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The Challenges of Expanding Your Nonprofit

One of the most challenging situations your nonprofit organization can face is the need to expand.  It is also an exciting challenge.  Compared with the alternative of diminishing effectiveness and shrinking support, growth is a good thing.  At least it means (usually) that your programs are having a positive impact and people are motivated about your organization’s cause.

But with expansion comes growing pains.  To significantly increase your footprint or your scope (or both!) requires a huge commitment on the part of the leadership, members, staff and volunteers.  When your organization is faced with opportunities that scream “Take action!”, there are critical things you must consider.  In this post, we’re going to take a look at two scenarios:  1) location expansion and, 2) additions to program services.  Knowing what to do in these situations can spell the difference between success and failure.

Location expansion. We’re talking geography here.  Let’s say that you are operating a children’s tutoring program in Asheville, North Carolina.  Your organization is about 5 years old and it has met with enormous success.  Results are measurable, donors are happy, volunteers are motivated and the community has taken notice.  Because of the strategic planning your founders wisely engaged in early on, your unique program is scalable and replicable.  Your executive director just received a call from a school principal across town who heard about your program on the evening news.  She thinks it is just the thing for the parents of her students.  Though replication of this sort will involve enormous effort, it is technically easy to figure out.  Just go do it all again across town!

But let’s say the call is from a city councilman in Louisville, Kentucky who happened to read about your program on your blog.  He thinks your program is just what his district in Louisville needs…and, he wonders if you have ever considered expanding.  Should your leadership decide to accept the challenge, what is technically involved?

Assuming you’ve successfully implemented a program once, you know how to do that again.  The tricky part is the legal and administrative.  In this scenario of adding a location in another state, you must know what that state requires.  The most common requirement is to register with that new state as a foreign corporation and to apply for a Certificate of Authority to operate a location there.  It is not automatic.  In addition, you will find yourself dealing with all the issues and agencies in that state that you encountered in your own:  from payroll taxes to sales taxes/exemption to charitable solicitations registration.  It can feel a lot like starting over…and, in a sense, you are.  Growing pains…

Program expansion. For purposes of this post, we should really call this program addition.  Expanding an existing program doesn’t require much in the way of getting permission.  It is when you are materially expanding your scope (or changing your purpose) that things get complicated.  An example is in order…

Suppose again we are talking about your tutoring program in Asheville.  Five years into the program, your leadership recognizes an inescapable conclusion:  you really need to become a full blown private school.  This is a situation where things are even less automatic.  In fact, since a school is a different category of 501(c)(3) than the existing program, your organization must inform the Internal Revenue Service and seek their approval under a different sub-Code section.  A formal written request must be made, complete with a detailed description of the situation and proposed new program.  You will likely have to include supplemental IRS Form 1023 schedules relative to the new program.  It is a big undertaking.  Unfortunately, we’ve seen numerous instances of an existing 501(c)(3) going off on a tangent completely unrelated to its approved purpose…as if changing course was simply a matter of board approval.  It isn’t.  And to be unaware or out of compliance with IRS requirements in this regard is to invite much unwanted attention from your Uncle Sam.

Expansion is not for every organization.  Many nonprofits prefer to stay small and easily manageable…and that’s OK.  Growth for growth’s sake alone just multiplies the headache.  But for those with the unique opportunity to expand their borders for the sake of achievement, knowing what lies ahead makes the journey a bit more navigable.

Got a question or comment?  We welcome your input!  See the comment box below…

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 8 Comments

  1. We are approved as a charitable/ educational nonprofit in California and as a charitable/educational 501c3 by the IRS. We have primarily been operating as a charitable nonprofit assisting at risk families with housing. We have an opportunity to absorb a Christian ministry school into our nonprofit. What sorts of issues would we need to address if our board was in favor of moving in this direction?

    1. Great question…It is possible to expand into an area that your organization was not originally approved to do, but it’s more than just a decision. If the board approves the move, you will have to report the addition of the new purpose/program to the IRS on your next Form 990. The IRS may choose to follow up with questions to make sure that the new venture is compliant. I highly recommend you seek professional assistance with preparation of that Form 990.

  2. We are a 501(c)(3) organization that picks up food from grocery stores and restaurants that they would otherwise throw away. We are 100% volunteer-run. Another large city in Nebraska (60 miles away) want to use our 501(c)(3) status to do the same. What concerns should we be made aware of?

    1. The biggest concern is that you would be 100% liable for their actions. Someone cannot simply “use” your 501(c)(3) status. The only way for your 501(c)(3) to cover them is if their activities are effectively under your control, including all monies run through your account. Don’t do this unless you are ready to absorb them into your group.

  3. Currently we are a public charity, 501(c)(3), under the IRS Code and are thinking of adding some sales to help raise funds. How will selling items for a profit affect our non-profit status under the 501(c)(3) Code?

    thank you

    1. That depends. As long as what you are selling directly furthers your exempt purpose, you may be able to do it. This is a very fact-dependent subject that you may wish to seek direct counsel regarding.

  4. Thanks for your services. I am the president of a non-profit organization that deals with arts from a biblical basis. We are currently developing programs in Kenya and East Africa. In expanding in this direction we also see a need to expand our services. As we are working with young people from the slums, many of them do not have the finances for bus fair. In tackling the complex issues in Africa we see a need of helping them to develop small business concepts. Would you recommend setting up a new non-profit for this work or expanding the scope of Watershed Inc. ? Thanks – garold

    1. That’s not an easy answer with the limited info you provided. There are legitimate reasons to go either way with it. May I recommend you contact our office for more specific assistance? I think that will help you more.

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