Starting a Nonprofit: Planning Stage

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Planning Stage

Step 5: Writing your nonprofit’s Articles of Incorporation

The founders of the organization should write its articles of incorporation. This document formally names the entity, its location, and its purpose. This document is the legal record of how the organization is to be managed. The Minnesota Nonprofit Corporation Act, Section 317A of the Minnesota Statutes, lists laws that govern Minnesota nonprofit corporations. It is important to remember when drafting the original articles of incorporation that parts of the Minnesota Nonprofit Corporation Act state the default laws that nonprofits must follow, unless their articles or bylaws state otherwise.

It is necessary to write and file the articles of incorporation prior to applying for tax-exempt status from the Internal Revenue Service. The IRS requires specific language to be used describing the charitable purpose of the organization, and the requirements it must follow for exemption. Please note the sample articles of incorporation provided by the Secretary of State’s Office do not include this information.

Tips for this stage

Filing your Articles of Incorporation with the Secretary of State makes your nonprofit a legal entity in the state of Minnesota, but does NOT mean that your nonprofit holds a 501(c)(3) tax-exempt status. This status can only be obtained through the Internal Revenue Service.

Step 6: Incorporate as a nonprofit organization

The main purpose of incorporating an organization is that of risk management. Filing articles of incorporation with the Minnesota Secretary of State’s Office provides a limited liability for the governing body of the organization. If directors act in a responsible and reasonable way, they can avoid personal liabilities to creditors of the organization. However, this does not include debts to the Internal Revenue Service for due payments or due to fraudulent activities.

Incorporating an organization also provides stability during personnel changes, eases future relationships with funders, contractors and employees, and provides the means to apply for tax-exempt status through the IRS. Once the articles are filed, the organization will receive a Certificate of Incorporation from the Minnesota Secretary of State’s Office. This certificate includes a charter number unique to that organization. The charter number is used only internally by the Secretary of State. To incorporate, send your organization’s Articles of Incorporation to the Minnesota Secretary of State. The filing fee is $90 for expedited service in-person and online filings, $70 if submitted by mail.

  • Articles of Incorporation filed online are processed immediately without staff intervention. A filed copy of the document is returned via email.
  • Articles of Incorporation filed through the mail are processed within three to four weeks.  A filed copy of the document is returned via mail.
  • Articles of Incorporation filed in person by appointment are processed while the customer waits.  A filed copy of the document is given to the customer before leaving.  Appointments can be booked on the Secretary of State’s website.

A nonprofit’s Articles of Incorporation only needs to be submitted once, but the nonprofit will be responsible for annually filing with the Secretary of State. Amendments can also be made to a nonprofit’s articles of incorporation, including a fee ($55 for expedited service in-person and online filings, $35 for mail).

Tips for this stage

As mentioned, directors acting in a responsible and reasonable way can avoid personal liabilities to creditors of the organization. However, it is recommended that you obtain Directors & Officers liability insurance for further protection.

Step 7: Create a business plan and a budget

Creating a thoughtful business plan during the beginning stages of a new nonprofit can provide a sense of direction to the organization as it develops. A plan should include what the organization’s goals are, what programs it will operate, where it will get funding, whether or not it will conduct events, have staff, volunteers, and more. It should also include a budget plan that includes where funding will come from, whether or not programs will rely on grants, individual donations, state or federal contracts, as well as expected expenses.

A business plan and budget are not only useful in thinking through the structure of the organization, but they are required as part of the narrative section of IRS Form 1023, Application for Tax-Exempt Status.

Need help developing your business plan?

The Minnesota Department of Employment and Economic Development (MN DEED) provides a detailed look at business plans in its Guide to Starting a Business in Minnesota (page 90-93). Additionally, MN Deeds has experts that can help you understand more about business plans through their network of Small Business Development Centers in nine main regional offices and several satellite centers statewide.

The U.S. Small Business Administration also has a highly informative web resource on business plans, including samples of both Traditional Business Plans and Lean Startup Plans.

Step 8: Draft your organization’s bylaws

The bylaws serve as the rule book for the nonprofit. Section 317A of the Minnesota Statutes is the basis for Minnesota’s nonprofit law, and the organization’s bylaws should follow this law. There is substantial flexibility to writing the organizational bylaws to fit the uniqueness of an organization. They are flexible and relatively easy to amend as the organization changes and grows.

Bylaws are much easier to amend than the articles of incorporation and should be reviewed frequently. This document should be more detailed then the articles of incorporation and address the following organizational issues:

  • Membership: Whether or not the organization will have members, who they are, how and when membership meetings will occur, what notice is required for meetings, requirements of a special meeting, quorum, and voting.
  • Board of directors: The number of directors, election process, meetings, length of term, number of terms allowed, vacancies, removals, quorum, officers, and standing committees.
  • Fiscal management: The fiscal year, committee and officer responsibilities, compensation of directors, reporting requirements, and dues.
  • Amendments: How will amendments be made and approved.

A nonprofit’s bylaws need to be submitted to the IRS when filing Form 1023 for tax-exempt status. Bylaws do not need to be resubmitted every time they are amended, but the IRS can request a nonprofit’s bylaws at any time.

Tips for this stage

A board may decide to form standing or ad hoc committees to deal with board business outside of regular meetings. Oftentimes a committee will deal more in depth with an issue that the board does not have time to address. It is important that committees do not do the work of the board; otherwise board members may not feel motivated to serve. Permanent, standing committees should be established in the organization’s bylaws while advisory, ad hoc, or temporary committees may form as needed. Each committee should have a chairperson. 

Step 9: Hold the first meeting of the board

The first official meeting should consist of the initial board members or incorporators. This gathering marks the official start to the organization.

At the first meeting of the board, the initial board members must approve the drafted bylaws and adopt its principles. The new organization will also vote on new board members and officers as it is called for in its bylaws. Once these activities are accomplished, the board should begin forming the mission and start the process of obtaining tax-exempt status.

Tips for this stage

The organization should keep records and minutes of the first board meeting and all future meetings for historical records.

Step 10: Consider any legal or insurance needs

While not a necessity, individuals starting a nonprofit may consult with an attorney for advice or technical assistance. Some of the reasons that may lend themselves to legal assistance in the startup phase and first couple of years are:

  • Setting up employee benefits
  • Setting up employment and HR policies/manuals
  • Hiring of staff

There are many kinds of insurance, but it is important to insure your nonprofit based on your specific activities and needs. Find an insurance agent that is knowledgeable in the nonprofit industry to help make sure that your nonprofit has appropriate coverage. The only required insurance is workers comp, if you pay over $1,000 in payroll. Other types of insurance considerations may be:

  • General liability can cover trip and fall type cases at your location and at your events.
  • Property insurance can cover items, but only items owned by the nonprofit, not things that staff has in the office.
  • Directors and Officers (D&O) can cover hiring & firing, fraud, and bad management.

Tips for this stage

To see a list of legal and insurance service providers that work with Minnesota nonprofits, visit the MCN Business Directory.