How do I start a non profit organization? Step-by-step

Published Saturday 28 February 2026

Table of contents

• What is a nonprofit organization?
• Types of nonprofit organizations
• Can you make money from a nonprofit?
• How does a nonprofit generate revenue?
• Should you start a nonprofit?
• How do I start a nonprofit organization?
• Manage your nonprofit finances with Xero
• FAQs on starting a nonprofit

Key takeaways

• Research existing organizations addressing your cause before starting to ensure you're filling a genuine gap rather than duplicating efforts, and validate there's real community need for your specific approach.
• File your state incorporation documents first to establish your nonprofit as a legal entity, then apply for federal 501(c)(3) tax-exempt status using Form 1023-EZ (for organizations under $50,000 annual revenue) or Form 1023 (for larger organizations).
• Set up dedicated financial systems from day one, including a separate bank account, accounting software, and organized record-keeping to meet compliance requirements and build donor trust.
• Register for additional state and local requirements after receiving federal tax-exempt status, including state tax exemptions, charitable solicitation permits, and annual filing obligations to maintain your legal standing.

What is a nonprofit organization?

A nonprofit organization is a business that, according to the IRS, must be organized and operated exclusively for exempt purposes, such as charitable, educational, or religious causes, rather than generating profit for owners or shareholders. Unlike for-profit businesses, nonprofits reinvest all revenue back into their mission.

Nonprofit status brings financial benefits that vary by location:

• Tax exemptions: Your organization's income may be exempt from federal and state taxes
• Grant eligibility: You may qualify for government and foundation funding
• Donor incentives: Contributions to your nonprofit may be tax-deductible for donors, as the IRS states that most 501(c)(3) organizations are eligible to receive tax-deductible contributions.

The definition of a nonprofit, and the taxes you need to pay, depends on your location. Check with your governmental body to find out the benefits you're entitled to and what nonprofit accounting practices you need to follow.

Types of nonprofit organizations

Nonprofits come in several forms, each with different structures and tax implications.

Charities

Charities provide direct services and support to the public. They qualify for 501(c)(3) status and include religious, educational, scientific, and humanitarian organizations. Examples include schools, hospitals, food banks, and animal shelters.

Foundations

Foundations fund other nonprofits rather than running their own programs. Private foundations are typically funded by a single source, like a family or corporation, and must distribute a minimum percentage of assets annually. Examples include the Bill & Melinda Gates Foundation and corporate foundations like the Coca-Cola Foundation.

Social advocacy

Social advocacy organizations work to influence public policy and promote social causes. These groups often organize as 501(c)(4) social welfare organizations, which allows more political activity than 501(c)(3) charities but means donations aren't tax-deductible. Examples include civil rights groups and environmental advocacy organizations.

Membership organizations

Membership organizations promote the collective interests of a specific group, such as a profession, industry, or hobby. They're funded primarily through membership dues. Examples include professional associations like the American Medical Association and trade groups. These typically organize as 501(c)(6) business leagues or 501(c)(3) educational organizations, depending on their activities.

Can you make money from a nonprofit?

Yes, nonprofits can and should generate revenue to sustain their operations and mission. Earning money helps reduce dependence on grants, donations, and government funding.

The key difference from for-profit businesses is how that money gets used. Nonprofit revenue cannot go to owners or shareholders as profit. Instead, all earnings must be reinvested into the organization through:

• Staff salaries: Paying reasonable compensation to employees; however, the IRS may impose an excise tax if the organization engages in an excess benefit transaction by paying someone with substantial influence more than their services are worth.
• Expanding programs: Funding new initiatives and services
• Operational costs: Covering rent, supplies, and day-to-day expenses

How does a nonprofit generate revenue?

Nonprofits need steady revenue to sustain their mission. Here are the main ways to fund your organization:

• Donations: Accept contributions from individuals who support your cause and corporations seeking tax benefits for charitable giving
• Grants: Apply for funding from government agencies and private foundations, though these typically require detailed reporting and financial transparency
• Fundraising events: Host activities like charity runs, auctions, or galas to raise money and build your nonprofit's visibility
• Program service fees: Charge for services you provide, such as membership dues, class fees, or adoption charges at an animal shelter
• Corporate sponsorships: Partner with businesses that provide funding or in-kind support in exchange for brand exposure and community goodwill

Each funding source has different requirements and time commitments. Most successful nonprofits combine several sources to create financial stability.

Should you start a nonprofit?

Before you start the paperwork, consider whether starting a new nonprofit is the right path for your goals. The process requires significant time, money, and ongoing commitment.

Ask yourself these questions:

• Is there a real need? Research whether existing organizations already address your cause effectively
• Do you have the time? Running a nonprofit demands consistent effort, especially in the early years
• Can you secure funding? Identify realistic revenue sources before committing
• Are you ready for compliance? Nonprofits face ongoing reporting requirements and public accountability

Consider alternatives to starting from scratch:

• Fiscal sponsorship: Partner with an established nonprofit that handles administrative tasks while you focus on programs
• Volunteering or donating: Support existing organizations doing similar work
• For-profit social enterprise: Some missions work better as businesses that donate profits or prioritize social impact

If you've confirmed a genuine need and have the resources to commit, you're ready to start your nonprofit.

How do I start a nonprofit organization?

Follow these nine steps to establish your nonprofit legally and set it up for success.

Step 1: Research and plan your nonprofit

Before filing any paperwork, validate that your nonprofit idea fills a real gap. This research phase saves time and increases your chances of success.

Start by answering these questions:

• What problem are you solving? Identify the specific social need your nonprofit will address
• Who else is working on this? Research existing organizations to avoid duplicating efforts
• What makes your approach different? Define how your nonprofit will add unique value

Once you've confirmed the need, create your foundation:

• Draft a mission statement: Write a clear, concise description of your nonprofit's purpose
• Set measurable goals: Define what success looks like in year one, three, and five
• Check permit requirements: Research any licenses or permits your activities require

Step 2: Build your foundation

With your mission defined, build the structural foundation your nonprofit needs to operate legally.

Choose a name: Select something memorable that reflects your mission. Check that it's available in your state and doesn't conflict with existing trademarks.

Form your board of directors: Most states require nonprofits to have a board. Recruit three to five people who bring diverse skills and share your commitment to the cause.

Select your legal structure: Common nonprofit structures include:

• 501(c)(3) public charity: The most common type, eligible for tax-deductible donations
• 501(c)(3) private foundation: Typically funded by a single source like a family or corporation
• 501(c)(4) social welfare organization: Focused on community benefit, with different tax rules

The right structure depends on your mission, funding sources, and activities. Consider consulting an accountant or attorney to make the best choice. Find a financial advisor with Xero's advisor directory.

Step 3: File state formation documents

State incorporation creates your nonprofit as a legal entity. This step must happen before you apply for federal tax-exempt status.

File these documents with your state's Secretary of State office:

• Articles of incorporation: A formal document stating your nonprofit's name, purpose, registered agent, and board members
• Bylaws: Internal rules governing how your organization operates, including meeting schedules, voting procedures, and officer roles
• Registered agent designation: Name a person or service to receive legal documents on your nonprofit's behalf

After filing, apply for an Employer Identification Number (EIN) from the IRS. This free nine-digit number identifies your organization for tax purposes. You can apply online at IRS.gov and receive your EIN immediately.

Step 4: Apply for federal tax-exempt status

Federal tax-exempt status under Section 501(c)(3) allows your nonprofit to avoid paying federal income tax and lets donors deduct their contributions.

To apply, you must submit the appropriate application and user fee through Pay.gov, using one of two IRS forms:

• Form 1023: The standard application for organizations expecting more than $50,000 in annual revenue. Filing fee is $600 and processing takes three to six months.
• Form 1023-EZ: A streamlined application for smaller organizations with less than $50,000 in projected annual revenue and assets under $250,000. Filing fee is $275 and processing is faster.

Both forms require your articles of incorporation, bylaws, EIN, and a description of your planned activities. The IRS reviews your application to confirm your organization qualifies for tax-exempt status.

Step 5: Create your business plan

A nonprofit business plan documents your mission, strategy, and financial projections. Funders, board members, and partners often request this document before committing support.

Include these key sections:

• Summarize your mission: Describe the community need you're addressing and your approach to solving it
• Define your programs: Explain the services, activities, or products you'll offer and the impact you expect to achieve
• Outline your marketing strategy: Detail how you'll reach your target audience and build awareness
• Describe your operations: Map your team structure, roles, and day-to-day workflows
• Project your finances: Estimate startup costs, ongoing expenses, revenue sources, and cash flow for the first one to three years

Get started with a free business plan template from Xero.

Step 6: Set up your finances and bookkeeping

Strong financial management builds trust with donors, meets compliance requirements, and keeps your nonprofit sustainable. Set up your systems before you start accepting funds.

Open a dedicated bank account: Keep nonprofit funds separate from personal accounts. Most banks offer free or low-cost accounts for nonprofits.

Choose accounting software: Track income, expenses, and donations from day one. Cloud-based tools like Xero let you access your finances anywhere and share reports with your board.

Create a realistic budget: Estimate monthly expenses and identify which revenue sources will cover them. Build in a cash reserve for unexpected costs or slower fundraising periods.

Establish financial controls: Require two signatures on large checks, separate duties between staff members, and review bank statements monthly.

Plan for transparency: Funders and the IRS require financial reporting. Keep organized records of all income, expenses, and donations so you're ready for audits or grant applications.

Step 7: Register for state and local requirements

After forming your nonprofit and receiving tax-exempt status, you may need additional registrations to operate legally and fundraise.

State tax exemption: Federal 501(c)(3) status doesn't automatically exempt you from state taxes. Apply separately with your state's revenue department for income tax, sales tax, and property tax exemptions.

Charitable solicitation registration: Most states require nonprofits to register before asking for donations. Requirements vary by state, and some exempt small organizations. Check your state attorney general's website for specific rules.

Employment registrations: If you hire employees, register with your state's labor department for unemployment insurance and workers' compensation.

Annual filings: Keep your nonprofit in good standing with:

• IRS Form 990: Annual information return required for most tax-exempt organizations; according to the IRS, if you fail to file for three consecutive years, your organization automatically loses its tax-exempt status.
• State annual report: Many states require yearly filings with the Secretary of State
• Charitable registration renewals: Update your fundraising registration annually in states that require it

Missing these requirements can result in penalties, or you could lose your tax-exempt status. Set calendar reminders to stay on track.

Step 8: Build your nonprofit's presence

A strong public presence helps you attract donors, volunteers, and community support. Start building awareness as soon as your nonprofit is official.

Create a website: Your site should clearly communicate your mission, programs, and how people can get involved. Include a donation button, contact information, and stories that show your impact.

Establish social media: Choose platforms where your target audience spends time. Share updates, success stories, and calls to action regularly.

Network in your community: Attend local events, join nonprofit coalitions, and connect with other organizations. In-person relationships often lead to partnerships, referrals, and funding opportunities.

Develop a marketing strategy: Research your target audience to understand what motivates them. Then create a clear, consistent message for your website, social media, and other communications to build recognition and trust. Learn more about how to do market research for your nonprofit.

Step 9: Manage and grow your nonprofit

Launching your nonprofit is just the start. Ongoing management keeps your organization effective and sustainable.

Build your team strategically:

• Recruit staff and volunteers who share your mission and bring complementary skills
• Define clear roles and responsibilities for every position
• Offer competitive compensation within your budget to attract and retain talent

Strengthen governance:

• Hold regular board meetings to review finances, programs, and strategy
• Conduct annual performance reviews for staff and the executive director
• Update bylaws and policies as your organization evolves

Measure your impact:

• Track outcomes that show whether your programs are working
• Collect feedback from the people you serve
• Share results with donors and stakeholders to build trust

Plan for growth:

• Review your strategic plan annually and adjust based on results
• Identify new funding sources before current grants expire
• Invest in staff development to strengthen your organization

Manage your nonprofit finances with Xero

Starting a nonprofit takes dedication, but managing its finances doesn't have to be complicated. The right tools help you stay organized, meet compliance requirements, and focus on your mission.

Xero's accounting software for nonprofits helps you:

• Track donations and expenses: See where your money comes from and goes in real time
• Simplify reporting: Generate financial statements for your board, funders, and the IRS
• Manage payroll: Pay staff and contractors accurately and on time
• Stay organized: Keep receipts, invoices, and records in one secure place

Get one month free to see how Xero can support your nonprofit's financial management.

FAQs on starting a nonprofit

Here are answers to common questions about launching a nonprofit organization.

Can I start a nonprofit by myself?

Yes, you can start a nonprofit alone, though most states require a board of directors with at least three members. You'll handle the paperwork yourself, but you'll need to recruit board members before incorporating.

Do I get paid if I start a nonprofit?

Nonprofit founders can receive reasonable compensation for work they perform. The IRS allows salaries for staff, including founders, as long as pay is comparable to similar roles at other organizations.

How much does it cost to start a nonprofit?

Expect to spend $500–$1,500 in filing fees, including state incorporation ($50–$250), IRS Form 1023 or 1023-EZ ($275–$600), and any required state registrations. Legal and accounting help adds to costs but isn't required.

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

IRS processing typically takes three to six months for Form 1023 and one to three months for Form 1023-EZ. State incorporation usually takes one to four weeks before you can submit your federal application.

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

Form 1023-EZ is a simplified application for smaller nonprofits with projected annual revenue under $50,000 and assets under $250,000. It costs $275 and processes faster. Form 1023 is the full application required for larger organizations, costs $600, and requires more detailed documentation.