9 Myths About Starting a Nonprofit

Starting a nonprofit often comes with strong opinions—some helpful, many misleading. New founders regularly hear conflicting advice about pay, fundraising, IRS approval, and legal requirements. These misconceptions can slow progress or lead organizations down the wrong path early on.

Below are nine common myths about starting a nonprofit, along with the legal and practical context founders should understand before moving forward.

Myth #1: Nonprofits can’t earn revenue

One of the most common misconceptions is that nonprofits must rely entirely on donations and grants.

The reality:
Nonprofits are allowed to earn revenue. Many do so through program fees, ticket sales, memberships, sponsorships, and the sale of goods or services. The key distinction is not whether revenue exists, but how it is used.

In a nonprofit, surplus revenue is generally reinvested into the organization’s programs and operations rather than distributed to private owners or shareholders. Some revenue may be taxable, depending on how it is earned and whether it relates to the organization’s exempt purpose.

Myth #2: You can’t pay yourself

Founders are often told that starting a nonprofit means working without pay indefinitely.

The reality:
While board members typically serve without compensation, nonprofit employees including founders who serve in operational roles, may receive pay. The IRS focuses on whether compensation is reasonable and tied to actual services provided.

Compensation decisions are often reviewed in context:

• Job responsibilities
  
• Comparable roles in similar organizations
  
• The nonprofit’s budget and size
  

Clear documentation and board approval are commonly part of this process.

Myth #3: 501(c)(3) approval is quick

Some founders expect tax-exempt status to be approved within days or weeks.

The reality:
IRS review timelines vary. While certain smaller organizations may qualify to file a shorter application, many nonprofits file the standard Form 1023, which can take several months to review.

The IRS evaluates:

• Formation documents
  
• Stated purpose and activities
  
• Governance structure
  
• Financial projections
  

Requests for clarification or additional information are common, especially when applications are incomplete or inconsistent.

Myth #4: You don’t need bylaws

Bylaws are sometimes viewed as optional or “extra paperwork.”

The reality:
Bylaws are a core governance document for many nonprofits. They outline how the organization operates internally, including board responsibilities, voting procedures, and officer roles.

Although bylaws are not always filed with the state, they are frequently requested by:

• Banks
  
• Grantmakers
  
• The IRS
  

Operating without bylaws can create confusion around authority and decision-making.

Myth #5: Anyone can serve on the board

Some founders assume they can fill board seats with family members or close friends without concern.

The reality:
Board composition matters. The IRS and many funders look for signs that a nonprofit serves a public purpose rather than private interests.

Boards dominated by related individuals may raise conflict-of-interest concerns, particularly during the 501(c)(3) review process. Independent board members with varied backgrounds often help demonstrate appropriate governance.

Myth #6: Grants roll in immediately

A common expectation is that once tax-exempt status is approved, grant funding follows quickly.

The reality:
Grant funding is competitive and often depends on more than tax-exempt status. Many grantmakers look for:

• A track record of program activity
  
• Financial reporting history
  
• Measurable outcomes
  

New nonprofits often rely on individual donations, events, or program revenue while building the organizational history needed for larger grants.

Myth #7: You can operate without incorporation

Some groups begin operating informally as unincorporated associations.

The reality:
Operating without incorporation can expose individuals to personal liability. Without a separate legal entity, founders and members may be personally responsible for contracts, debts, or legal claims.

Incorporation creates a legal structure that separates the organization from the people involved, which is one reason it is commonly completed early in the process.

Myth #8: Starting a nonprofit is cheap

Because nonprofits are mission-driven, founders sometimes assume startup costs are minimal.

The reality:
Starting a nonprofit involves expenses that should be planned for, including:

• State incorporation filing fees
  
• IRS user fees for exemption applications
  
• Charitable solicitation registration fees (in some states)
  
• Compliance-related costs
  

While costs vary by state and organization size, understanding them early helps avoid financial strain during formation.

Myth #9: The IRS rarely denies applications

Some founders believe approval is almost automatic if the application is submitted.

The reality:
The IRS does deny applications. Common reasons include:

• Vague or inconsistent descriptions of activities
  
• Formation documents that lack required language
  
• Governance structures that raise private benefit concerns
  
• Incomplete or inaccurate financial information
  

Awareness of common rejection reasons can help founders prepare more thorough filings.

Myth vs. Fact

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Ready to Start Your Nonprofit the Right Way?

Navigating the legal landscape of nonprofit formation can be complex, but you don’t have to do it alone. Chisholm Law Firm assists founders in establishing their nonprofits correctly from day one. We handle the paperwork and filings so you can focus on your mission.