There’s a lot that goes into starting a nonprofit. Here’s 11 things to consider…because 10 is never enough!
When defining the purpose of your organization, ask yourself the basics of journalistic investigation: Who, What, Where, When, How and Why:
- Why am I starting this nonprofit?
- What is the mission of my organization? What wrong am I trying to right? What values will drive my organization’s activity?
- Who is the target or beneficiary group that my organization will impact? Who will administer the services and resources my organization will provide? Who are the stakeholders who will support the mission? Who are my board members and potential staff?
- How will I accomplish my mission? How will we pay for the programs and services we administer? How will we raise funding for operations?
- Where will we accomplish our mission? Is it a local community initiative, a state or regional initiative, or national/international in scope?
Once you have the answers to these questions, you can begin to flesh out a three-year plan of action for your organization, including potential activity milestones, impact goals, budget figures and other details.
Your three-year plan of action will not only be an indispensable guide to help direct your activities, but much of that plan will need to be disclosed to the IRS in your 501(c)(3) application. There are many additional benefits to fleshing out your three-year plan, including the following:
- Feasibility – By defining your purpose and clearly outlining your program plans for the first three years, you will get a good idea of whether or not your plan is realistically achievable. You can begin to map out human resources needed, program-related costs, fundraising goals, and next steps to achieving your mission.
- IRS Compliance – You cannot get where you want to go without 501(c)(3) status. To get that, and to keep it, requires your nonprofit to be organized and operated for an exclusively charitable purpose. The IRS is going to evaluate whether or not your purpose, programs, and organizational structure meet that standard. Then, you have to maintain that compliance for the lifetime of your nonprofit’s existence.
- Sustainability – Once you’ve determined that your plan is feasible and IRS compliant, you need to take a step back and consider your plan from the perspective of your community. Can you generate enough public interest that you will get the support you need to keep the organization going? Is the scope of the mission large enough and specific enough to help you gain board members, major donors, grants, volunteers and/or funding?
Answering these questions and preparing a detailed purpose and program plan are the first steps to setting up a sustainable nonprofit with lasting impact.
A nonprofit is a public organization that belongs to no person or group of people. In a for-profit company, shareholders, members, or partners make controlling decisions for the organization. The owners control the company and share in the profits. Not so, in a nonprofit.
The reason why there is no ownership of a nonprofit is three-fold:
- The whole idea behind being a nonprofit is that it exists for a publicly beneficial purpose. To ensure this, no person or persons will be allowed to own it and profit from it.
- Being exempt from taxation requires that no one stands to personally gain or profit from the entity
- Though nonprofits can and do cease operations, the premise is perpetual public benefit. To ensure the longevity of the organization, control of the nonprofit should rest with members who can plan for succession and continuity.
We won’t go into a lot of detail here on this, because we have covered this topic extensively elsewhere (see links). Suffice it to say that if you’re starting a 501(c)(3) charitable organization, we will almost assuredly choose between a public charity, a private foundation, or a private operating foundation. Each has its distinct requirements and reasons for why it may be the right choice for you.
The most important question you should ask when assessing board prospects is:
“Does your prospective board member have a passion for the mission of your organization?”
If they’re not willing to give their time, money, and resources, they’re probably not a good fit. Board members should also have some business skills and be willing (and able!) to help make financial decisions.
It can be tempting to seek wealthy and/or prestigious names to join your board, but if they are not people of action and enthusiasm, they will be a detriment to your nonprofit. Obviously, board members should have high standards of integrity and value compliance and transparency.
It is also important to consider your board as a whole when identifying prospective board members. Remember, family members and business associates cannot make up a majority of a public charity’s board.
Another important consideration is the range of skills and experience that your board represents. Ideally your board will represent a diversity of skills that will help support all areas of your nonprofit – fundraising, governance, and programs.
Even on a private foundation board, which allows for much closer relationships, having a healthy representation of necessary talents is still vitally important.
One of the most frequent challenges we face when working with clients is conflict-of-interest concerns.
New 501(c)(3) organizations are particularly vulnerable to this for a number of reasons, particularly the close control often seen in the early years. Conflict-of-interest is often hard to avoid in these situations, partly because close control can be advantageous to maintain temporarily while the organization is getting its sea legs.
What you have to avoid at all costs, however, is allowing conflict-of-interest to devolve into inurement and private benefit. Inurement is defined as an insider in a nonprofit unfairly benefiting from the nonprofit’s resources. In other words, an abuse of power resulting in personal gain from the organization’s assets. The most common offenders tend to be nonprofit employees who also hold board seats, but inurement can extend to any board position or employee.
One of the most important things that a nonprofit can do to build a sustainable organization is to develop a robust fundraising system. Funding for nonprofits typically comes from three sources: donations, grants, and program revenue. Each of these sources has benefits and limitations, but a critical thing for nonprofits to do is to diversify their funding sources to ensure they can continue to operate in case any funding source goes dry.
For most startup nonprofits, building a broad donor base of individuals who can give at a variety of levels is the best way to sustainably grow your organization. Supplementing that broad base with major-gift givers and grant funding is merely the icing on the cake.
Your donor base should become your fan base! They are not only your best source of funding, but can also be a great group of people who can provide word-of-mouth advocacy, in-kind donations, volunteerism, and other non-financial resources.
Compensation is a hot-button topic for both nonprofit and for-profit companies. It is important to understand what is fair and competitive when setting your employees’ salaries. In fact, the IRS places a great deal of significance on this issue when evaluating new nonprofits seeking 501(c)(3) status.
Before deciding what to pay your nonprofit employees, the first step is to determine the market value of the job. This process includes gathering information from sources such as the Labor Department, census data, or comparing the salaries for job postings of companies in similar sizes and locations. Completing this due diligence is most helpful in giving you an idea of what is reasonable and fair.
Compensation for nonprofit executives should be set by an impartial, non-biased party. No executive, nor anyone related by blood or business interest, should be involved in discussions regarding their own compensation. This scenario is most sensitive when employees occupy board seats, such as frequently occurs with founders of small organizations. Employees and their relatives should recuse themselves from any related discussions in order to avoid the appearance of impropriety.
Perfecting the habit of properly documenting the activities of your nonprofit is one of the most important disciplines any new social entrepreneur can master. So what exactly do you need to be keeping records of?
The first category is your accounting records. If anything needs to be buttoned up tightly, this is it! Both state and federal regulations require that the financial records of your nonprofit be complete, accurate, and consistent with Generally Accepted Accounting Principles, or GAAP. In fact, your board has a fiduciary responsibility to ensure your accounting records are accurate.
First, you have a regulatory requirement to keep accurate giving records. This is true of both cash and non-cash (or in-kind) gifts. The IRS will want details concerning this information on your Form 990, and your state likely will, too.
The second reason is more practical. Accurate records of donation activity makes is much easier to solicit future contributions from your supporters.
Obviously, you need to keep copies of all your corporate documents, such as your articles of incorporation, bylaws and related amendments, and your corporate annual reports.
What might be less obvious is board meeting minutes, which are the notes of what was discussed and decided in your board meetings. If the IRS or another government agency examines your nonprofit for some reason, it is very common for them to request meeting minutes.
What has your nonprofit been up to? If it is a fundraiser, how much money came in? What did it cost? Same thing for programs. What was accomplished? How many people were served? This is information that the IRS and your state will likely want to know the details of. It also makes great content for communicating with your donor base about all the incredible things your nonprofit is accomplishing.
Every year, all 501(c)(3) organizations are required to file some version of IRS Form 990. Again, we’ve covered Form 990 exhaustively, but it is essential to understand what’s required. Failure to annually file a Form 990 in a timely annual fashion can result in significant fines. Failure to file a Form 990 for three consecutive years results in an automatic revocation of 501(c)(3) status.
Managing state fundraising requirements can be complicated, too. The vast majority of states require nonprofits to register to solicit donations with that state’s Division of Charities prior to soliciting. Nonprofits fundraising in multiple states must also register in each of those states, and renew that registration on an annual basis.
Starting and operating a nonprofit is complicated. You need a third-party professional you can trust to help you navigate the complex rules and regulations standing between you and your success.
Having successfully guided thousands of nonprofits through the 501(c)(3) process, we’ve learned a thing or two about what works…and what doesn’t. Starting and operating a nonprofit is all about tax compliance. You need a firm who can actually provide tax counsel and help you avoid the pitfalls. Not only are we licensed to represent your case before the IRS, we’re legally obligated to provide you with the best, most accurate tax counsel for your particular situation.
As I stated in the introduction, there’s a lot to consider before starting a nonprofit. In fact, this article is excerpted and abbreviated from our eBook, “10 Things You Need to Know Before Starting a Nonprofit“, which has over 10,000 downloads to date.
You can be successful in launching a new nonprofit. Knowing what goes into it before you do will determine the degree of your success, or lack thereof.
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