How Much Does It Cost to Start a Nonprofit Organization?
Planning for initial startup expenses pays off
Nonprofit organizations are an excellent way for individuals or groups to make a difference in their communities and use their passion to help others. While deciding on a mission statement might be relatively easy, navigating the financial side of starting a nonprofit organization can be difficult for founders.
While some nonprofits have deep pockets because they are established by for-profit businesses (the Ronald McDonald Houses are an example), the vast majority of nonprofits set up each year originate with one inspired person or a small group of people.
Sometimes, it comes as a surprise to these people or groups just what is involved in setting up a nonprofit and the costs involved. However, being prepared for the initial costs of starting a nonprofit will help ensure success down the line.
The IRS recognizes many categories of nonprofit organizations. The most well-known is the 501(c)(3), also known as a charitable nonprofit. However, your homeowner's association is a type of nonprofit, and the regional sports league near you may be one, too. They all face similar startup costs, and the steps to becoming a fully recognized nonprofit are nearly identical. For now, we’ll look at what it costs to start a charitable nonprofit, or 501(c)(3).
Nonprofit Startup Costs
As with any business, financial planning is a priority when starting a nonprofit organization. It's also essential to understand how much it costs to start a nonprofit organization before starting. Pre-planning allows you to find funding, recruit more donors, or save up until you can sufficiently support the startup costs.
While somewhat affordable, initial fees and startup costs for nonprofits may still be overwhelming for unprepared groups. Get organized early to help reduce any stress.
When planning to launch a nonprofit, consider expenses such as:
- Incorporation fees
- 501(c)(3) fees
- Office space
- Website and branding
Depending on your nonprofit’s sector, you may also need to consider outreach or program expenses and the cost of supplies. All of these expenses can add up, so considering everything you need to invest in can help you find the most cost-efficient option in some cases. However, incorporation and 501(c)(3) status fees are relatively standard and are often the first expenses your nonprofit will face.
Incorporation fees are often one of the first costs associated with starting a nonprofit organization. Incorporation may not be necessary for very small or temporary nonprofit groups (also known as unincorporated associations), but it can be highly advantageous for larger ones. Think about the pros and cons of incorporation before deciding not to seek it.
Groups wanting to start a nonprofit organization must register with their state to operate as a corporation and seek tax-exempt status within their state. Nonprofit organizations must file their articles of incorporation with the state secretary of state to become a corporation.
The fee for filing an organization’s articles of incorporation usually ranges between $30 and $125, though some may be even cheaper. This cost depends on the state where the nonprofit will operate. For example, as of December 2019, Pennsylvania’s incorporation fee for a nonprofit was $125, while Kentucky’s fee was only $8.
All states have additional fees besides those for incorporation that could add to the cost of starting a nonprofit organization. These fees may include a business license fee and a fee for charitable solicitation. Check your state’s website so that you know all the fees you’ll incur.
The Cost of 501(c)(3) Status
Charitable nonprofit organizations can apply for 501(c)(3) status with the IRS once their articles of incorporation are accepted by the state. Organizations have approximately 27 months to file an IRS Form 1023 after acceptance. Form 1023 is necessary for gaining 501(c)(3) status, which grants exemption from federal income taxes. As of December 2019, the standard filing fee for Form 1023 was $600. Nonprofit organizations that do not expect annual revenue to exceed $50,000 may file Form 1023-EZ. As of December 2019, the fee for Form 1023-EZ was only $275.
Nonprofit organizations should also request an employer identification number (EIN) when filing for tax-exempt status. Even if the organization does not have any employees, it can be helpful to have an EIN because it may help you save money on startup costs, like materials or technology, depending on your state’s sales tax exemption laws.
Other Financial Considerations
Aside from the cost of filing the necessary paperwork, there are a few other costs to consider when starting a nonprofit. For one, you should decide if you will hire employees, use volunteers, or both. If hiring employees, it’s crucial to determine potential salaries so that you can include those costs in the starting budget.
If your nonprofit organization needs office space, you may need to account for those extra costs, as well. Such items can include rent or mortgage payments, signage, electricity, internet, and telephone services. Setting aside funds for essential office equipment, such as computers or copiers, may also be important. Sales tax exemption may be useful for purchasing these.
Make sure your purchases qualify as necessary to your organization to qualify for a tax exemption.
Determining insurance costs before starting a nonprofit organization is crucial, too. Insurance can cover both the building the nonprofit will operate in and any services that the nonprofit offers. If a nonprofit organization plans on hiring paid employees, it should determine how much it costs to provide health insurance coverage. The nature of your nonprofit work may also require additional insurance, so you’ll need to evaluate various nonprofit insurance options.
The Big Picture
Federal costs associated with a new nonprofit, such as application fees for Form 1023 and tax-exempt status, are reasonably straightforward. Other expenses involved in starting a nonprofit organization are not as easily defined.
Calculating the exact cost of starting a nonprofit organization depends on where it is based, and the size of its initial structure (for instance, how much, if any, office space and whether there are paid employees). To determine your startup costs, review the requirements for incorporation in your state, and outline all expenses you anticipate in the first year or so of operation. This creates realistic expectations and avoids nasty surprises.
Once you have a grasp on nonprofit startup costs, you can assess how much money you will need and consider sources for those funds. For instance, if you were to start a nonprofit in Kentucky, you may only need $283 to get started with incorporation and Form 1023-EZ fees. However, you may need $725 for incorporation and Form 1023 fees if you were to start a high-earning nonprofit in Pennsylvania.
Understand that startup money for a nonprofit will not likely come from public fundraising because you should wait until you’ve received your 501(c)(3) from the IRS to start a fundraising campaign. It is not mandatory to wait for your IRS exemption letter, but it is advisable because you cannot guarantee any charitable tax breaks for donations before that time.
Similarly, do not think that you may receive a grant from a foundation for startup funds. Foundations provide money usually only for already-established 501(c)(3) charities. Startup funds might come from traditional bank loans, from private “investors,” or the pockets of the founders. Another option might be obtaining a fiscal sponsor that can collect donations, help with grant applications, and more.
Although the costs of getting your small nonprofit up and running may not be huge, preplanning, and knowing what you will need and when can make a huge difference. The work your nonprofit plans to accomplish is important, so make sure you give the organization a healthy financial start.
Resources to Help You Start Your Nonprofit
Figuring out where to find information about nonprofit startup costs can be overwhelming. Here are a few quick resources to help you get started:
- Secretary of State websites and contact info
- Incorporation costs
- 501(c)(3) status with IRS
- Form 1023
- Form 1023-EZ