Three people dressed for cold weather pick up trash on a beach. Each person wears light gray gloves. The person closest to the camera is a long-haired woman wearing a blue jacket; she is crouched down, picking up a crushed red cup with one hand and holding a large black garbage bag in the other hand. The two people further in the background are out of focus. The one on the left is wearing a plaid jacket and brown scarf and is bending over to pick up a garbage bag. The one of the right is wearing a black-and-red windbreaker and is crouched on the ground, opening up a new garbage bag.
A mission isn't just a good thing for a nonprofit to have; it's a necessity. The IRS requires an organization to have a stated purpose in order to qualify as a nonprofit. — Getty Images/Inside Creative House

Starting a nonprofit can be a very rewarding experience. It also involves navigating IRS rules, keeping organized financial records, and reaching out to donors—activities that not all entrepreneurs will find appealing. Here’s what you should know before starting a nonprofit.

Every nonprofit must have a mission

Nonprofits must have a stated charitable, religious, educational, scientific, or other qualifying purpose that is recognized by the IRS. Not only is a mission required, but it will help you stay focused and make decisions that advance the cause your venture supports.

Part of developing your mission statement is understanding which causes are currently underserved in your area. “Fully explore the landscape in your community and figure out where your organization will fit in,” wrote Get Fully Funded, a resource for nonprofit leaders. “Build relationships with the leaders already in the space. When organizations work in competition, the community loses. When organizations work in partnership, everybody wins.”

[Read more: 9 Things to Consider When Starting a Nonprofit]

There are many types of nonprofits

There are different types of nonprofits with designated “501” status, referring to the code the IRS uses to signify the tax-exempt benefits these organizations enjoy. 501(c)(3) nonprofits are among the most common, but it’s worth exploring the different options as you consider starting your new venture.

[Read more: Choosing the Right Nonprofit Type: Which Is Right For Your Business?]

Keep in mind that the type of nonprofit you establish will be subject to a specific set of rules from the IRS. These rules vary for churches, political organizations, associations, and more.

The IRS has specific rules you must follow

IRS rules governing nonprofits change depending on the purpose of your organization. For instance, 501(c)(3) groups cannot participate in any political activity; foundations are required to donate a certain portion of income annually to maintain their status.

These rules extend to your reporting responsibilities to local and state authorities. While the rules vary, nonprofits must be transparent in their economic activities and provide certain information to the public, such as their tax-exempt status, financial information, and information about their programs and services.

Part of developing your mission statement is understanding which causes are currently underserved in your area.

You will need a business plan, of sorts

It’s common for for-profit founders to write a business plan they can use to raise money, recruit leaders, and attract customers. Bylaws can cover elements of this business plan, in that they determine the governance of your nonprofit. Bylaws define:

  • The size of your governance board, its role, and how it will function.
  • The roles and responsibilities of your directors and officers.
  • The procedures for holding meetings, electing directors, and appointing officers.
  • Conflict-of-interest policies and procedures.
  • How grant monies will be distributed.
  • Other essential corporate governance matters.

This document, along with your operating procedures, will help ensure your nonprofit is working toward its stated mission.

There are many, many ways to fundraise

Nonprofit fundraising is an industry unto itself. Cold-calling isn’t the only way to bring in donations for your venture. There are dozens of options, from in-kind donations to working with foundations. Other common fundraising methods include personal fundraising, direct mail donations, online fundraising, using social media, posting on crowdfunding platforms, hosting events, corporate fundraising, and applying for grants. Many nonprofits use a combination of strategies to meet their annual goals.

Location matters

Of course, you should try to incorporate your nonprofit in a geographic area where you are connected to the cause. “Consider where the board members reside, where funds are raised, and where events are held,” wrote Candid, an e-learning platform.

However, if your mission is not tied to one place, there are states that are more friendly to nonprofits than others. Delaware, Arizona, Nevada, Wisconsin, and Texas each have fewer regulations or fees related to starting a nonprofit. Comparatively, California and New York tend to be stricter in their oversight of nonprofits. Resources like Candid’s state-by-state map of nonprofit regulations or Donorbox’s state-specific guides can help you determine the right location for your new venture.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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