Starting a Nonprofit or Charity in the US

This Article Covers

• Charity vs Nonprofit
• Nonprofit and Charity Criteria
• Requirements before Applying for Charity Status
• Nonprofit and Charity Setup Steps

Charity vs Nonprofit

While these terms are sometimes used interchangeably, they have different purposes and implications. All charities are nonprofit organizations, but not all nonprofits are charities.

• Nonprofit status is how an entity is established under state corporate law.
• Charity status is a designation of the IRS tax code, and effects how an organization pays taxes.

The nonprofit entity is established at the state level and can apply to be recognized as a tax-exempt charity at the federal level. A nonprofit may or may not choose to be or qualify as charitable at the federal level for a variety of reasons. The information in this article is focused on organizations that are nonprofits and charities, and the requirements needed to meet both. For more information on the difference between the two see our Nonprofit vs Charity article.

Nonprofit and Charity Criteria

If you want to start a nonprofit and become a charity, there are a few things you should consider.

• Is there a demonstrated need in the community for a new nonprofit with the mission you’re envisioning?
• What issues will your nonprofit address?
• Are you financially prepared to start a nonprofit? Costs range from $2,500 to $5,000, to cover legal, registration, and business start-up expenses.
• Will you be committed to running the nonprofit and ensuring that it complies with all the necessary regulations and requirements? See our compliance checklist.
• Will you be committed to upholding the mission, vision, and values of your organization?

Charities must also meet the following criteria:

1. Organizational structure
   1. It is a charitable entity in trust or corporate form
   2. If the charity dissolves, assets will be given to another qualified public charity with a similar mission
2. Operations
   1. The organization operates within the charitable mission
   2. Follows additional tax requirements
3. Only a limited amount of lobbying
   1. Private foundations cannot award grants to a public charity that has activities that involve influencing legislation.
4. No engagement in any political activity
5. No private benefit is provided to insiders or outsiders, except for a charitable class
   1. A charitable class is a sufficiently large or indefinite group that the grant benefits the community

If you’re thinking of starting a nonprofit or charity because you have received grant funds, another alternative would be to seek fiscal sponsorship.

Before Applying

Before filing anything at the state or federal level for your nonprofit and charity you need to set foundational values, prep organizational documents and select a board of directors.

1. Think of a name for your organization and check whether it is available for use or has already been registered.
2. Prepare the following as the foundation of your organization:
   1. Values statement
   2. Mission statement
   3. Purpose statement
3. Create a business plan as you will need a solid infrastructure to support your future programs. This may include:
   1. Organizational Structure
   2. Marketing Plan
   3. Budget Plan
   4. Resource Development/Fundraising
4. Select your board of directors. Check your state requirements for the minimum number required, typically it is 3, as well as other qualifications needed.

Nonprofit and Charity Setup Steps

Below are the basic steps to starting a nonprofit and obtaining charity status within the US.

1. Incorporate your Organization

2. Obtain your EIN

3. Apply for tax-exempt (charity) status with the IRS. This step is what will define you as a charity.

4. Check state requirements if you need to:
   1. register before fundraising
   2. secure any permits or licenses
   3. apply for state tax or additional tax exemptions
   4. register for unemployment insurance

5. Maintain tax-exempt status. You can check this US Charity Compliance Checklist for guidance or refer to this IRS website.

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