Entrepreneurs create more than businesses. It takes every bit as much skill, perseverance, and luck to start a nonprofit enterprise as it does to start a for-profit business. For those passionate about helping others, the opportunity to maintain control over organizational operations and policy is rare. The zealous entrepreneur can make a tangible difference in the lives of others, but a prior understanding the legal benefits and requirements of nonprofits and the steps necessary to create a nonprofit entity is crucial to the success of the venture.
Mission Statement: What Can a Nonprofit Do?
The key difference between a business and a nonprofit is in its purpose. A business’ purpose can be anything legal, but it is usually to make a profit. A nonprofit organization must be organized for a purpose other than profit. You cannot form a charity that only helps you and your family. You must help others or serve the community. So long as you are helping others, you can make a salary as an employee of the organization.
Several types of nonprofit organizations exist. Civic-minded groups, churches and religious organizations, and charities are all entitled to nonprofit status. The Internal Revenue Service (IRS) recognizes two main categories of nonprofits: 501(c)3 organizations are formed for religious, charitable, scientific, literary, or educational purposes, and 501(c)4 groups are community organizations. (The terms 501(c)3 and 501(c)4 refer to subsections of the Internal Revenue Code). Further information about the types of Georgia nonprofits and their legal requirements can be found in the Georgia Nonprofit Corporation Code and IRS website.
The Business of Charity: How Does a Nonprofit Work?
Nonprofit enterprises are run in a variety of different ways, but the trend is to run them in a fashion similar to a business: split the day-to-day and strategic management of the entity. Typically, a Board of Directors controls strategic direction. The Board holds regular meetings, and at the first meeting should approve by-laws, appoint officers, and approve initial corporate transactions. Its managers control the day-to-day operations of the organization: its CEO or President or Executive Director, its CFO or treasurer, and other employees. Managers are allowed to be on the Board, but are not required to have seats by law.
Nonprofits have employees and independent contractors, but they frequently diverge from businesses by utilizing volunteers. Charities and nonprofits are exempt from some labor laws, including those governing internships. A smart organization will leverage outside assistance to increase its impact.
A passionate mission will attract employees, but so will potential forgiveness of their student loans. Lawyers with federal student loans, for example, will qualify for complete forgiveness of their outstanding balance after 10 years working for nonprofits if they’ve been making regular monthly payments on the debt.
$$$: How Does a Nonprofit Survive?
Businesses need investors in order to get started, and a key function of the individuals forming a nonprofit is to secure funding. Many nonprofits exist entirely on the contributions of donors, though there are a variety of different sources and strategies. Local, state, and federal governments provide grants and loans. Existing nonprofits, businesses, and universities have grant programs, as well. Loans and grants usually come with strings attached, with the money earmarked for a specific purpose. Soliciting donors to support a nonprofit’s general fund may prove essential even if the majority of the funding comes from elsewhere. Keep in mind that donors get more from giving than simply supporting a pet cause: state and federal tax exemptions make philanthropy a smart financial strategy.
Nonprofits also survive because they are given tax breaks by governments. In Georgia, nonprofits get some sales, use, and property tax exemptions. Only some exemptions apply, and only some nonprofits qualify. Orphanages, adoption agencies, hospitals and nursing homes, private schools, and food banks are exempt from paying sales and use taxes. If you sell tangible personal property such as clothes, sales tax still applies. Schools, Boy Scouts, Girl Scouts, orphanages, adoption agencies, Parent Teacher Organizations, and religious institutions are exempt from collection of Georgia sales and use taxes.
State governments, counties, and local municipalities sometimes provide tax breaks to specific organizations or classes of nonprofit. Take advantage of these programs, but beware local politics and the motivations of the politicians involved!
Blank Slate: How Do I Start a Nonprofit?
The first step is to pick a name and incorporate. Reserve a name with the reservation system. To shield managers, directors, and funders from personal responsibility for the debts of the organization, it is necessary to file with the Georgia Secretary of State. Filing can be made by mail or online, and there is an initial $100.00 filing fee. Required information includes the name of the new entity, registered office address, a registered agent in Georgia, and the name of the incorporator. Soon after incorporating, you must file an initial annual registration that lists three key officers of the organization: CEO, CFO and Secretary. The initial annual registration and changes to the corporation’s address, registered agent, or main address also require $50.00 filing fees. Corporations must also pay $40.00 to publish a Notice of Intent to Incorporate in certain newspapers the next business day after filing the Articles of Incorporation.
Next, to hire employees and finish the paperwork required to become a nonprofit, you must register for a Federal Employer Identification Number (EIN). Fortunately, this is one of the few steps that does not require a filing fee!
Nonprofits are not automatically tax exempt. You must apply for federal tax exemption as a 501(c)3 or 501(c)4. Form 1024-EZ can be filled out online. The filing fee for this one isn’t small, ranging from $400.00 to $850.00 depending upon the type of organization. You will have to provide details about your organization’s mission and projected budget.
After you have your federal exemption, you can file for Georgia tax exemptions. Send your IRS determination letter to the Georgia Department of Revenue along with an Application for Recognition of Exemption, and apply for a tax number.
Next, register for charitable solicitation and fundraising with the Secretary of State.
This is not a final step. The IRS and Georgia both require updated filings be made at least once a year.
For more information check out our free ebook about how to form a corporation, LLC, or LLP in Georgia.
The Road Less Traveled
It takes a special, passionate person to start a nonprofit, but the results can change the world. Seeking to improve the lives of others in ways large and small is a reward in itself, but creating a lasting institution around your cause or idea will multiply the impact of the blood, sweat, and tears you put into the enterprise. Just as important, a strong organization will be able to fairly compensate its employees for their hard work. If you are smart and savvy, you can make a difference and get paid to do what you love.
The information above should be viewed as only a partial guide. When starting a nonprofit, it is crucial to seek advice from a trusted, experienced attorney.