The third-easiest way to start a nonprofit

Okay, the elephant in the room: What's the easiest way?  Pay $8 at IncFile

IncFile is a great service with really good reviews so I recommend it.  However, nonprofits are still difficult to set up (by design, since the government doesn't want to hand out tax exemption to just anyone) and to save money you'd still need to register for an EIN yourself, draft your own bylaws, and appoint a Board of Directors and Officers.  Even then, to be formally recognized by the IRS as a tax-exempt nonprofit you'd need to pay an additional $275-600 fee.  Hmm.. the costs add up quickly.

As a second option, consider finding a Fiscal Sponsor.  This arrangement let's you use some other organization's 501(c)(3) legal standing by becoming essentially an independent sub-component of their umbrella nonprofit.  Many of them also offer HR and Finance services as well as business guidance.  It's the fastest way if you need to apply for grants quickly, but FYI the Fiscal Sponsor will take a percentage of your revenue as a fee (typically 7-10%).  Getting warmer.. but those fees are pretty steep for a startup nonprofit just trying to break even.

As a thought experiment, I decided to find the absolute simplest and cheapest tax-exempt nonprofit setup.

Behold!  The Unincorporated Nonprofit Association.  This hidden gem has a ton of advantages:

• It's formally recognized by the IRS.
• No complicated Board and Officers structure; just find one other person (or in Texas, two others) and do something charitable, religious, educational, or scientific and boom! you're an Unincorporated Nonprofit Association!  Yep, that's right!  It's so easy many groups become one without even knowing it.
• What about paperwork?  An unincorporated nonprofit association may, but is not required to, file with the Secretary of State.  It's pretty easy and inexpensive, though, and required for an EIN so I'll show you how to do it in a moment.
• What about tax exemption?  Well, as long as your nonprofit has less than $5,000 in annual revenues, it may function as a 501(c)(3) without applying for IRS recognition of its status.  Sweet!
• Will I eventually "outgrow" this organizational structure and need to convert to a 501(c)(3) in the future?  Nope.  It is not necessary for an unincorporated association to convert to a nonprofit corporation to obtain IRS recognition of its Section 510(c)(3) status.

Wow, sounds great.  What's the catch?  Well there are some disadvantages:

• Unincorporated Nonprofit Associations were originally treated as business partnerships in court so individual members were personally liable if the association was sued.  Fortunately, many states have passed laws such as MNCA, UUNAA, and RUUNAA granting the same liability protections enjoyed by LLC and Corporation organizations to Unincorporated Nonprofit Associations.  State laws that provide liability protection:
• Alabama (§ 10A-17)
• Alaska
• Arizona
• Arkansas (repealed)
• California (§§ 18605-21401)
• Colorado (§ 7-30)
• Connecticut
• Delaware (§§ 1901-1916)
• Florida
• Georgia
• Hawaii (§ 23A-429)
• Idaho (§ 30-27)
• Illinois
• Indiana
• Iowa (§ XII-501B)
• Kansas
• Kentucky (§ 273A)
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan (§ 450.3100)
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada (§ 81.700-750)
• New Hampshire
• New Jersey
• New Mexico (no explicit clause for nonprofits)
• New York
• North Carolina (§ 59B)
• North Dakota
• Ohio (§ XVII-1745)
• Oklahoma
• Oregon
• Pennsylvania (§ 15-91)
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas (§ 6-252)
• Utah
• Vermont
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming
• District of Columbia [Washington D.C.] (§ 29-11)

What if my state isn't one of those?  No worries, you can organize in any state using something called a Registered Agent.  I'll show you how to do that in a moment.

• Another disadvantage is that Unincorporated Nonprofit Associations are generally considered legal oddities so expect some raised eyebrows and blank stares if you go down this (perfectly legal) road less traveled:
• "Unincorporated associations long have been a problem to the law ... The most baffling of all are the non-profit unincorporated associations." - Oleck, Non-Profit Associations as Legal Entities, 13 Clev.-Mar. L. Rev. 350 (1964).
• "an unincorporated association [is] an 'airy nothing,' or a 'non-existent legal ghost,' no matter how powerful it may be in reality."  - Justice Sam Ervin, North Carolina
• In nearly every State, an Unincorporated Nonprofit Association is still not a recognized entity by the Secretary of State.  They simply let you register to protect your association name and have an address on file in case a complaint is raised.  For example, filing with Texas "does not represent the creation of the nonprofit association; it simply provides a method for a nonprofit association to receive notice of any lawsuit brought against it" [source]
• Alabama, California, Colorado, Delaware, Hawaii, Iowa, Kentucky, Michigan, Nevada, and District of Columbia have no online method for filing with the Secretary of State.
• Idaho, North Carolina, Ohio, and Pennsylvania have online portals to appoint a registered agent for an Unincorporated Nonprofit Association but they don't file Articles of Association.  As an example, an overview of the North Carolina process can be found here.
• Alabama's Secretary of State has no forms specific to Unincorporated Nonprofit Associations.  Instead you can optionally "file in the office of the judge of probate of the county where the association has its principal office a statement appointing an agent authorized to receive service of process" but they don't have forms specific to Unincorporated Nonprofit Associations either.  Not really an option for formal businesses.
• California has the most robust legal recognition of Unincorporated Nonprofit Associations but the process is a bit labyrinthine and it uses antiquated 'snail mail' forms.
• Colorado has a steep $150 fee.  Too rich for my blood.
• Delaware's code says you can identify a Registered Agent with the Secretary of State, but there are no forms to do so.
• Hawaii says Unincorporated Nonprofit Associations do not need to register with their Department of Commerce and Consumer Affairs.  Their code says "may file in the office of the registrar of the land court or in the bureau of conveyances a statement appointing an agent" but the Registrar of the Land Court has no forms for Unincorporated Nonprofit Associations, neither the Bureau of Conveyances.  The may clause indicates this is optional so the only legal mention of your company would be a Trade Name, which isn't ideal.
• Idaho requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service.
• Iowa requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service.
• Kentucky's code doesn't even mention Registered Agent registration and there are no Secretary of State forms for Unincorporated Nonprofit Associations.
• Michigan's code doesn't even mention Registered Agent registration and there are no Secretary of State forms for Unincorporated Nonprofit Associations.
• Nevada's Secretary of State has no forms for Unincorporated Nonprofit Associations.
• North Carolina requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service.
• Ohio requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service.
• Pennsylvania requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service.
• Texas requires the physical signature of the Registered Agent which is complicated when using an online Registered Agent service and requires three persons instead of the customary two.
• Washington D.C. has no forms for Unincorporated Nonprofit Associations.

For simple associations you typically just have to draft Articles of Association (change "Incorporation" and "Corporation" to "Association" in this IRS template), have two people sign it (the first should be the association leader and have a title of "Manager"), and you're done!  Total cost: $0

For liability protection, you can register in California ($10) or Colorado ($150).  Cheapest option: $10

Unless you happen to live in The Golden State with a non-P.O. Box address open during business hours, you'll need someone to represent your business in California.  This is called a Registered Agent.  There are a number of options to choose from but the least expensive is FreeRegisteredAgent by InCorp because they give you the first year free and they price match thereafter so you can lower their regular price of $99 to $39.  So, register for a free registered agent account online.

Note: when picking out your business name, some States have stipulations regarding naming so you'll need to check.  For example, here's California's naming restrictions.

Lastly, once you've registered the agent with the State you can apply online for a free EIN which provides federal government recognition of your association.  An EIN is also needed to open a business bank account, register for grants, etc.

So, for $10 and a lot of manual effort you can have a two-person non-profit.  Considering the hassle and the less common business structure, I recommend you save a couple bucks, find a few people as a Board of Directors, and go with an authentic $8 501(c)(3) incorporated non-profit.