Starting a nonprofit organization is a noble endeavor, but it's crucial to consider the financial aspects of turning your vision into reality.
While the costs can vary widely depending on the organization's scope and location, you don't necessarily need a massive investment to get started. Understanding the basic expenses involved and managing them efficiently can help you establish your mission and serve your community effectively.
We will break down the essential costs of starting a nonprofit, provide a state-by-state cost analysis, and offer strategies to help you save money along the way.
Table of Contents
Costs of starting a nonprofit: What are the different expenses involved?
Cost of starting a nonprofit in US states
6 tips to bring down costs for nonprofit organizations
Overview of the costs involved in starting a nonprofit
FAQs on the cost of starting a nonprofit
Costs of starting a nonprofit: What are the different expenses involved?
1. State costs
State fees cover costs every nonprofit incurs when registering their organization in a specific state.
Incorporation costs
When starting a nonprofit organization, filing the articles of incorporation is mandatory. This document legally establishes your organization.
To get started, you'll need to contact your state's business filing office. Keep in mind that each state has different required legal documents, steps, and fees.
The cost of incorporation can vary significantly from state to state. You might pay anywhere from $50 to $1,098, depending on your location. If you need to fast-track the process, be prepared for additional expedited fees.
Check out IRS’ State Links of Exempt Organizations, to learn about the incorporation process in your state.
Charitable solicitation fees
Most states require nonprofits to register before they start fundraising. In at least 40 states of the US, it is mandatory to register as a charity before you decide to actively fundraise. This applies to fundraising: online, in-person, or by mail.
Some states take a broader view of fundraising activities. For example, they might consider a "Donate" button on your website as active solicitation. This is because residents from those states could potentially access your page and make a contribution at any time.
As a result, you might find yourself needing to register in multiple states before you even begin your fundraising efforts. It's important to research the state solicitation laws where you might have potential donors to ensure you're complying with all necessary regulations.
The average charitable solicitation fees are $85.91, ranging from $0 to $425.
Business license and permit fees
To operate an organization in certain states, you have to obtain a business license or permit. Depending on your tax-exempt status, many states don't require nonprofit organizations to have a permit. You still should contact your state office to determine if you need to make any essential business filings.
The US State business license usually ranges from $50 to $550, depending on the type of permit required. This cost covers processing and filing fees.
Miscellaneous fees
These are state-dependent fees your nonprofit will have to pay in some situations. These include sales tax permits, annual registration, sales tax exemption, a gambling license, name registration, and others. Each of these will have different charges depending on your state and nonprofit type.
2. Costs for filing for tax-exempt status
Filing for tax-exempt status with the Internal Revenue Service and establishing your nonprofit legally are two separate steps. The filing process with federal tax exemptions varies depending on the type of 501(c) organization that you want to form.
Depending on your eligibility, you will typically have to fill out Form 1023, Form 1023-EZ, or Form 1024 with the federal government.
Form 1023-EZ
It costs around $275, and you can expect to hear results in about a month. It is filed online and is ideal for new or smaller nonprofits. The main eligibility requirements are that your projected gross receipts will not exceed $50,000 in the next three years and that your assets do not cross $250,000.
Form 1023
Most nonprofits fill out this form to apply for tax-exempt status. It costs $600 and is also filed online. You can expect to hear back in about three to six months.
Form 1024
If you're filing as any other type of 501(c) organization, you will file this form online. It costs $600, and you will receive your tax-exempt status in about three to six months.
If the IRS approves your application, they will share a determination letter with you and recognize your nonprofit as a tax-exempt organization.
3. Legal fees
When it comes to legal help, costs can vary widely as some attorneys charge by the hour, while others offer a flat fee for setting up your nonprofit. The complexity of your organization and the level of assistance you need will influence the overall cost.
Don't forget to explore pro-bono options. Some law firms offer free or reduced-cost services to nonprofits as part of their community outreach. These services can significantly reduce your startup expenses while ensuring you're on solid legal footing.
While it might be tempting to handle all the legal work yourself, having professional guidance can save you time and potential headaches down the road. Consider it an investment in your nonprofit's future.
4. Administrative costs
These are the charges that help you to support your organization's operations and keep it up and running. Administrative costs comprise of:
Office space
Traditionally, office space has been seen as a must-have for nonprofits. It provides a physical location for your team to collaborate and can lend credibility to your organization. However, the landscape is changing rapidly.
Many nonprofits are now embracing remote work options. This shift can significantly reduce overhead costs like rent, utilities, and office supplies. It also allows for greater flexibility in hiring, as you're not limited to a specific geographic area.
When deciding on your workspace needs, consider factors like your team size, the nature of your work, and your budget. Some organizations find success with a hybrid model, using co-working spaces or shared offices for occasional in-person meetings while primarily operating remotely.
Your office setup should support your mission and operations without draining your resources. Be creative and flexible in your approach to maximize your impact and grow your nonprofit.
Staffing and recruitment
Most organizations need hired staff to help them with their daily operations and fundraising activities. The number of people you need to hire, as well as your roles and responsibilities, will depend on the kind of nonprofit you're starting.
Nonprofits generally set aside a percentage of their annual budget to cover staffing expenses. This number depends on your organization's size, but in most cases, it is anywhere from 60 to 90% of your annual budget.
According to the Better Business Bureau, nonprofits should spend at least 65% on program expenses, including salaries.
Insurance
As a nonprofit organization serving your community and the public, you can be exposed to many risks. By investing in nonprofit insurance, you can seek protection from any claims made against your organization as a result of your activities, say fundraising.
Many nonprofits start out with a Business Owner’s Policy (BOP). This covers general liability insurance, business income insurance, and commercial property insurance.
According to the insurance marketplace Insureon, the average cost of this policy is $53 per month or $636 per year.
Apart from BOP, nonprofits also invest in Directors and Officers (D&O) insurance that covers the board and officers of the nonprofit. Insureon states that most charitable organizations pay $70 per month for directors and officers (D&O) insurance, but you could pay less or more depending on your risks.
Communications and marketing
Creating a strong marketing strategy is essential to spreading the word about your cause while finding donors, volunteers, members, and so on. It is best to create a communication and marketing plan from the starting stages. As a nonprofit, you'll need to develop a strategy that balances impact with cost-effectiveness.
Consider a mix of online and offline methods. Digital marketing through social media, email newsletters, and your website can be highly cost-effective. Don't overlook traditional methods like community events or partnerships with local businesses, which can help build strong local connections.
When budgeting for marketing, factor in costs for tools like email marketing software, social media management platforms, and design resources.
Pro tip: Consistency is key in marketing. Start with a few channels that you can manage well rather than trying to be everywhere at once. As your organization grows, you can expand your marketing efforts.
Website
A website adds to the credibility of your organization. People will search for you online when they learn about your cause. With an online presence, you can make it easy for your potential supporters to find you and confirm the legitimacy of your organization.
Having a domain name makes it more professional when asking for donations and applying for grants.
To create a website, you have a few choices.
- DIY approach: With online website builders, you can design a website yourself. These don't require any coding or extensive technical expertise.
- Freelance web designer: A freelancer or someone you know who works specifically with websites is a reasonable way to create a website.
- Web design agency: They will take care of your website from start to finish. The average cost associated with hiring a web design agency is $100 to $149 per hour.
Nonprofit software
Choosing a nonprofit management software tool is one of the most important decisions for your organization when starting out. These are tools that help you manage several aspects of your nonprofit, from daily operations to fundraising, marketing to donor management, and more.
You will find software dedicated to support each of your nonprofit's operations. They further easily integrate with each other, facilitating collaboration and flexibility.
The cost of nonprofit software varies, but most quality solutions charge a monthly or yearly fee. Most companies offer discounts to charitable organizations.
Zeffy is a 100% free, all-in-one fundraising solution with plenty of useful tools to maximize the impact of your organization.
5. Fundraising costs
Fundraising is essential for your nonprofit's growth and in fulfilling your mission. These costs include more than just event expenses. They include:
- Software for donor management and online fundraising
- Marketing materials for campaigns (digital and print)
- Staff time dedicated to fundraising activities
- Grant writing expenses (if outsourced)
- Donor appreciation and stewardship costs
- Payment processing fees for donations
While some of these are ongoing operational costs, it's important to budget for them from the start. The exact amount will vary based on your nonprofit's size and fundraising strategies.
Minimum cost of starting a nonprofit in the top US States
6 tips to bring down costs for nonprofits
1. Use free fundraising software
Effective fundraising is crucial for your nonprofit, but traditional fundraising tools can be expensive. Most platforms charge transaction fees (call them credit card fees) on top of platform fees. That's why free, comprehensive fundraising software is a game-changer for new and growing nonprofits.
Zeffy offers a 100% free solution that covers all your fundraising needs:
- Incorporate your nonprofit
- Online donation processing with zero transaction fees
- Event management and ticketing
- Peer-to-peer fundraising campaigns
- Robust donor management system
- Email marketing tools
- Customizable donation forms and pages
By using Zeffy, you can redirect thousands of dollars from software costs and transaction fees directly to your mission. This allows you to maximize the impact of every donation you receive.
Remember, choosing the right fundraising platform from the start can significantly reduce your ongoing operational costs and streamline your fundraising efforts.
2. Leverage free resources for nonprofits
There are many free and affordable online resources for nonprofits available. With them, you can significantly reduce the costs of your nonprofit - since these tools can do a lot of what nonprofits traditionally outsource.
TechSoup is a website that helps you find discounts on software, technology, and services for nonprofits. These include tools offered by Microsoft, Intuit, and Adobe.
3. Buy second-hand and look for in-kind donations
Many for-profit businesses have furniture or office supplies lying around that they want to get rid of. Watch out for these donations, or actively look for companies that donate to nonprofits. If you can't find companies donating at the moment, you can always visit a thrift store or buy second-hand instead of new.
4. Retain your donors and employees
The cost of hiring and training new nonprofit employees is incredibly high. The same goes for identifying new donors and building relationships with them. That's why you should pay attention to your company culture, incentives, rewards, and more to keep your employees satisfied.
You should also focus on your donor retention strategies to build a loyal and dedicated donor base. Try to reach out to your supporters for more than just asking for donations. Share company updates, mission impact, branded merch, and more to make them feel valued and appreciated.
5. Hire more volunteers
Volunteers help you remedy a staff shortage without having to invest more funds in the budget for people's paychecks.
Recruiting volunteers should be about something other than obtaining free labor. Instead, your focus should be on attracting supporters with a genuine interest in your cause. Since you will not be paying them for their efforts, it's important to make these individuals feel valued.
Give your volunteers meaningful tasks and opportunities that allow them to expand on skills and knowledge.
6. Take your events virtual
Online fundraising is an effective way to save on costs spent on renting a venue, catering services, and other on-site logistics. Virtual online events only require a solid technology foundation to get started.
They reduce the need for printed marketing materials and physical entertainment equipment, as digital fundraising event platforms have these functions in-build.
You also require fewer staff and volunteers, eliminating recruitment expenses.
Moving your fundraiser virtually allows anyone anywhere in the world with an internet connection to join your mission. You are no longer confined by geographical barriers and can scale to a large audience without a significant cost increase.
Overview of the costs involved in starting a nonprofit
It may seem like a lot, but the cost of starting a nonprofit organization is pretty reasonable.
While you'll have to pay filing fees, incorporation costs, and other government charges, there are certain areas where you can save money. These include working remotely instead of in a physical space in the beginning, purchasing second-hand office furniture and supplies, and, most importantly, looking for free resources and tools.
Many companies provide discounted or even free services to nonprofits. These comprise software subscriptions, professional development resources, and marketing tools. Take advantage of these opportunities to grow your nonprofit without spending much from your pockets.
Zeffy allows nonprofits to incorporate and start their organization 100% free of charge. We cover all the costs associated with incorporation, making it easier than ever to start your nonprofit.
