The Alpha dog of the nonprofit world is the 501(c)(3).  It has federal income tax exemption, contributions to it are tax deductible to the donor and it is potentially state sales & property tax exempt.  Not bad.

The government provides incentives like these when an organization’s purpose is:  religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international sports competition or prevention of cruelty to children or animals.  But what about the other nonprofit organizations?  What are their purposes and what benefits do they get?  We’ll talk a little about the three most popular nonprofits other than the more well known 501(c)(3).

Read the rest of this entry »

You’ve seen the news.  You know it’s tough out there.  Just this morning I saw the following headlines on my Chronicle of Philanthropy RSS feed:  “Charitable Donations Fell by Nearly 6% in 2008″, “Ford Foundation Offers Buyouts to One-Third of Employees”, and “Robert Wood Johnson (Foundation) Offers Buyout to 40% of its Employees”.  Tough stuff indeed.  I’m sure that you have your own stories about what the current economic situation has meant to your family and friends.  So, the question is this:  Is there any way to survive, maybe even thrive, in such circumstances?  We resoundingly say, “Yes!”  Consider this your 2009 Nonprofit Survival Guide.

First off, stop listening to the news.  I mean it…turn it off.  I’m not advocating locking yourself into a cave and shutting out the world.  But, the constant drumbeat of negativity takes its toll on you after a while.  I saw a great sign on a realty office near my home the other day.  It said, “We have decided not to participate in this recession.”  What a great message!  The half-empty folks driving by no doubt scoff at such a sign and call it denial.  I call it taking responsibility for your own success.  The facts around them may not have changed, but at least for this one realty office in Mt. Juliet, Tennessee, they aren’t making excuses.  So what about you?  Yes, it’s harder to win than to lose.  But you have people (or animals or something) that need what your organization brings.  Determine to make it.

Read the rest of this entry »

Occasionally, you have to protect people from themselves.  Even those with the best of intentions can mess things up so badly that it can jeopardize what they are trying to accomplish.  In the nonprofit world, there are best practices, good practices and acceptable practices…and, really, really bad practices that will cause your organization, its board, donors and beneficiaries headaches galore.  This week, we are going to explore the Dirty (Half) Dozen Nonprofit No-Nos, in no particular order.  We will limit our discussion to 501(c)(3) nonprofits.

1.  Dictatorships. If you want to be your own boss and run the show as a benevolent dictator, then by all means, go start a business.  Just don’t start a nonprofit organization.  What many people fail to understand before they establish a 501(c)(3) organization is that nonprofits do not have shareholders, i.e., owners…only stakeholders.  Stakeholders can be defined as an organization’s board of directors, its members and its beneficiaries.  No one can legally assume ultimate control.  In fact, the IRS requires tax-exempt organizations to be structured such that control rests within a group of individuals.  This protects everyone involved.  Many times we’ve seen placeholder boards who basically rubber-stamp every decision made by a dictatorially-inclined president or executive director.  That does everyone a disservice.  Even worse, the IRS will hold all the leaders accountable for the governance and management of the organization, not just the dictator.

Read the rest of this entry »

Tonight’s title match:  In the red corner, numbering 948,954, representing over half of all 501(c)(3) organizations, are public charities.  And in the blue corner, numbering 108,594, having increased 54% since 1998, are the 501(c)(3)s known as private foundations.  Both competitors bring a long and varied history into the ring.  Though greatly outnumbered by public charities, private foundations bring a lot to the contest.  Let’s take a closer look at the differences, and similarities, between these title contenders.

Many people have a layman’s understanding of the difference between public charities and private foundations:  Public charities are understood to perform charitable work, while private foundations support the work of public charities.  That grassroots definition is, in practice, mostly true.  The specifics, however, are slightly more complicated.

Read the rest of this entry »

Last week we looked at some key points regarding nonprofit executive compensation.  This week, we want to take a closer look at best practices for paying everyone else your organization employs.

Payroll for nonprofits is a complex issue already.  Certain rules and exceptions apply that are different than what applies to for-profit payrolls.  As if that complication isn’t bad enough, many nonprofits seem bound and determined to create their own rules and exceptions that are categorically incorrect…and destined to get them in hot water with the IRS and/or their state.  Fortunately,  the principles we discussed last week apply to ordinary employees, as well as executives:  compensation must be reasonable, due diligence must be performed, and all decisions should be made at arms-length.  If you haven’t read last week’s post, I suggest you do so before you proceed…it will help.

In addition to those things, other considerations should be made.  This article is going to focus on two big issues:  1) payroll classification and, 2) types of payments.

Read the rest of this entry »

Nonprofit executive compensation tops the current list of IRS hot button issues.  A few weeks ago we talked about the fact that the IRS is ramping up its oversight and enforcement of nonprofit executive compensation.  With all the rancor surrounding executive perks and bonuses on Wall Street, expect that populist sentiment to spill over into the nonprofit sector as well.  It all adds up to the equivalent of a message written in the sky:  get your house in order!

So, how do you do that?  Let’s take a look at a few key points that will go a long way toward ensuring that the compensation package for your nonprofit’s leader(s) is appropriate.

Reasonable compensation. It all starts here.  The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable.  Unfortunately, the IRS doesn’t really define reasonable…at least not in a way that you could look up in Websters.  Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements.  These factors look something like this:

• Actual job description
• Required level of education or experience
• Compensation averages in your area
• Number of hours worked
• The overall budget of the charity

Read the rest of this entry »

The issue of a charity having operations in a foreign country is rather complex, one that involves oversight not only by the Internal Revenue Service, but also Homeland Security.  It is fraught with pitfalls that can only be avoided if you understand the rules.  The Foundation Group has worked with thousands of 501(c)(3) clients with foreign activities…and each situation is different.  We can only scratch the surface in this article, but our goal is help you understand some of the challenges associated with foreign country activities.

This subject can best be divided into two primary scenarios:  1) direct activities and 2) charitable giving.  Let’s look at each in order:

Read the rest of this entry »

Once upon a time, there were two websites, each belonging to a different charity.  Our tale follows the adventures of these websites.

The first website…we’ll call it “the good site”…was considered a real asset to its owner.  While not fancy or flashy, it was nice to look at and was obviously well taken care of.  The content of the good site talked about the charity, the charity’s mission, its programs…it even had nice pictures of some of the volunteers helping the charity’s beneficiaries.  And, everything was correct and up to date.  The good site was very good indeed.

The other website…we’ll call it “the bad site”…was also considered a real asset to its owner.  It was fancy and flashy and quite beautiful to behold.  The content of the bad site talked a little about the charity, the charity’s mission, its programs…but, it talked a lot more about the charity’s president, John, and John’s for-profit business.  In fact, it was kind-of hard to tell who the website was supposed to be promoting, John or the charity.  There were some nice pictures of John, John’s family…even John’s dog…plus lots of conveniently placed “Buy Now” buttons for website visitors to snap up John’s new book.  The bad site was very bad indeed.

Read the rest of this entry »

Your board of directors is one of the most important assets your nonprofit has.  Assuming they understand their role and are there for the right reasons, your board members provide invaluable insight, direction and oversight.  They volunteer their time and expertise, usually for little more than a pat on the back.  They also assume a certain level of liability in exchange for their efforts.  The old phrase, “No good deed goes unpunished”, is not something you want to see come true.  Let’s explore how to protect those who give of their time to your organization.

Understanding the issues. The first step to properly protecting your board members is to educate them as to what they are responsible for.  It is discouraging to see the level of ignorance that many boards operate under.  We frequently encounter boards where some members are merely placeholders who are doing a favor for the founder.  They rarely participate in substantive discussions or planning, nor are they consulted with by the program director.  They have no idea that there is any liability to them, but there is.  This liability usually falls into three categories:  1) corporate (state), 2) federal (IRS) and, 3) general liability.  Let’s take a closer look at each:

1. Corporate liability:  Board members are the legal, governing body of a nonprofit corporation.  They collectively represent the organization and its interests.  Each nonprofit corporation is incorporated in a particular state, according to that state’s corporate law.  Board members are responsible to make sure the corporation follows state law and that it follows its bylaws.  It is not terribly uncommon to hear of court cases involving other board members, or members of the public, accusing the organization of not abiding by its bylaws.  And, if the corporation is an employer, the board members have a fiduciary responsibility to ensure that employment taxes and related things are properly handled. Read the rest of this entry »

The headline for this article is not really “new” news.  The Internal Revenue Service has been stepping up enforcement of its regulations governing nonprofits for several years now.  Those who have been keeping up with the changes to the Form 990 annual reporting requirement know this to be true.  What is new this time is that the IRS is focusing hard on two, key areas:  1) nonprofit pay practices and, 2) abusive activities by charities.  Let’s take a look at each of these.

1) Nonprofit pay practices. The topic of nonprofit pay practices has long been an area of concern for the IRS.  Federal regulations require that compensation paid to employees of tax-exempt organizations must be “reasonable”.  Unfortunately, “reasonable” is a subjective evaluation of the situation as a whole, not necessarily an objective check list.  Moreover, the IRS is the ultimate arbitor of what is considered reasonable.  So what is new?  The overall economic downturn, along with the focus on executive pay, has ramped up IRS scrutiny of the compensation nonprofits pay their executives.

Read the rest of this entry »

It often seems that when otherwise business-savvy individuals become involved in a nonprofit organization, they set aside all they ever learned in business and proceed to operate their nonprofit as if business rules do not matter.  As most soon find out, they matter a lot.  In this post, let’s take a look (in no particular order) at 10 business basics that nonprofits ignore at their own peril.

Money. This may come as a shock to some, but being “nonprofit” does not, cannot, mean NO profit.  With the notable exception of GM, AIG and a few others, a business must make a profit to survive.  Your organization is probably not on Geitner’s list for TARP funding, so red ink should be regarded as impending doom.  With the uncertainty of this economy, you simply must be solvent.  You and your board may have to make some tough decisions.  Some programs may have to be scaled back or eliminated.  Fundraising must become even more focused and intentional.  I won’t repeat a lot of what we’ve discussed recently concerning funding…suffice it to say you must keep a lid on overhead…now more than ever.

Read the rest of this entry »

In last week’s blog post, we looked at a set of core principles that are critical for nonprofit organizations needing to raise financial support.  If you haven’t read it yet, check that one out before diving into this one.  It will make the ideas discussed below more effective.

So, what are some funding strategies that work?  Let’s explore four categories of fundraising:  direct appeal/pledging, professional programs, self-directed programs and grant funding.

Direct appeal/pledging. With this type of fundraising, you are literally asking people to give money to your organization, either through an individual gift or a pledge.  This is the simplest and most direct method of funding your nonprofit and it should be a component of most funding plans.  To be effective, however, you must be able to clearly articulate your program’s purpose and why someone should support it.  This requires your program to be a more attractive target for someone’s giving than some other cause.  I would again recommend you read last week’s blog article for a refresher on getting your pre-funding ducks in a row.  After convincing someone to donate, you must maintain a consistent stream of communication with your donors, keeping your program before them on a regular basis if you want them to continue supporting you.  That can be done through a variety of creative methods, one of the best being monthly newsletters.  Technology has made this so much easier and cheaper, too.  Instead of the hassle of dealing with printed material and postage costs, you may wish to consider a number of online communication tools that allow you to send newsletters, promos, etc. via email.  We like Constant Contact for this purpose.  You can also check out Aweber and some others.  All are similar in features and price.  They all come with pre-designed templates that make it simple to create good looking communications.  Another often-overlooked tactic is to send a receipt/thank you letter for every donation, not just at the end of the year.  Just remember that donor cultivation is a never-ending process.  As soon as you start letting that slide, you’ll see your support slide right with it.

Read the rest of this entry »

It is the burning question of every nonprofit organization:  “How do we get funding?” With the economy in the dumps, and recovery looking like a distant hope, this question screams for an answer.  In fact, we get more requests from newsletter subscribers for articles on funding than just about any other topic.  The purpose of this article is to do just that, but maybe not like you expect.

We could present an article on the how-to of bake sales or silent auctions or raffles.  We could lay out, point-by-point, the best method for putting on a first-class consignment sale or Spring Fling carnival.  We could wax eloquent about the best practices of grant writing…and we probably will discuss all these things later on.  But for now, we would rather challenge you to think about the bigger picture.  We believe it will provide a much better environment for specific ideas to flourish.

So, what does it take to get funding?  Let’s look at several, key concepts.

Read the rest of this entry »

This opinion piece is from the Wall Street Journal, March 3, 2009.  We are reprinting this timely article as a wake up call to charities of the battles to come.  Philanthropy has its enemies indeed.

By Naomi Schaefer Riley

Nonprofit leaders are reeling from the recent news that President Barack Obama’s proposed budget would limit tax deductions on charitable contributions from wealthy Americans. But now the philanthropic world has something else to worry about. Today the National Committee for Responsive Philanthropy (NCRP), a research and advocacy group, will release a report offering “benchmarks to assess foundation performance.” Its real aim is to push philanthropic organizations into ignoring donor intent and instead giving grants based on political considerations.

The committee is part of a rising tide of politicians and activists who are working to change the face of American philanthropy — and not for the better.

Read the rest of this entry »

If there is one constant in life, it’s change.  And most people don’t do “change” very well…even the IRS!  The new 2008 Form 990 is a complete, top-to-bottom overhaul of the form (as we’ve discussed in previous posts).  As we talk with more and more clients/prospects, we’re really starting to see some trends develop…most of them not good.

Read the rest of this entry »