Is a Not for Profit the Way to Go?

Is a Not for Profit the Way to Go?
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Last updated: July 2013

What are the main differences between a not for profit organization and a for profit business?
What are the legal steps to starting a not for profit organization versus a for profit company?
What are some wrong reasons to start a not for profit organization?
Should I start a not for profit organization?
What documents do I need to prepare for the IRS as a not for profit organization?
How can I develop a clear description of our operations, or a business plan?
I want to establish a not for profit organization, where do I go from here?

What are the main differences between a not for profit organization and a for profit business?

Not for Profit For Profit
Created for educational, charitable, religious, literary or scientific purposes Created to make a profit; to be independent; to be your own boss
Must be a corporation or a trust May be a sole proprietorship, a partnership or a corporation
Operated and organized for an exempt purpose, as identified by the Internal Revenue Service (IRS) Operated to make a profit
No one owns it, not even the founder. Run by its Board of Directors Owned by the individuals who start it. The owners control the business
The Board of Directors hires the employees.  Directors should not be the employees The owners hire the employees and may be the employees
All income is used to support programs Increases in income are returned to the owners or shareholders as dividends
Assets, cash, equipment or other property do not belong to the founder, directors or staff The owners own the assets
It is accountable to the public and the Attorney General.  It must file annual reports with federal and state authorities and those reports may be seen by anyone Privacy of proprietary information
Sources of revenue: donations, grants, earned revenue for services and products related to its exempt purpose, and borrowed funds Sources of revenue: purchase of shares by investors, earned revenue from sales, services, borrowed funds
Does not pay taxes on its net related income Pays taxes on its net income

What are the legal steps to starting a not for profit organization versus a for profit company?

A Not for Profit A For Profit
Incorporate as a not for profit, with at least three directors, preferably who are not related to each other Choose business form and draft necessary documentation
Obtain Federal Employer Identification Number Obtain Federal Employer Identification Number
Draft and adopt bylaws Adopt bylaws if entity choice requires
Get business license Get business license
Register with the Illinois Attorney General Charitable Trust Bureau Get State business tax identification number
Submit application to the IRS for recognition of income tax exemption Begin your business operations
Obtain recognition of income tax exemption - 6-12 month time period.  Begin your business operations            

What are some wrong reasons to start a not for profit organization?

If any of these are your reasons, you may want to think about starting a for profit business:

  • To have a paying job;
  • To deal with your own problems rather than a true public interest;
  • To do a short term project like paint a mural on a building;
  • To solve a short term problem;
  • To hold a block party;
  • To give aid and support to a needy individual or family;
  • To do things your way and not deal with having a boss; or
  • To get large sums of money that you think funders are waiting to give you.   

Should I start a not for profit organization? Is it necessary?

Starting a non-profit is a great deal of work. If another organization already deals with the issue, seriously think about working with that organization. Funding is hard to find and it may be better to work with an existing organization becoming a project or a program, instead of starting a new organization and competing for funding. Also, by starting programs under an existing organization, you can avoid some of the management or administrative duties. If you choose to start a new organization, make sure you can set your organization apart from the other organizations that are already running.

What documents do I need to prepare for the IRS as a not for profit organization?

Having 501(c)(3) status means that the organization will not have to pay federal income tax. To apply for 501(c)(3) status, the organization must be organized and operated for an exempt purpose. A list of exempt purposes can be found in the Internal Revenue Code. For more information about what constitutes an "exempt purpose," click here. The IRS looks at the organization's legal documents (it's Articles of Incorporation and bylaws) and how it is operated to see if it is organized for an exempt purpose. The group should have a short and clear report of how the organization works and a business plan made before filling out any legal documents. Once project ideas and a business plan are fully developed, the group can address the legal issues.

How can I develop a clear description of our operations, or a business plan?

You need to think about what the organization will be doing, how it will function and be able to explain it. Think about the following questions and keep in mind that your passion about the issue is not enough. The organization must be able to explain why its programs are needed.

Find data to support the organization's position. Research the issues and define what the organization will do. Read and learn everything you can about the issue you want to address. Learn what others have tried and learn what works and what doesn't. Talk to people who know about the subject; get other people's opinions. Learn how a not for profit operates.

The information you gather should answer the following:

  • Is there a need, cause, issue or problem the organization will address? If so, how will the program(s) work to fix the problem? 
  • What is the organization's goal? How will it meet its goal? What steps will be taken to meet the goal?
  • What money will the organization need to get started? 
  • How much money will the organization need to stay in business?  
  • Will the organization charge for its services? If so, how much? 
  • How is the organization getting money?
  • Who will help? Are there other people who will volunteer and commit their time to see the organization do well? There must be at least three people on the board of directors. Do not choose people to be on the board if they are not willing to work hard and commit their time to the organization. 
  • Do you and the people on your board have the skills to start and run a not for profit or do you have access to people who will work with the organization who have fundraising experience? Accounting experience? Administrative experience? Specific program expertise? Remember: the people on the board should not be the same people who work day-to-day for the organization. The people who want to help need to understand what their involvement will be: employees or directors on the board.

I want to establish a not for profit organization, where do I go from here?

When you are able to answer each of these questions and have decided that starting a not for profit organization is the right choice, you need to make a business plan. The business plan needs to address the operations of the organization and include a budget for the first two years of the organization. Your business plan should also include what products, programs, or services your organization will offer and what community your organization will reach. When the organization has a well thought-out business plan, it is ready to go forward with the legal process of establishing a not for profit corporation and applying for income tax exemption from the IRS. For more information about this, see the "Related Articles."

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