How to start a nonprofit organization

What is a nonprofit organization?

Nonprofit organizations are businesses that serve a charitable or socially beneficial purpose. Nonprofit status brings some financial benefits, depending on your location. For instance, your profits may be tax exempt, you may be eligible for government grants, and any donations you receive may be eligible for tax relief.

The definition of a nonprofit, and the taxes you need to pay, depends on your location. Check with your governmental body to find out the benefits you’re entitled to and what nonprofit accounting practices you need to follow.

Can you make money from a nonprofit?

Yes, nonprofit organizations can make money – in fact it’s often useful to do so! Being able to turn a profit means you won’t have to depend on grants, donations and government funding.

However, the main goal of all nonprofits is to further a social cause or mission, not to make a profit for shareholders or owners. While you can generate revenue as a nonprofit, profits cannot be given to the company’s owners or shareholders – they must be reinvested in the business, to hire employees or fund new projects, for example.

How does a nonprofit generate revenue?

Although you’re not in the business of making profits when you start a nonprofit, you still need enough cash to keep your business going. Here’s how to earn revenue in a nonprofit organization.

1. Donations

Donations can come from both individuals and corporations. Individuals often donate to causes they believe in, and corporations may be motivated by the tax relief they’ll receive for their donations.

2. Grants

Grants supplied by government bodies or private foundations can provide a financial lifeline for nonprofits. Grants often come with extra administrative responsibility, like financial transparency and reporting requirements. If you’re not familiar with grant applications, get help from a grant writer.

3. Fundraising

Hosting fundraising events can boost both your finances and your US: nonprofit’s profile – which can help increase donations once the event is over, too. Fundraisers can be all shapes and sizes, from 5 km runs to silent auctions to extravagant galas. Because events can be costly to organize, make sure the benefits outweigh the time and money it costs to host them.

4. Program service fees

Consider introducing program service fees, such as by providing a paid membership to your nonprofit, as a way of raising income.

This is often done by arts organizations, professional associations, and other types of nonprofits to fund their services, such as a dog shelter charging an adoption fee to a prospective owner.

5. Corporate sponsorship and partnership

These can be a mutually beneficial relationship – you get cash while a corporation gains brand exposure. A corporation may offer to sponsor an event for you, provide ongoing cash income, or provide other assistance that saves you money.

It’s a win–win relationship where a corporation is seen to be doing something beneficial for everyone, while your nonprofit gets much-needed financial support.

Types of nonprofit organizations

Charities

Charitable organizations provide services and support to the public. The qualification rules for charitable status differ between places, but they include religious, educational and scientific organizations or other public charities. For instance, a charity could be established to set up a school, a disease research center or an animal rescue shelter.

Foundations

Like charities, foundations have a humanitarian outlook but they give funding or grants to other nonprofit causes rather than raising money for their own initiatives. They’re often set up by wealthy individuals with particular interests – for instance, helping travel writers from underrepresented backgrounds – or by for-profit companies to fund good causes (such as the Coca Cola Foundation).

Social advocacy

As suggested by its name, social advocacy groups are set up to advocate a social issue or cause. They may promote the causes of large groups of people, like human rights organizations, or smaller sections of society, like anti-semitism campaign groups.

Membership organizations

You might set up a membership organization to promote the collective interests of a particular group. These organizations represent professions, locations, hobbyists, activities or industries.

An example is the American Medical Association, which represents the medical profession. Such organizations usually charge membership fees that fund their activities.

How do I start a nonprofit organization?

Research and plan

First, pin down why your nonprofit is needed. What social need is going unmet and how can your nonprofit help fix it? Market research helps you understand the landscape, solidifies your aim and identifies information that supports the reasons for your organization’s existence.

Once you know why your organization is necessary, develop a clear nonprofit mission statement and decide what your goals are. This creates a touchstone to return to as your organization grows. You also need to identify any permits or licences you need to operate.

Do the foundational work

Next, come up with a name for your nonprofit. Something catchy and memorable gives your brand valuable recognition.

To start a nonprofit you’ll also need to identify which legal structure your organization belongs to. For instance, you might be a community interest company, a trust, or a trade association. The right legal structure depends on your region, so it’s good to get accounting and legal advice to make sure your nonprofit:

• Operates within the law
• Has access to financial benefits it’s eligible for, like tax deductions

Find a financial advisor with Xero’s advisor directory.

Comply with the law

You now need to legally register your nonprofit. During your registration you’ll be given an identification number for your tax return.

In the US, you’ll get an Employer Identification Number (EIN).

You’ll then need to apply for nonprofit status to be eligible for tax exemptions and relief. Your local governmental body can tell you how to register your nonprofit.

Create a business plan

A business plan maps out the financial needs of your nonprofit so you can decide what to spend where, and how much you’ll need to raise from different income streams.

You’ll need to flesh out these key areas of the plan:

• Executive summary: sum up your nonprofit’s mission, the key points from your research, the need in your community you aim to meet, and how you’re going to meet it.
• Offering description: describe, in depth, what your nonprofit is offering – these could be programs, services, or products. Include your nonprofit’s impact goals.
• Marketing plan: explain how you’re going to reach your audience and build brand recognition.
• Operating plan: summarize your team structure, each role’s responsibilities, and how your organization will operate each day.
• Financial plan: write a detailed plan of your nonprofit’s financial situation – the startup cash needed, your budget, financial statements (cash flow and income), balance sheets, your revenue streams, operating costs, and so on. Basically, everything to ensure your business is financially sound and prepared.

Get going with our free business plan template.

Fundraising, budgeting and financial transparency

Without a robust funding model it’s hard to make your nonprofit sustainable. You need to identify which income streams are most relevant to your nonprofit, whether they’re grants, donations, events or corporate partnerships.

Be realistic when creating a budget. Consider your monthly cash flow so you can cover the costs of running your organization. Within your financial plan, include reserves you can dip into in higher-cost months (for instance, when you’re hosting an event), and balance this with cheaper months when you rebuild your reserves.

Financial transparency is essential for nonprofits. You may need to show your financial statements to funders or to access certain tax benefits. Make sure you manage your finances to make sure they’re compliant.

Start building your nonprofit’s presence

Once your business plans are ready, it’s time to think about your outward-facing presence.

A clearly communicated and professionally presented website is great for anyone to understand your nonprofit and what you stand for. Make sure your website clearly communicates your mission and goals so that the moment a funder, event attender, or community member clicks on your site, they know what your nonprofit is for.

An active, brand-appropriate social media presence helps build your community and communicate your nonprofit’s aims and achievements. Though plenty of community engagement can happen online, it’s also important to remember the impact of networking and meeting people in your community in real life too.

Before setting off on your marketing plan, carry out market research. Once you know who your target audience is, and how to reach them, you’ll be able to craft a marketing strategy that builds your nonprofit’s presence, which could lead to increased donations and funding.

Ongoing management is important

Starting a nonprofit is just the beginning – keeping it afloat is an ongoing process. Setting up regular assessment and evaluation frameworks can help to keep your nonprofit on track.

• Because nonprofits have tighter finances than most businesses, you’ll have to think creatively to attract the best talent (and keep them). You may also need volunteers to support you.
• Strong and supportive leadership is key to building a team and managing them effectively.
• Everyone who works for you needs to be clear of their roles, feel challenged and supported, and included in the nonprofit’s mission.

As your nonprofit changes and adapts to opportunities and challenges, your business and employee strategy will need to follow suit. Use the strengths of your team to help you navigate these challenges and make your employees feel valued.

Are you ready to start your nonprofit journey?

Founding a nonprofit can be a rewarding and satisfying experience – but it comes with its challenges. Creating a strong business plan, building the right team and efficiently communicating your message all help to get your nonprofit off the ground. Being legally compliant and professionally managing your finances will help you claim any tax relief you’re entitled to.

Xero’s online accounting software for nonprofits can help simplify your accounting processes, from keeping track of cash flow and paying your employees, to sharing financial reports. You’ll have more time to set up and manage a successful nonprofit.