WHAT IS A NONPROFIT ORGANIZATION? 

In thinking about starting a nonprofit, one must pause and ask themself the question-"what is a nonprofit organization"? Depending on who you ask, we're known by a variety of names. Sometimes we are referred to as "charities" or "community-based organizations." Some people refer to us by our disciplines, such as "environmental groups" or "human service organizations" or "the arts." Our sector is also called "the philanthropic sector." The best way to define a nonprofit is to think of it in terms of its mission. What makes a nonprofit different from a business is that a nonprofit's successful bottom line is defined as achieving its mission, not profit. When land is preserved, a homeless child sleeps in a safe place, or an isolated senior is visited by a home care nurse, a nonprofit has succeeded. And while a nonprofit can actually earn excess revenue, any such revenue must be used to fuel the mission and sustain the work of the organization.

All Arkansas nonprofits must register with the state and all but the smallest are required to register with the IRS, which breaks nonprofits into 25 different categories. These categories include human services, hospitals, education, arts, environment and civic engagement. Also under the nonprofit umbrella are entities such as testamentary trusts, fraternal groups, recreational leagues, trade associations and foundations. Nonprofits are governed by boards of directors, traditionally made up of volunteers who care deeply about the mission. 

 For more information on the Steps to Starting a Nonprofit, please review the information below. 

 Steps to Starting a Nonprofit 2008 (64.57 kB)

Visionary stage

Step 1: Determine if you really need to start a nonprofit.

Is starting a new nonprofit organization really the best way to accomplish the goals you have set forth? Other alternatives, including collaborating with an existing nonprofit organization, establishing an informal club or association (a viable option for groups with annual budgets under $25,000), finding a fiscal sponsor, or forming a for-profit business, may achieve your objectives quicker, more efficiently, and for the best benefit of your target audience.


Step 2: Decide on the purpose and mission.

The purpose of a charitable nonprofit must be for the public benefit and charitable purposes by the tax code (501 (c) (3).  It should establish a single mission and a set of goals and programs that will accomplish that mission.

This is a step where a new nonprofit should analyze what it wants to do, whom it wants to reach, and how it wants to impact society. A mission statement should be brief, timeless, and descriptive of what the organization is trying to accomplish. This statement will guide the organization through its initial formation, program development, growth and change.


Step 3: Recruit board members.

The initial board of directors will assume much of the responsibility in starting a new nonprofit. They will determine the direction and goals of the organization and set forth precedents for future board members. The first board writes the articles of incorporation and approves the original bylaws, does much of the initial fundraising and hires staff as the organization takes shape and becomes an entity in and of itself. This initial all-volunteer period can prove to be very challenging for new organizations.


Step 4: Check for availability and reserve a name.

Not only is it Arkansas law, it is crucial to your new organization's identity to obtain a unique name under which to operate. Any potential names for a new business or nonprofit can be checked through the Arkansas Secretary of State's Office for duplications.  You may call the Secretary of State’s Business and Corporate Services at (501) 682-3409 or access it directly at http://www.sos.arkansas.gov.

Organizations should reserve a unique name through the Arkansas Secretary of State’s Office. Once a name is reserved, no other organization may use that name.  To reserve your organization's name, use the "Request for Reservation of Name Form" available from the Arkansas Secretary of State which can be found at http://www.sos.arkansas.gov . The filing fee for this form is $22.50 for online filing, or $25 for a paper filing.  Name reservations hold names for 120 days while the articles of incorporation can be filed.


Planning stage

Step 5:  Write the articles of incorporation.

The founders of the organization should write its articles of incorporation. This document formally names the entity, its location, and its purpose. This document is the legal record of how the organization is to be managed. The 1993 Arkansas Nonprofit Corporation Act lists laws that govern Arkansas nonprofit corporations. It is important to remember when drafting the original articles of incorporation that parts of the Arkansas Nonprofit Corporation Act state the default laws that nonprofits must follow, unless their articles or bylaws state otherwise.

It is necessary to write and file the articles of incorporation prior to applying for tax-exempt status from the Internal Revenue Service. The IRS requires specific language to be used describing the charitable purpose of the organization, the plan for disposition of its assets upon dissolution, and the requirements it must follow for exemption.

Arkansas code annotated section 4-33-101 Securicor


Step 6: Incorporate as a nonprofit corporation

Corporate existence begins when the articles of incorporation are filed with the Arkansas Secretary of State. A primary benefit of incorporating an organization is in the area of risk management. The members of a nonprofit corporation are not liable for its debts or liabilities. Also, directors are not personally responsible for the obligations of the corporations, and they normally are not liable to the members or to outsiders dealing with the corporation so long as their conduct meets the standard duty of care applicable to corporate boards.

Incorporating an organization also provides stability during personnel changes, eases future relationships with funders, contractors and employees, and provides the means to apply for tax-exempt status through the IRS. Once the articles are filed, the organization will receive a “Certificate of Incorporation” from the Arkansas Secretary of State’s Office. This certificate includes a charter number unique to that organization. The charter number is used only internally by the Secretary of State.

To incorporate, complete the online form at https://www.ark.org/sos/ofs/docs/index.php for a fee of $45 for online filing. You may also download the form in Adobe pdf format at: http://www.sos.arkansas.gov/corp_ucc/corp_forms/forms/NPD-1.pdf. The filing fee for forms sent by mail to the Arkansas Secretary of State’s office is $50.


Step  7: Draft the corporate bylaws.

The bylaws will serve as the rule book for the nonprofit. The Arkansas Nonprofit Corporation Act is the basis for Arkansas nonprofit law and the organization’s bylaws should follow this law. There is substantial flexibility to writing the organizational bylaws to fit the uniqueness of an organization. They are flexible and relatively easy to amend as the organization changes and grows.

Bylaws are easier to amend than the articles of incorporation and should be reviewed frequently. This document should be more detailed then the articles of incorporation and address the following organizational issues:

• Membership: if the organization will have members, who they are, how/when membership meetings will occur, what notice is required for meetings, requirements of a special meeting, quorum, and voting.
• Board of directors: number, election process, meetings, length of term, number of terms allowed, vacancies, removals, quorum, officers, and standing committees.
• Fiscal management: fiscal year, committee/officer responsibilities, reporting requirements and dues.
• Amendments: how will amendments be made and approved.

Step 8: Hold first meeting of the board.

The first official meeting should consist of the initial board members or incorporators. This gathering marks the official start to the organization.

At the first meeting of the board, the initial board members must approve the drafted bylaws and adopt its principles. The new organization will also vote on new board members and officers as it is called for in its bylaws. Once these activities are accomplished, the board should begin tackling the mission and start the process of obtaining tax-exempt status.


Step 9: Create a business plan with a budget

Creating a thoughtful business plan during these beginning stages of a new nonprofit can provide a sense of direction to the organization as it develops. A plan should include what the organization’s goals are, what programs it will operate, where it will get funding, will it conduct events, will the organization have staff, volunteers, and more. It should also include a budget plan. Where will funding come from? Will programs rely on grants, individual donations, state or federal contracts? What expenses will the organization incur?

A business plan and budget are not only useful in thinking through the structure of the organization, but they are helpful in preparing the narrative and financial sections of IRS Form 1023, Application for Recognition of Exemption.


Federal filing

Step 10: Apply for Federal ID Number (EIN).

Nonprofit organizations should have an EIN, often referred to as a Federal ID Number, even if it has no employees. The EIN acts similarly to the social security number for individuals and may be requested when opening a bank account or in other fiscal operations. Organizations must receive their EIN before filing Form 1023.  Use IRS Form SS-4 — Application for Employer Identification Number (EIN).

Organizations must be incorporated prior to applying for an EIN.  There are no filing fees.  Processing can take up to five weeks if application is through mail or fax; it's immediate through Tele-TIN telephone filing.

Arkansas organizations should mail their application to: IRS, Attn. Entity Control, Stop 6800, 2306 E Bannister Rd, Kansas City, MO 64999.  For more information, call 1-800-829-4933 from 7:30 a.m. and 5:30 p.m.


Step 11: Obtain income tax exempt status from the IRS.

Once the organization's articles of incorporation have been filed and the bylaws have been approved by the initial board of directors, the next step for a new nonprofit is applying for federal tax exemption from the Internal Revenue Service. A common myth is that all nonprofits are automatically tax- exempt.

There are several steps and filing requirements an organization needs to complete before receiving exemption. And even then, not all organizations qualify for the same exemptions. The following applies for 501(c)(3) status which is the type of tax exemption which applies to charitable organizations.

First, obtain IRS Publication 557— Tax-Exempt Status for Your Organization. This 55-page document includes no forms to file, but lays out the federal laws regulating tax-exempt organizations. It is available free and serves as a useful reference guide for filing requirements, employment issues, lobbying expenditures, and many other complex nonprofit issues governed by the tax code and regulations.

Second, get copies of IRS Form 1023 and Form 8718 — Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code. Form 1023 applies for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3). This package of forms contains both Form 1023 and Form 8718 (User Fee for Exempt Organizations Determination Letter Request). Form 8718 is used to process the fee for applying for tax-exempt status and must be included when filing Form 1023. Organizations applying for exemption under another 501(c) section should file IRS Form 1024.

The filing fee is $750 for organizations anticipating gross receipts averaging more than $10,000 during its first four years and $300 for organizations anticipating gross receipts averaging less than $10,000 during its first four years.

IRS Forms 1023 and 8718 must be submitted together.  Processing time varies, but can take six months.  Mail the forms to IRS, PO Box 192, Covington, KY 41012-1092.

The foregoing is provided as general information. It must not be construed as legal or tax advice. Each organization should consider its own legal and tax advisers to determine its own course of action.

Adapted from the Minnesota Council of Nonprofits Tools