You’re entrepreneurial, but you want to dedicate your efforts to a charitable cause. Starting a nonprofit seems like the right thing to do. You get to do something good AND personally rewarding.

But is it the right thing to do?

And how do you start a nonprofit anyway?

Should I Form a Nonprofit?

A great idea and a committed individual are key ingredients for starting a nonprofit public charity, but you should have more than that before you actually form an organization.

The 10 Questions You Must Answer First

1. What is the mission of your contemplated organization?

2. What are its core activities?

3. Who are the beneficiaries of your activities?

4. Is there another organization out there with the same or similar mission and/or engaging in the same or similar activities?

5. Would your mission be furthered more effectively and efficiently by an existing organization?

6. Can you attract sufficient resources (human, financial, and other) to start and operate your organization?

7. Have you drafted a business plan (including a budget)?

8. Have you educated yourself with what it takes to start and run an organization in compliance with the laws and best practices?

9. Have you considered fiscal sponsorship?

10. Whose help will you need in order to get the organization up and running?

How Do I Figure This Stuff Out?

If you are having trouble answering the 10 Questions or the answers indicate that you are not yet ready to proceed, there’s more work to do.

Go out into the community and learn more about the people who make up your targeted charitable class and the organizations that are currently serving them.  Talk with them, read about them, volunteer in the community, and participate in forums where their critical issues are being discussed.  Find out who the key players are:  charity leaders, citizen activists, public agencies, major donors, and institutional funders.  If you’re going to do something differently, figure out who are your allies, who are your competitors, and who is your opposition.

Get educated on the requirements of a nonprofit entity and 501(c)(3) tax-exempt public charity, whether it is actually operating or not, the duties and responsibilities of its directors and officers, and the types of activities in which the organization is allowed and not allowed to engage.  Make sure you understand financial management, and have sufficient expertise on the board (and staff, if you plan to have a staff) to properly operate the organization and effectively and efficiently further its mission.  In order to recruit a top notch board, you should consider incorporating and obtaining adequate insurance in light of the organization’s activities.

What are My Next Steps?

If you’ve done your homework and determined that you will be able to form and operate a viable nonprofit that will further its specific charitable mission more effectively and efficiently than an existing organization, here are the next steps for forming a California nonprofit public benefit corporation:

10 Essential Steps in Forming a Nonprofit

1. Determine the name of the organization.

2. Draft and file articles of incorporation with the Secretary of State.

3. Obtain a federal employer identification number.

4. Appoint the board of directors.

5. Draft bylaws and a conflict of interest policy.

6. Hold and document the first board meeting (make sure you elect officers and adopt the bylaws and conflict of interest policy).

7. File the initial registration with the California Registry of Charitable Trusts and registrations with other states’ charities authorities, as required.

8. File the Statement of Information with the Secretary of State.

9. Prepare and file Form 1023 with the IRS; receive a determination letter of exempt status under Section 501(c)(3) from the IRS.

10. Prepare and file Form 3500A with the California Franchise Tax Board (FTB); receive a determination letter of exempt status under 23701d from the FTB.

Do I Need An Attorney?

It’s not essential for every startup charity to use an attorney, but if you proceed without legal counsel experienced in this area, you should move forward with great care and diligence.  At minimum, proceed with the guidance of a trustworthy book and the assistance of persons experienced in working with other nonprofits. You may find template documents in a book or online, but you’ll still need to determine whether the provisions best fit your facts and circumstances and whether any revisions you make are in compliance with applicable laws and best practices. 

An exempt organizations attorney can help guide you through the process and help set you up with the right form of organization and governance structures.  You may also benefit from the confidence of understanding your governing documents, your legal duties and responsibilities, your filing requirements, your permissible activities, and your restrictions.  You may make further use of the attorney to set up policies to best protect the organization and its directors and officers.

How Do I Best Work With An Attorney?

If you decide to use an attorney, you first need to find the best attorney for your organization and its circumstances.  A pro bono attorney may be perfect for some organizations but not right for others, particularly if the attorney neither practices in this area nor understands it with respect to the client’s particular circumstances.  A small exempt organizations firm may be perfect for some organizations but not right for others, particularly if the client seeks counsel from one source on a variety of other matters such as employment and intellectual property law.  A full service law firm may be perfect for some organizations but not right for others, particularly if the attorneys actually working on the client’s matter do not have sufficient experience or the legal fees are outside of the client’s budget.  The appropriate attorney will also communicate with you clearly, ensure that you understand your decisions, and be responsive to your specific needs.

Once you find the appropriate attorney and determine the appropriate scope of services based on your budget and circumstances, you can best work with the attorney by observing the following tips:

10 Tips for Working With an Attorney

1. Be open and honest.

2. Share your goals and limitations (including legal budget and timelines).

3. Ask questions.

4. Fully disclose what you understand and don’t understand.

5. Share with your attorney at the start of the representation a written basic business plan including your mission, your activities, and a 3-year budget.

6. Work from your attorney’s draft articles of incorporation and bylaws (it will generally be more cost effective) and inform your attorney at the start of the representation of any unique governance provisions you desire.

7. Be open to recommended changes to your plans and desired governance structures based on legal compliance, best practices, and your attorney’s judgment.

8. If the attorney does not give you a checklist of items to complete with respect to the exemption application, take a first shot at completing IRS Form 1023 (at least the check-the-box items you know you can answer) and give it to the attorney for review.

9. After receiving a draft document from the attorney, have the board (or authorized committee) go over the document and send all the questions and comments to a point person who can consolidate and forward them to the attorney.

10. Have the attorney speak to the board about the duties and responsibilities of the directors (increasing the participation and productivity of board members may be the best part of your legal investment).

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