Did you wake up on New Year’s Day and decide that 2014 was the year you would finally start your own nonprofit? Did you dream up an idea for an artistic project that virtually no one else is doing and that has potential for long-term activity? Did you read my last article about the perfectly viable option of fiscal sponsorship, but skipped that paragraph about how ever-diminishing sources of foundation support for the arts, even as arts nonprofits, proliferate? Sigh.
If you are truly convinced that your project must have its own incorporation, here are the steps you need to take. These steps will be an elaboration of those found on the National Council of Nonprofits website (www.councilofnonprofits.org/howtostartanonprofit) and, as it states there, please take them as rough guidance only. A lawyer familiar with the nonprofit filing requirements in your state is the person to talk to seriously about all this.
Step 1: Research
Do not skip this step. Unless you have a vision for a national organization (how about Teach Voice for America?), start by taking a look at what other projects are active in your area. But go beyond a Google search. Take some time to examine who is doing what kind of work in your city, evaluate how successful they are, and think about the redundancies that exist. If you really want to start an opera company, will you be the only one in town or will you duplicate existing work? Assessing the scene will help you decide if your idea has the potential to be a long-term presence (making nonprofit incorporation a good choice) or if you are better served by fiscal sponsorship.
Step 2: Six Questions to Ask Yourself
Who will be involved? You will need more than just yourself to run this new business. Can you identify a good number of stakeholders who will fill the various roles needed as board members, volunteers, fellow worker bees and, most importantly, audience?
What will this organization do? Start out on the right foot by sitting down with your stakeholders and creating a business plan (the National Council of Nonprofits lists numerous resources for this process.) The plan should include a clarified statement of your mission, a three-year budget, details on the organization’s structure and basic job descriptions, and plans for marketing your work and raising revenue.
When will you file the required paperwork and formally launch? This is the part that, as an artist, you will feel the least inspired about. Gaining recognition for your new organization is a three-step process of paperwork and fees. First you file with your state government, which has different requirements depending on the state. Then you submit the six documents needed to apply for tax-exempt status with the IRS. Once you receive a determination letter from the IRS acknowledging your tax-exempt status, you file for recognition from state and local entities as a nonprofit public charity. From there, you will file annually with the state and the IRS to maintain your tax-deductible status (your activities must benefit the greater good, not simply line your pockets), and report to funders and donors.
Where are you setting up shop and where can you find help? You will need a good network of volunteers that can help you in the initial stages or connect you to experts who can. When it comes to choosing where to incorporate, bear in mind that government funders and many foundations fund only those nonprofits that are incorporated in the state where they operate. If you have a choice of where you can incorporate, research potential funders first. You might be surprised to find that some states and counties have more dollars available. Once you have decided on your state, take advantage of state and local resources that can help you set up operations, such as state associations of nonprofits.
How will you work toward your mission? To answer this question is to write your business plan. Identify precisely what your activities will be, how you will do them, and how you will pay for them. This is also the time to set limits on the project. If you intend to start a contemporary music education curriculum, for example, but your partners also want to perform concerts, you might find yourself with a case of “mission creep,” in which you attempt to tackle goals tangentially related to your original purpose. This can be all right at first—but if you end up with too many different things to fundraise for, you may run into trouble.
Why a new organization? Could this be a short-term fiscally sponsored project instead? Remember that establishing a nonprofit reflects a high level of commitment to your idea. If it is something that could be accomplished over several years, or if you are uncertain if you can muster long-term support, fiscal sponsorship is likely a better option. Unless you have a truly unique mission, widespread support, and a transformative vision, a new organization might not be what is needed. Perhaps a mission to create affordable performance and rehearsal space is the best candidate for incorporation: it is perennially needed, has the opportunity for lasting impact, and cannot be easily accomplished as a fiscally sponsored project.
Step 3: State Forms
The fun begins! One of your stakeholders should be a lawyer, ideally someone who has incorporated a nonprofit in your state before. He or she will help draft your Articles of Incorporation, which require specific legal language explaining, among other things, the purpose of your business, its governance (as in, the role of your board of directors), and what will happen to the organization’s funds if operations cease. This is also your opportunity to choose a name for your new nonprofit, which must be unique in your state. You might be required to submit other documentation and even publish your articles of incorporation in a newspaper before you file.
Step 4: Federal Filings
If you like doing your taxes, then you’ll love this part. The heart of the application is the 26-page Form 1023, in which you answer numerous yes/no questions to determine if the activities you are proposing are eligible for tax exempt status and, if so, which type—there are a number of different categories that nonprofits can fall into. The filing fee is $850, or $400 if your revenue is under $10,000.
Step 5: The Real Work Begins
The filing process is just the first part of the ongoing activities needed to maintain your tax-exempt status: annual state and federal filings, regular board meetings, establishing and maintaining accounting systems, fundraising efforts, and the structures and policies needed to run a business well. It’s all a great rigmarole, to be sure. But this is the kind of administration that any kind of business demands.