparations4. Articles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status8. Registrations9. 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)

1. What is a Nonprofit?2. Why?

3.3. PreparationsPreparations4. Articles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status8. Registrations9. Ongoing Operations

STEP THREESTEP THREE

Important preparations

• Vision and clear mission

• Planning Strategic Business (including budget)

• Start convening board & supporters

• Strong Executive Director

1. What is a Nonprofit?2. Why?3. Preparations

4.4. Articles of IncorporationArticles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status8. Registrations9. 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

4. Location of Office

5. Incorporators One or more Fiduciary Names initial board

6. (extra) Include IRS restrictions

7. (extra) Protect board & volunteers

1. What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation

5.5. Board of DirectorsBoard of Directors6. Bylaws7. Tax-Exempt Status8. Registrations9. 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!

• Local resource: www.boardconnect.org

• More info: www.boardsource.org

Board tips

• Passion / Interest / Commitment

• Expertise

• Connections / Resources

• Diversity

• Customers

1. What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation5. Board of Directors

6.6. BylawsBylaws7. Tax-Exempt Status8. Registrations9. 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 one. 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

1. What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation5. Board of Directors6. Bylaws

7.7. Tax-Exempt StatusTax-Exempt Status8. Registrations9. 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

1. What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status

8.8. RegistrationsRegistrations9. 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

1. What is a Nonprofit?2. Why?3. Preparations4. Articles of Incorporation5. Board of Directors6. Bylaws7. Tax-Exempt Status8. Registrations

9.9. 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 MNA at NEW Center(October 30, Nov 6, Nov 13)

• Ongoing Operations Michigan Nonprofit Management Manual,

by Michigan Nonprofit Association

How Can NEW Help You?

• ResourceConnect®

• BoardConnect®

• npServTM

• The NEW Center

Good Luck!