How Much Does it Cost to Start a Nonprofit?
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You know what I love about nonprofits, or any business? Regular people like you and me can start one. From an idea that starts as a simple dream, you can birth something that changes countless people’s lives. Even though it’s more accessible now more than ever to start a nonprofit business, it’s still a confusing process that leave many people with lingering questions: What’s the right process to start? What should I do first, and most importantly, how much will it cost?
While I cover the startup process in detail in this post and this video, I wanted to break down the other, REAL side of starting a nonprofit: the financial cost.
So….how much does it cost to start a nonprofit?
The answer is “it’s complicated.” Generally, you need an investment of $500 at a bare minimum, but costs can be as high as $1,000 or more. If this has you intrigued, keep reading to find out how the decisions you make, and the state you're operating in dictates how much you will spend.
Note: In this post, I'm talking about nonprofits that seek 501c3 tax exempt status. Not all nonprofits are 501c3 nonprofit organizations.
I’m going to break down your startup costs by four different categories. Some of these costs are non-negotiable, while others I strongly suggest you consider. The four categories include:
Incorporation Costs
Filing for Tax Exempt Status
Charitable Solicitation Fees
Other Costs
Incorporation Costs
After you’ve developed your idea for your nonprofit, recruited a board and developed your mission and vision statements, you will be ready to establish your organization as a business in the state you will operate in.
In some states, your business may be called a nonprofit, nonstock corporation, or something similar. In order to become a nonprofit organization and have a quick and easy process when you file for federal tax exempt status, I do not recommend that you start as a LLC.
The names of the forms and filing fees are different across each state. Reach out to your Secretary of State’s office to learn their process for filing your incorporation papers. You can go HERE to see a listing of forms and fees for each state.
The fees range from $0 in one state to up to $250 in another state. You may also be asked to pay a small fee to reserve the name of your organization. The cost may go up if you want to speed up the process and get your filings done right away.
You will never know until you do the research yourself, read your state’s guidance, or call the Secretary of State’s office to find out more. Learn your state’s nonprofit laws and equip yourself with the knowledge you need to start. Most states allow you to file your papers online, and some states provide templates you can use to file. Be sure to include the right language in your incorporation papers so you don’t run into issues when you file for tax-exempt status. I go over the language in this post HERE.
Your state may also require a business license, depending on your specific activities. For example, if you provide barbering services for clients - you will need a license to cut hair. Or maybe you want to provide counseling services- you certainly need credentials to do that. Do a thorough search and examination of your work activities and check in with the Secretary of State to ensure you’ve filed ALL the correct paperwork.
Your state’s nonprofit association will also be a good resource to find out the specific requirements for your state.
Cost: $0 - $250 (depends on the state)
Filing for Tax-exempt Status
Filing for tax-exempt status with the federal government and establishing your organization as a nonprofit are two separate processes. Not all nonprofits seek tax-exempt status, or some delay the process for whatever reason. Nonprofits that provide an educational, research or charitable service typically apply for 501c3 status. Associations or clubs, hospitals, etc., can all be nonprofits but may have a different tax-exempt status other than 501(c)(3).
To apply for 501c3 tax-exempt status, you have the option to file one of two forms - the 1023EZ or 1023 forms.
The 1023EZ form (released in 2014), was created to have a streamlined process for new or smaller nonprofits. Nonprofits that estimate that they will have no more than $50,000 in gross receipts each year for the first three years are eligible. Also, if you have no more than $200,000 in assets, were not formed in a foreign country, along with other requirements, you can be eligible for the 1023EZ form.
See the IRS’ eligibility form to determine if you qualify. The fee for the 1023EZ form is $275. You can fill out the form online at pay.gov.
The 1023 form is the OG form. I mean that in every sense of the word. It is no joke to fill out! It requires you to declare several things such as: your mission (to assess whether or not you actually should qualify as a nonprofit), your spending and projected budget, detailed listing of programs, your board of directors, conflict of interest policy, and more. The cost of the long form is $600. You can fill out the form online at pay.gov.
In addition to paying for the filing fees, you may ask a lawyer or tax professional to either file your forms or review your forms. That will certainly drive up your costs.
If you need help organizing your documents in a corporate binder and you're lazy (like me) and don’t want to format it yourself, check out my mini-kit which gives you a cover sheet, board agenda and a meeting template for your organization.
I’ll stop here and take a quick moment to answer a question I see a lot: What if you happen to make more than $50,000 after you filed the 1023EZ?
Even with the best intentions, you may have a good year and take in more money than expected. You don’t have to go back and resubmit anything. The IRS will know your made more than $50,000 when you submit your annual 990 tax form, so you may be on their radar. But as of now, there’s no specific penalty for making more than $50,000 in the first 3 years if you applied using the EZ form. If you really do plan to make more than $50,000, just make sure you do the right thing and complete the long form.
Remember that you are filling out this form in good faith that you do not expect to make over $50,000. Things happen. Just make sure you keep good records of your board meetings and your finances.
I’ll stop here for another question I’ve often received: Can I fundraise to get the money I need to start a nonprofit?
The answer is “yes, but…..” You can collect funds but you have to inform your donors that you have yet to receive your tax-exempt status. If they donate while you’re waiting to hear back on your tax-exempt status, they will be able to take the deduction once you get your status. You also need to make sure you get approval to solicit for funds in your state, which we’ll cover in the next section.
Cost: $275 or $600 for filing fees, and additional cost if you seek professional services for filing
Charitable Solicitation Fees
Most new nonprofits are surprised to hear that they have to be approved to fundraise in many states. In at least 40 states, you have to register as a charity before you can actively fundraise in that state. That fundraising may be in person, by mail or online.
Why is this important? Because states want to protect their residents from fraudulent fundraisers or scammers that are not operating in good faith.
Many states require that you register as a charity BEFORE you solicit any of their residents. Also, newsflash: some states may consider a “Donate” button on your page as active solicitation because their residents at any time can access your page.
“Most new nonprofits are surprised to hear that they have to be approved to fundraise in many states.”
If you’re hearing this for the first time, and you've re-read the previous paragraphs to make sure you read it correctly, I’ll save you the time. Yes, you read it correctly! You have to apply in multiple states if you want to actively fundraise. Before you make the decision to fundraise in any state, you should check their state solicitation laws to be prepared.
Due to the administrative burden and cost barriers to new organizations, you will have to assess at what point you want to consider registering in other states. At a minimum, register in the state where you have any physical presence and where you may have a cluster of donors. Also keep in mind that you may not be required to register if you don’t raise a large amount.
Charitable solicitation fees are typically paid every year. To help keep track of all your requirements, use my nonprofit compliance checklist and calendar.
Cost: It depends on the states you fundraise in!
Other Costs
While your startup fees include filing fees to start your nonprofit, there are other hidden costs that you may not have thought about. Just as with any other business, there are startup costs that you should include in your budget so that they won’t come as a surprise.
Insurance
You should have a general liability or umbrella insurance to cover the general activities of your nonprofit. In addition, there is Directors and Officers (D&(O) insurance that covers the board and officers of the organization. There may be other insurances you may need based on your planned activities for the year. My nonprofit startup workbook includes a worksheet to help you understand the insurances that may be necessary.
Cost: $500/yr and up
Communications & Marketing
Early on in your organization’s existence, you should prioritize communications and community outreach. That will require a variety of strategies, both online and in person. You should be prepared to cover the minimum costs of doing regular promotions for your nonprofit. Consider making room in your budget for printing brochures, one-pagers, and even branded materials like T-shirts, or pens.
Website
While we’re talking about communications, we HAVE to talk about a website, which is a must for any nonprofit organization. It speaks to the credibility of your organization. People will search for you when they learn about your organization so you should invest in a website from the very beginning.
Very early on, you should purchase a web domain so that you can reserve a web address for your organization's website. A domain is like having a space on the web for your website to reside. This is the first step before creating your website.
Depending on the web address you choose, domains can be relatively inexpensive, like less than $50 for up to 3 years. If you have a popular name, it may already be taken, or expensive to purchase.
Once you decide on a name for your organization, purchase the domain, using a service like Bluehost, Host Gator, or GoDaddy. Use this link HERE to get 30% off your first year at Godaddy.
Once you purchase your domain, focus on building a website, which may cost as low as $20/month if you create your own using a service like Wordpress, Wix, or Squarespace, or thousands of dollars if you engage a website designer.
Graphic Designer
You may consider investing in someone to design a logo and other materials for the public. If you’re a DIYer like me, design your materials yourself. Canva is an awesome free tool you can use for simple designs for logos, posters, business cards, and more.
One of the most important things in your startup phase is to ensure the legitimacy of your organization. Having an email at your website domain can ensure that people feel confident partnering with you. Which address would you rather receive email from - thehearthouse@msn.com or info@thehearthouse.org? Email systems costs range from free to a few dollars per email address. G-Suite (gmail) has a discount for nonprofit organizations.
Cost (for all communications): $250/year and up
So as you can see the total costs to start your nonprofit depends on the different routes you take. At a bare minimum, you should expect to spend at least $500, but that is dependent on the state you operate in and how you approach your first year.
In this post, my goal is to give you a general sense of the costs, but I strongly advise you to draft a budget for the first year so you can understand the true cost of running your organization before you get started. Your first budget will be guided by your organizational goals. You can’t assess what the cost is until you know what you’re trying to accomplish in the year. Be realistic about what it takes to reach your goals so you can have an incentive to raise the money. If you don’t write or articulate what you need, the reality is, you won’t get it.
If you’re reading this post, that means you’ve thought about starting your nonprofit. That means you probably need help understanding what’s next. Read my blog post on how to start your nonprofit so you can launch successfully ———-> HERE.
