4 Common Nonprofit Startup Mistakes

It is hard enough to start a nonprofit. Do not make these mistakes.

Five people engaged in starting a nonprofit.

If you want to solve a social problem by starting a new charitable nonprofit, you may want to stop and reconsider. That's not to say that you shouldn't, but many people assume starting a charity will be a piece of cake. But it isn't, no matter how well-intentioned one might be.

Starting a charitable (501(c)(3) nonprofit is complex, with many missteps possible at any point. Going from nothing to a sustainable and financially healthy nonprofit is tough.

First, make sure you understand what a charitable nonprofit is, For instance, there are many types of nonprofits listed by the IRS under section 501(c), but the 501(c)(3) organization (aka "public charity") is what we usually think of when we set out to solve some social problem. These are the groups that educate, heal, advocate, alleviate, or bring together people of a particular faith.

501(c)(3) organizations receive special treatment from the IRS, such as being able to provide a tax deduction to their donors and exemption from federal taxes.

Second, make sure you understand how a charitable nonprofit organization is different from a for-profit organization. For example, a business pursues a profit. Profit is its reason to exist. But charitable nonprofits pursue a social purpose first, and all income goes to that purpose. A for-profit business is owned by someone, either a person or shareholders. A charitable nonprofit belongs to no one person or group. It answers to the public and exists for the common good.

There are approximately one million public charities in the US but, just as with small businesses, many fail to thrive. Nevertheless, there is a lot of competition among nonprofits. Some charities address similar issues and may solicit donations from the same people.

Just having a passion for a cause will not be enough. Nonprofits require just as much foresight and knowledge about running an organization as any for-profit business does. It takes money to get started and marketing smarts to bring in the money to sustain the organization.

For instance, charities must incorporate at the state level before applying to the IRS for tax exemption. Doing so requires a lot of organization upfront. For example, you'll need to draft bylaws and articles of incorporation . You may need an attorney, both for incorporation and for applying to the IRS for tax-exempt status as a charity.

Here are the most common mistakes nonprofit founders make. Avoid them, and you might be off to a great start.

1. Poor Research and Planning

Lack of a business plan is one of the most common mistakes that startup nonprofits make. In their enthusiasm to do good, many founders of nonprofits forget that a nonprofit is a type of business. Businesses have business plans in hand before launching. A business plan includes an evaluation of the competitive environment, sources of funding, potential products or services to be offered and to whom, and a needs assessment.

2. Lack of Financial Knowledge

Close behind the lack of planning is an unrealistic expectation about funding for a startup nonprofit. Many founders do not anticipate what it will cost to start their nonprofit; much less have any idea of where to get the funds. Costs range from incorporation fees in your state to application fees for Form 1023 and tax-exempt status.

Any nonprofit startup needs a funding plan, must decide if it will charge a fee for its services, and should set up a proper financial records system. A nonprofit with weak funding at the beginning is unlikely to sustain itself long enough to get a vigorous fundraising program going.

3. Thinking It's Easier to Start a Nonprofit Than It Is

It is harder to start a nonprofit than most people think. The process of incorporating at the state level and then applying for exempt status with the IRS entails numerous steps. Passion is not enough. Hard-nosed realism about what is involved and the time it takes to achieve success will be more critical for the long haul.

4. Not Building an Effective Board

If there is one thing that could make or break your new nonprofit, it might be not putting together an active board. Your first board members represent your "circle of influence." They should be people who have resources, influence, and lots of other contacts. Your board members should believe in your organization's mission and be willing to sell that mission to others. They should be able to open doors for you.

You might also consider hiring a non-profit consultant. No matter how talented your team is, some tasks and projects could use an outside expert. Consultants can be especially helpful for special initiatives, key fundraising campaigns, or anything that falls outside your team’s typical skill set.

Article Sources

  1. IRS. "Publication 557, Tax-Exempt Status for Your Organization," Page 47. Accessed Jan. 21, 2020.

  2. IRS. "Publication 557, Tax-Exempt Status for Your Organization," Page 20. Accessed Jan. 21, 2020.

  3. IRS. "Publication 557, Tax-Exempt Status for Your Organization," Page 22. Accessed Jan. 21, 2020.

  4. IRS. "Publication 557, Tax-Exempt Status for Your Organization," Page 21. Accessed Jan. 21, 2020.

  5. Urban Institute. "The Nonprofit Sector in Brief." Accessed Jan. 21, 2020.

  6. IRS. "Publication 557, Tax-Exempt Status for Your Organization," Page 24. Accessed Jan. 21, 2020.

  7. Harbor Compliance. "Entity Formation Fees by State." Accessed Jan. 25, 2020.

  8. IRS. "Form 1023 and 1023-EZ: Amount of User Fee." Accessed Jan. 25, 2020.

  9. IRS. "Governance and Related Topics - 501(c)(3) Organizations." Accessed Jan. 25, 2020.