The desire to start a charity is a beautiful aspiration that’s almost always driven by the greatest intentions. But truthfully, starting a charity is a real pain in the butt! You’ll deal with a lot of paperwork and face a long waiting game for government approval. Not to mention money at new charities is usually tighter than your belt after Thanksgiving dinner.
But that doesn’t mean you should give up on the dream. Those hurdles are nothing when you’ve got the passion and drive to make your dream happen. You just need to prepare yourself for a lot of hard work and patience. Let’s dive in and get real about what it takes to start a charity so you know exactly where to start.
How to Start a Charity in 4 Steps
Starting a charity might be a long and tedious process, but it doesn’t have to be a complicated one. You can get started right away with these four steps:
1. Do Your Homework
The first step to starting a charity is to do your homework! You can have all the passion in the world for your cause, but until you’ve learned a few things about the nonprofit world, you won’t get very far. Start by learning all the government terms, forms and tax statuses. If you’re starting a charity, you’re probably going to need to become familiar with 501(c)(3).
What Is a 501(c)(3)?
A 501(c)(3) is a type of nonprofit that’s been approved by the IRS as a tax-exempt, charitable organization.1 It gets its catchy (not really) name from Section 501(c)(3) of the U.S. Internal Revenue Code. There are 28 other types of 501(c) organizations, but most public charities, private foundations or private operating foundations fall under the 501(c)(3) category.2
To be approved as a 501(c)(3), the nonprofit must exist for one or more exclusively charitable purposes:3
- Testing for public safety
- Developing national or international amateur sports competitions
- Prevention of cruelty to animals or children
The charity must also receive most of its income from sponsors, individual donors, foundations or the government.4
Part two of doing your homework is to make sure your organization is actually needed. For example, if you’re passionate about opening a shelter to help homeless people, find out how many homeless shelters currently operate in your area. Call them. Find out how full they are. If they’re not at capacity, your community probably doesn’t need another shelter. You might find a better way to serve by teaming up with an existing nonprofit that shares your mission instead of creating your own. Just like businesses have franchises, nonprofits have affiliates.
If you’ve done all your homework and believe that starting your charity is the right thing to do, your next step is to start planning.
2. Outline a Business Plan
Yes, a charity is still a business, and if you’re going to be successful, you need a business plan!
Because a charity is a nonprofit business, your business plan needs to include how you’ll make enough money to get started. How will you approach donors? Don’t assume your community will rally around you just because you have great intentions. And nonprofit doesn’t mean no profit. Yes, the name is a little confusing, but the term nonprofit is simply a tax status. If you’re planning to run a nonprofit with no profit, you’re planning to be out of business!
Your business plan also needs to include a proposed name for your charity and a mission statement that will need to be approved by the state.
3. Apply, Apply, Apply
Once you’ve got your business plan all laid out, it’s time to start the real paperwork. Our advice: Get an attorney you trust! If money is tight, maybe someone from your church or pick-up basketball league will donate a little time to help you with this stage. It’s a lot of paperwork, so you’ll need expert help to get everything filled out correctly and turned in.
Apply to Establish Your Organization With the State
Before you get to Uncle Sam, you have to apply at the state level. First, decide if your organization will be a corporation, an unincorporated association or a trust.5 No matter which you choose, your next step is to find and fill out a slew of forms and applications to get your nonprofit started in your state.6 The processing time here changes by state, but it can typically be between four to five days for printed/mailed files and around one to two business days if you file online.
Apply for a Federal Employer Identification Number (EIN)
Once your organization is formed (at least in the eyes of the law), you can apply for an Employer Identification Number (EIN). The EIN is basically an IRS payroll number, and you can’t apply for tax-exempt status until you get it.7
Every business goes through five distinct stages. Find out which stage your business is in with our free assessment.
The IRS has a checklist of steps you need to complete before you apply to become a 501(c)(3). If you do things out of order, your application will be rejected and you’ll want to smack yourself for all the time and money you wasted on application fees.
Apply for 501(c)(3) Status
Once you’ve jumped through all those hoops, it’s finally time to apply for tax-exempt status for your charity. There are two application options here: Form 1023-EZ or Form 1023.8 The 1023-EZ is named that because it is easy—at least compared to its counterpart. The 1023-EZ is a streamlined version of the tax-exempt application. The IRS estimates Form 1023 will take you well over 100 hours to fill out.9 So, if you qualify to take the EZ way out, do it. You can start the application process here.
Once you turn in the paperwork for the 501(c)(3), it’s time to test your patience! It typically takes six to eight weeks to get approved. But that doesn’t mean you’ll be sitting around twiddling your thumbs—you’ve got work to do!
4. Raise Some Money
You can start taking donations as soon as your charity is established and you get your tax ID number. The only question at this point is if the donations will be tax-deductible for the people who donate to your charity. If the 501(c)(3) isn’t approved, the donations won’t be tax-deductible. And depending on when you start the application process, you might get it approved in the same calendar year—but you might not.
That means anyone who donates this year probably won’t be able to deduct their donation. You might find some people who believe in what you’re doing so much that they’ll fund some of it initially without the benefit of the tax deduction. Just make sure they know that before they give you any money.
If you’re planning a fundraising event, pick a date for the following year since you should have your 501(c)(3) approved by then. But it’s never too early to start planning. You’ll need to think about how you’ll get the word out (social media, website, media), what other organizations you may want to partner with, and when to start connecting with foundations or businesses that make charitable donations. As funny as it sounds, you always need money to make money—even in the nonprofit world.
Keep in mind, these are four basic steps to start a charity. You’ve got a lot of work to do if you want to be a successful nonprofit leader and make a real difference in your community. It takes hustle, heart and—we’ll say it again—a good freakin’ plan!
If you need help getting started on your plan, check out EntreLeadership Elite. You can get one-on-one executive coaching, join an advisory group with like-minded business owners, or work through a self-guided training program to deep dive into what it takes to run a successful nonprofit. Get started today, start changing the future tomorrow.