How to start a nonprofit organization

Published Tuesday 12 May 2026

Table of contents

• What is a nonprofit organization?
• Nonprofit vs. for-profit: key differences
• Types of nonprofit organizations
• Can you make money from a nonprofit?
• How does a nonprofit generate revenue?
• Should you start a nonprofit?
• How to start a nonprofit organization
• How much does it cost to start a nonprofit?
• Manage your nonprofit finances with Xero
• FAQs on starting a nonprofit

Key takeaways

• A nonprofit organization operates under IRS 501(c)(3) status, which grants tax exemptions, eligibility for grants, and the ability to offer donors tax-deductible contributions. You'll need to file both state and federal paperwork to earn this designation.
• Starting a nonprofit typically costs between $500 and $1,500 or more, covering state incorporation fees, the IRS application, and initial registrations. Planning your budget upfront helps you avoid surprises.
• The process involves nine core steps, from researching your mission and building a board of directors to applying for tax-exempt status and setting up your financial systems. Each step builds on the last, so following them in order keeps things on track.
• Strong financial management matters from day one. Setting up dedicated bank accounts, tracking donations, and maintaining clean books helps you stay compliant and build trust with donors and grantmakers.

What is a nonprofit organization?

A nonprofit organization is a type of business that operates for a charitable, educational, religious, or scientific purpose rather than to generate profit for owners or shareholders. Instead of distributing earnings, nonprofits reinvest all revenue back into their mission.

Most nonprofits in the United States seek tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This designation means the organization doesn't pay federal income tax on money related to its mission. It also makes your nonprofit eligible for government and private grants, and allows donors to claim tax deductions on their contributions.

Before you start, check the specific requirements in your state. Each state has its own rules for incorporating and registering a nonprofit. You'll also want to understand nonprofit accounting practices early on, since accurate financial records are essential for maintaining your tax-exempt status.

Nonprofit vs. for-profit: key differences

Understanding how nonprofits differ from for-profit businesses helps you decide which structure fits your goals. Here are the main distinctions between the two:

• Purpose: Nonprofits exist to serve a charitable, educational, or social mission. For-profit businesses exist to generate profit for their owners or shareholders.
• Profit distribution: Nonprofits must reinvest all surplus revenue into programs and operations. For-profit businesses can distribute profits to owners, shareholders, or investors.
• Tax status: Nonprofits with 501(c)(3) status are exempt from federal income tax. For-profit businesses pay income tax on their earnings.
• Governance: Nonprofits are governed by a board of directors with a fiduciary duty to the mission. For-profit businesses answer to owners or shareholders focused on financial returns.
• Funding sources: Nonprofits rely on donations, grants, and fundraising. For-profit businesses generate revenue primarily through sales of goods or services.
• Ownership: No individual owns a nonprofit. For-profit businesses have defined owners or shareholders who hold equity.

Types of nonprofit organizations

Nonprofits come in many forms, each serving a different kind of mission. Here are four of the most common types you'll encounter.

Charitable organizations

Charitable organizations are the most recognized type of nonprofit. They provide direct services to communities, such as food banks, homeless shelters, disaster relief agencies, and health clinics. Most public charities depend on donations from the general public and grants from foundations or government programs.

To qualify as a public charity, an organization typically needs to demonstrate broad public support rather than relying on a single funding source. The IRS applies a public support test to verify this. Public charities make up the vast majority of 501(c)(3) organizations in the United States.

Private foundations

Private foundations typically receive their funding from a single source, such as a family, individual, or corporation. Rather than running programs directly, most foundations distribute grants to other nonprofits. The Bill & Melinda Gates Foundation and the Ford Foundation are well-known examples.

Social advocacy organizations

Social advocacy nonprofits work to influence public policy, raise awareness, or drive social change. They focus on issues like environmental protection, civil rights, education reform, or public health. While they can engage in some lobbying, there are limits on how much lobbying a 501(c)(3) organization can do.

If political activity is central to your mission, you may want to explore organizing under a different section of the tax code, such as 501(c)(4), which allows more flexibility for advocacy and lobbying activities.

Membership organizations

Membership organizations serve a defined group of members who share a common interest or profession. Examples include trade associations, professional societies, alumni groups, and chambers of commerce. Revenue often comes from membership dues, conferences, certifications, and educational programs offered to members.

Some membership organizations qualify under 501(c)(6) rather than 501(c)(3), similar to how a limited liability company offers different tax flexibility, depending on their purpose. Business leagues and professional associations typically fall under this category. The tax treatment and eligibility rules differ, so check which classification fits your organization before filing.

Can you make money from a nonprofit?

Yes, a nonprofit can generate revenue, and staff members can earn salaries. The key difference is how that money gets used. All income must go back into the organization's mission, programs, and operations. No individual can pocket the profits.

Founders, executive directors, and other staff can receive reasonable compensation for their work. "Reasonable" means the salary is comparable to what similar roles pay at other organizations of the same size and type. The IRS monitors this closely.

If the IRS determines that a nonprofit is paying excessive compensation or directing funds to insiders for personal benefit, it can impose penalties called excess benefit transactions. In serious cases, the organization could lose its tax-exempt status entirely. Keeping compensation transparent and well-documented protects both you and the organization.

Many nonprofits conduct a compensation study or review comparable salary data before setting pay levels. Your board should formally approve all executive compensation and document the process in meeting minutes. This creates a clear record that demonstrates compliance if the IRS ever audits your organization.

How does a nonprofit generate revenue?

Nonprofits use several revenue streams to fund their work. Diversifying your income sources helps build a more sustainable organization. Here are the most common ways nonprofits bring in money:

• Individual donations: Contributions from individuals make up the largest share of nonprofit funding in the United States. These range from small one-time gifts to major recurring pledges.
• Grants: Government agencies, private foundations, and corporations award grants for specific projects or general operating support. Grant applications typically require detailed proposals and reporting.
• Fundraising events: Galas, auctions, runs, and community events generate both revenue and public awareness. They also help build relationships with supporters.
• Program service fees: Many nonprofits charge fees for the services they provide. A nonprofit hospital bills patients, a nonprofit school charges tuition, and a nonprofit museum sells admission tickets.
• Corporate sponsorships: Businesses sponsor nonprofit programs or events in exchange for visibility and community goodwill. These partnerships can include financial support, in-kind donations, or employee volunteer programs.
• Merchandise and product sales: Some nonprofits sell branded products, publications, or other goods. Revenue from unrelated business activities may be subject to unrelated business income tax.

Should you start a nonprofit?

Starting a nonprofit is a meaningful commitment that goes beyond passion for a cause. Before you incorporate, ask yourself a few honest questions to see if this is the right path.

Consider whether your mission is distinct enough from existing organizations. If a nonprofit already serves the same community with the same approach, partnering with them might create a bigger impact than starting from scratch. Research what's already out there before filing any paperwork. Tools like GuideStar and your state's nonprofit registry can help you find organizations with missions similar to yours.

Think about your capacity to fundraise, recruit board members, and handle administrative responsibilities. Running a nonprofit requires consistent effort in areas like financial reporting, compliance, and donor relations, on top of the actual mission work.

If you're not ready to launch a full organization, you have alternatives worth exploring:

• Fiscal sponsorship: An established nonprofit acts as your legal and financial sponsor, letting you accept tax-deductible donations without forming your own 501(c)(3)
• Volunteering or consulting: You can contribute your skills and time to an existing organization that aligns with your mission
• For-profit social enterprise: A business structured to generate profit while pursuing a social mission, giving you more flexibility in how you use revenue

How to start a nonprofit organization

Once you've decided a nonprofit is the right structure for your mission, follow these nine steps to get your organization up and running.

Step 1: Research and plan your nonprofit

Start by defining the problem you want to solve and the community you plan to serve. Research existing nonprofits in your area to identify gaps and opportunities. Look at what's working, what's missing, and where your organization can make the strongest impact.

Study the legal requirements in your state for forming a nonprofit. Each state has different rules around incorporation, governance, and ongoing compliance. This early research saves time and prevents costly missteps later.

Talk to people in the community you plan to serve. Their input helps you shape programs that address real needs rather than assumed ones. Reach out to leaders at established nonprofits, too. Many are willing to share what they've learned about running an effective organization.

Step 2: Build your foundation

Recruit a board of directors who bring a mix of skills, connections, and commitment to your cause. Most states require at least three board members. Choose people who can contribute in areas like fundraising, legal guidance, finance, or community outreach.

Draft your organization's mission statement, vision, and values. These documents guide every decision your nonprofit makes, from program design to hiring. Keep your mission statement short, specific, and easy to understand. A strong mission statement typically answers three questions: who you serve, what you do, and why it matters.

Step 3: Create your business plan

A solid business plan maps out how your nonprofit will operate, grow, and sustain itself financially. Include your mission, target audience, programs, marketing strategy, organizational structure, and a detailed budget for at least the first year.

Your financial projections should cover expected revenue sources, operating costs, and any startup expenses. A nonprofit business plan template can help you structure this process. Funders and board members will want to see a clear plan before committing their support.

Step 4: File state formation documents

To formally create your nonprofit, file articles of incorporation with your state's secretary of state office. This document typically includes your organization's name, purpose, registered agent, and a statement that the organization won't distribute profits to individuals.

Filing fees vary by state, generally ranging from $50 to $250. Once approved, you'll receive a certificate of incorporation. You'll also need to draft bylaws, which outline how your organization will be governed, including details like board meeting frequency, officer roles, and voting procedures.

Make sure your articles of incorporation include the specific language the IRS requires for 501(c)(3) eligibility. This includes a statement of purpose and a dissolution clause directing assets to another exempt organization if yours ever closes. Missing these details can delay your federal application.

Step 5: Apply for federal tax-exempt status

After incorporating, apply for 501(c)(3) status with the IRS. You'll need an Employer Identification Number (EIN) first, which you can get for free from the IRS website. Learn more about what an EIN is and why you need one.

You have two options for applying. Form 1023 is the standard application, with a filing fee of $600. Form 1023-EZ is a streamlined version for smaller organizations with gross receipts of $50,000 or less and total assets of $250,000 or less, with a filing fee of $275. Processing times vary, but plan for three to six months for the standard application.

Step 6: Set up your finances and bookkeeping

Open a dedicated bank account in your nonprofit's name. Never mix personal and organizational funds. Set up a bookkeeping system that tracks all income, expenses, donations, and grants from the start. Creating a realistic budget early helps you plan for both startup costs and ongoing expenses. You may also want a separate savings account for reserve funds or restricted grants that can only be used for specific purposes.

Nonprofits have unique accounting requirements, including tracking restricted and unrestricted funds. You'll also need to file Form 990 with the IRS each year. Getting your financial systems right early makes annual reporting and audits far less stressful. Consider working with an advisor experienced in nonprofit accounting to make sure your setup meets compliance standards.

Step 7: Register for state and local requirements

Most states require nonprofits to register before soliciting donations. This is typically called charitable solicitation registration and may need to be renewed annually. Some states also require registration in every state where you plan to fundraise.

Check whether your nonprofit needs any state or local licenses, permits, or tax exemptions beyond your federal status. Many states offer separate state-level tax-exempt status, but you usually need to apply for it separately. The process for registering a business varies by state, so verify the specific steps in yours.

Step 8: Build your nonprofit's presence

Create a website that clearly communicates your mission, programs, and how people can get involved. Include a straightforward way for visitors to donate online. A professional online presence builds credibility with donors, volunteers, and grantmakers.

Set up social media accounts on the platforms where your audience spends time. Develop a simple communications plan that covers how often you'll post, what you'll share, and how you'll tell your organization's story. Conducting market research helps you understand where your audience spends time and what motivates them to give. Consistent, authentic communication helps build a loyal community around your cause.

Consider creating an email newsletter to keep supporters updated on your progress. Share stories about the people your programs serve, milestones you've reached, and upcoming events. Transparency about how you use donations builds long-term trust and encourages repeat giving.

Step 9: Manage and grow your nonprofit

With your nonprofit officially launched, focus on sustainable growth. Build relationships with donors through regular updates and transparent reporting on how their contributions create impact. Retention matters more than acquisition when it comes to long-term funding stability.

Review your programs and financials regularly. Track what's working, adjust what isn't, and look for new opportunities to expand your reach. Invest in your board and staff through training and development. Strong internal leadership drives stronger outcomes for the communities you serve.

Set up a regular schedule for board meetings, financial reviews, and strategic planning sessions. File your Form 990 on time every year to maintain your tax-exempt status. As your nonprofit grows, consider hiring staff, applying for larger grants, and forming partnerships with other organizations that share your mission.

How much does it cost to start a nonprofit?

The total cost of starting a nonprofit depends on your state, the size of your organization, and whether you hire professional help. Here's a breakdown of the most common expenses.

• State incorporation filing fee: $50–$250, depending on the state
• IRS tax-exempt application: $275 for Form 1023-EZ or $600 for the standard Form 1023
• Charitable solicitation registration: $0–$300 per state, with some states charging nothing and others requiring an annual fee
• Registered agent service: $100–$300 per year if you use a professional service instead of a board member
• Legal and accounting assistance: $500–$2,000 or more if you hire professionals to help with incorporation or IRS filings

In total, expect to spend at least $500 to $1,500 to get a basic nonprofit up and running. If you hire a lawyer to handle incorporation and the IRS application, costs can reach $3,000 or more. You can keep costs low by handling much of the paperwork yourself and using free resources from the IRS and your state's nonprofit association.

Budget for ongoing costs as well. Annual expenses can include state registration renewals, accounting software, insurance, and your annual Form 990 filing. Building these recurring costs into your first-year budget ensures there are no financial surprises after launch.

Manage your nonprofit finances with Xero

Running a nonprofit means tracking donations, managing grants, filing annual returns, and keeping your books audit-ready. Xero gives you a clear view of your nonprofit's finances in one place, so you can spend less time on bookkeeping and more time on your mission. Get one month free.

FAQs on starting a nonprofit

Here are answers to frequently asked questions about starting a nonprofit.

Can I start a nonprofit by myself?

You can initiate the process on your own, but most states require a board of directors with at least three members. You'll need to recruit board members before you can file your articles of incorporation and apply for tax-exempt status.

Do I get paid if I start a nonprofit?

Yes, nonprofit founders and employees can receive salaries. Your compensation must be reasonable and comparable to similar roles at organizations of the same size. The board of directors typically sets and approves executive compensation.

How long does it take to get 501(c)(3) status?

The IRS generally processes Form 1023-EZ applications within one to three months. The standard Form 1023 can take three to six months or longer, depending on the complexity of your application and the IRS backlog at the time you file.

What's the difference between Form 1023 and Form 1023-EZ?

Form 1023-EZ is a simplified, online-only version for smaller nonprofits with annual gross receipts of $50,000 or less and assets of $250,000 or less. It costs $275 and processes faster. The standard Form 1023 is more detailed, costs $600, and is required for larger organizations or those with complex structures.

Do I need a lawyer to start a nonprofit?

A lawyer isn't legally required, and many founders handle the process themselves using IRS guides and state resources. However, consulting a lawyer can help if your organization has a complex structure, operates across multiple states, or if you want to make sure your governing documents are thorough and compliant.