How to Start a Non-Profit Organisation
- Last updated on . Written by Offshore Protection.
If you are looking to form a non-profit, they can benefit from a number of advantages and have a wide range of uses that go beyond the narrow definition and what are traditionally referred to as a not for profit organisation.
Additionally when incorporating in an offshore jurisdiction nonprofits have the added benefits such as higher asset protection, confidentiality and added tax leveraging.
Table of Contents:
- What Is a Non-Profit Organisation?
- Types of Non-Profit Organisations
- What Are the Benefits of a Non-Profit Organisation?
- How Do You Start a Non-Profit Organisation?
- Examples of Non-Profits
- Should You Start a Non-Profit Organisation?
What Is a Non-Profit Organisation?
A non-profit organisation (NPO) is a type of business that is formed with the aim of conducting activities and financial transactions for purposes other than shareholder profit. Recognised non-profits in the US are those which have been given tax-exempt status by the IRS because they contribute to the public good.
Non-profits are allowed to earn a surplus, but this must be reinvested so as to grow and further the goals of the non-profit, and cannot be withdrawn as distributions by its members. Non-profits have similar asset protection and limited liability features of normal corporations and LLCs. However, most of their transactions are not commercial.
Types of Non-Profit Organisations
There are different types and categories which non-profits can fall into. The two main distinguishing types of non-profits are “membership organisations” and “charitable organisations”.
A membership organisation conducts activities with the aim to benefit its members, and is usually supported by its members in turn. Examples include social clubs, sports clubs, special interest groups, etc.
A charitable organisation is one which conducts its activities so as to benefit the wider public or specific groups of society. It generally receives donations from the public, as well as from the government and other institutions. Examples include animal welfare organisations, those which provide food and shelter to the needy, environmental groups, etc.
Both of these types of non-profits have members which have similar rights and responsibilities to the shareholders of a corporation, with the exception that they do not receive financial gains from the organisation.
Within these two broad types of non-profit organisations are various sub-categories, including:
- Literary and Cultural
- Public Safety
- Animal Welfare
- Various others
What Are the Benefits?
Non-profits, as the name suggests, are not formed with the intention of making profits for its individual members. Rather, they aim to benefit the wider society and those in need. As such, they enjoy a number of benefits and privileges which include:
- Tax exemption: Non-profits can apply for 501(c)(3) status from the IRS, which if granted, means they are exempt from paying any income tax. In addition, donors can claim tax deductions on any donations made to a tax-exempt non-profit organisation. Similar procedures exist for non-profits in most other countries around the world.
- Limited Liability Protection: Just like in the case of a corporation or Limited Liability Company, the directors and members of a non-profit organisation are not held personally accountable for the organisation’s liabilities and debts. This means that NPOs can be an effective asset protection tool.
- Eligible to receive grants: Some NPOs may be eligible to receive public and private grants depending on the nature of their activities.
- Perpetual existence: NPOs exist independently of their directors which means they can have a perpetual existence beyond the lifetime or involvement of their directors.
How Do You Start one?
The exact procedure for incorporating a non-profit can vary across different countries and states, and is also dependant on the type of non-profit which is being formed.
However, bellow are the common steps which will generally need to be followed when forming an NPO.
Step 1: Do Your Research
It is important to begin by doing thorough research on forming Non-Profits in your jurisdiction and determining whether doing so will suit your particular situation and goals.
This should start by doing a needs analysis to determine whether the non-profit which you hope to form is actually needed where you are. You should also find out whether there are any other organisations doing similar work which could make your idea obsolete or unnecessary.
You should then check whether a non-profit organisation is indeed the right type of structure for your needs. Non-profits come with their own complications, and should not be formed with the hidden intention to just pay yourself a high salary and avoid taxes. There should be a genuine need for the NPO in order for it to acquire tax-exempt status. You should also seek to understand the alternative types of structures and whether any might be a better match for your needs.
Step 2: Do the Basics Right
Before you can actually go ahead with the incorporation process, there are some basic things you should first put in place. These include:
- Drafting a mission statement: This is an important initial document which outlines what your non-profit’s aim is, what groups or segments of society it aims to help, and how it plans to help them.
- Developing an organisation plan: As a follow-up to the general mission statement, you should develop a more specific plan which describes how the non-profit plans to accomplish its goals.
- Establish a governing board: Finally, you need to carefully put together the right team of people to help manage and govern the non-profit organisation. The board members should be prepared to fulfil various important roles and responsibilities. The management might evolve as time passes, so it is important to have a sound system of recruiting, orientating, and maintaining an effective leadership board.
Step 3: Incorporate It
Once you have all the fundamentals in place for your non-profit, it is time to proceed with the incorporation process. The exact procedure and requirements will differ in each location, so it is worth getting professional and/or legal guidance during the formation process.
Typically, incorporating a non-profit will involve filing documents such as the articles of association with the governing authority in your jurisdiction and paying the relevant filing fee. This stage of the incorporation process of a non-profit is remarkably similar to that of a corporation or LLC.
Step 4: Apply for Tax-Exempt Status
After you have successfully incorporated your non-profit organisation as a legal business entity, you can proceed with filing for 501(c)(3) tax-exempt status with the IRS. This can involve a fee of between $275 and $600 and can take anywhere from 3 – 12 months to be finalised.
Step 5: Ensure Ongoing Compliance and Success
There are strict rules and regulations which non-profits need to adhere to so as to maintain their official status. You should start by registering with the agency in your state that is in charge of overseeing non-profit organisations.
You will then need to ensure you adhere to all financial and annual reporting requirements which are required by non-profit organisations. NPOs are usually more open to public inspection and scrutiny, and so you should keep comprehensive records of all finances and key activities to ensure things continue smoothly with the regulating authorities.
Finally, you should have a complete understanding of all the rules which apply to non-profits in your area and make sure that you follow them closely. This will protect you from putting your non-profit’s tax-exempt status at undue risk.
- Boy Scouts
- Red Cross
- World Vision
- Sierra Club
- Save the Children
- Oxfam America
Should You Start a one?
Non-profit organisations are definitely not the best type of business organization for everyone or all situations. However, they do offer their own unique features and benefits which can be useful in certain circumstances.
If your ultimate goal is to create an organisation which is not aimed primarily at financially benefiting its members but instead serves the wider public, then a non-profit organisation could indeed be the most appropriate type of business entity to use.
Furthermore, non-profits are useful in their ability to provide similar levels of asset protection and limited liability as that of a corporation, and benefit from being eligible for tax exemption and grants.
It is also allowable for non-profit organisations to employ staff, as well as to pay the main members/directors an appropriate salary. However, like the name suggests, they should ultimately be formed without the intention to make personal profit.