Non Profit Division

There's an issue that has touched your heart. It's a great cause. It deserves attention. You believe in it. You want to do something about it. You're passionate about it. Maybe you even want to devote your life to changing the status quo and making sure this gets the attention it needs and deserves. Either nothing is being done about it, or certainly not enough is being done. You have some great ideas about what needs to be done in order to make this very worthwhile cause successful and change the world, or just your little corner of it, for the better. Your motives are pure. You're sure if others knew more about this, they would rally behind to help you. At the very least, you're pretty sure there's funding available that no one has tapped into that can help make a much needed difference in this situation. So you've decided the way to do this is to form your own non-profit organization.

There are many steps to the founding of a non-profit organization, but the first few steps begin with asking yourself some very critical questions. First and foremost, 

"Do you really need to start another non-profit organization?"

Just search through the databases of irs.gov or even guidestar.org and you will see thousands upon thousands of non-profit organizations already in existence - and every single one of them vying for funding. There's a misperception that there's all this money available, either through donors or grants, which isn't completely true. Most organizations are hurting for money. Establishing a financial base is difficult in any business, and non-profits must find creative ways to get, maintain and increase their funding sources.  If you think it's difficult to get someone to purchase a product that they may or may not want, imagine how difficult it is to get people to give you money for your cause and get nothing but a possible tax-deduction in return. Tax deductibility isn't as much of a motivation as you might think. Unless you itemize, and let's face it, most people take the standard deduction (according to the IRS), it doesn't even become a factor. There are many ways to raise money, and that's a topic for another post, but it should be noted that fundraising is just another form of sales, and it's not easy. You're raising money for a great cause, something that will make a difference rather than just buy your boss' new house, but you still have to get people to give you their money - and that's never easy.

So let's start with some very basic market research. 

How many organizations target the same issue? 

Look nationally, regionally and locally. Are there any organizations that focus on the same issue? Even tangentially? Check for public, private and faith-based groups. If you find any organizations that are targeting the same issue, even closely, it's important to know as much as you can about them. I recommend volunteering with those organizations. Finding out as much as you can about their programs, funding, operations and goals. Does your vision fit with any of theirs? Can it? And by that I mean, pitching your ideas to them as a potential program or project. Working with an existing organization, especially in the beginning gives you a support and power base that will help any program or project get better footing.

Existing organizations already have a funding and administrative base. They have history and have made and learned from many mistakes and mis-steps along the way. There is much to be learned from these organizations.  And again, funding dollars are in very limited supply so working with an organization with history stands a better chance of getting the necessary funding needed to make any program successful.

If you've determined that there aren't any organizations that are addressing your issue, or those that are addressing it are closed to the programming ideas you have that you believe will make the biggest difference in this area, then having crossed that first bridge, we move on to the next one....Understanding the Organizational Structure

Understanding NonProfit Organizational Structure

Before tackling the basics of starting an organization, it's important to truly understand non profit organizational structure. Many people come into the process understanding something about the general business world, but corporate structure and nonprofit structure may look the same and sometimes use the same terminology, but they function very differently.

First of all, unlike traditional for-profit businesses, starting a non-profit means giving up ownership and control of the very project you are so passionate about. If you want to retain ownership and control - and a respectable salary, you should consider other business models, such as the new B-Corporation, which allows for-profit organizations to have an other-than-financial goal as a primary purpose.

But if a you're certain that your goal is a public charity or charitable foundation (or the various other forms nonprofits can take), then it's important to understand a bit about organizational structure.

Nonprofits operate under the structure of a Board of Directors and operationally with an Executive Director who serves to carry out the programming and general administrative functions. Best practices indicate that the Board of Directors be an all-voluntary Board. The Executive Director can be salaried, but the control and direction are in the hands of the Board and the Executive Director serves at their pleasure.  The Executive Director hires and fires all other staff, and those decisions are based upon a budget that is submitted to and approved by the Board of Directors. Any and all hiring decisions, while under the exclusive control of the Executive Director, are subject to the budgetary approval process.

Then, there's the whole concept of nonprofit, which is actually a misnomer. Nonprofits can and should make a profit - how else would they carry out their programming. Non-profit merely means that the profits do not enure to the members but to the general public (through their programming objectives).   Many non-profits are grant-supported, some are self-supporting, and fundraising is going to be a major part of the process.  There are specific restrictions on types of fundraising.  

While serving the public through the carrying out of specific programs is the practical focus of any nonprofit, that can only be done with revenue generating activities, so making money is a primary focus of any nonprofit. Next up we will tackle some specifics of that process...

Making money

Developing a basic fundraising strategy is an important and foundational first step, and one that needs to be well-considered before taking that very first step in formalizing your organization on paper.

Fundraising is what drives the organization, enables it to carry out its mission and purpose.  Many organizations operate under a grant-funded model. There are many grants and funding foundations out there, private and governmental. Grants are a great way to fund your organization; however, there are generally many restrictions on how and where the money can be spent and a significant amount of reporting requirements. For this, you need to have someone in place with a significant understanding of reporting procedures and a strong administrative base in order to properly implement the funded project - and generally speaking, those administrative costs must be funded from other sources as most grants do not cover administrative costs.

Donation drives and fundraising events are another possible source of both funding and marketing; however not all types of fundraising is either permissible or appropriate. They often provide a decent start, but generally work best for short-term projects rather than on-going financing needs.  Certain common types of fundraising, such as raffles, bingo and other related types of fundraising fall under gaming regulations and require lots of additional regulations and reporting requirements, which can extend for years beyond the event.  Some events are fun and provide a good source of income, just know that you will need quite a bit of volunteer support. The best events take a lot of hard work to make them seem effortless.

Self-supporting concepts are becoming very popular, and are a great option to consider. There are many ways to do this; however, you have to keep in mind that the way you earn money has to be in line with your nonprofit purpose. It is not enough that the funds generated get used for your programming purposes, the IRS is concerned about the way it is earned as well. UBIT (unrelated business income tax) is a very serious issue to consider.  This is where the money you earn from activities are not substantially related to your nonprofit purpose. (Example: a social services organization runs a very profitable coffee shop. Even though the profits from the coffee shop fund the organizations programs, running a coffee shop is not substantially related to the mission and purpose of a social services organization. However, running a Thrift Store, where all items are donated is a related purpose. Conversely, general retail sales of wholesale purchased products is NOT related and considered UBIT - confused yet???) 

The first consideration is that unrelated business income is taxed at the regular corporate tax rate (generally about 40%). Purchases are not considered donations and are not tax-deductible to the consumer (except for another complicated rule about the amount paid exceeding the value). Additionally, the amount of money generated cannot exceed income from related purposes or public support. It's more complicated than that, but it's important to keep it in mind when undertaking any venture.  There are many, many things you can do, you just have to keep these things in mind. Much of it is about percentages, and those percentages matter because it is a possibility to jeopardize your hard-earned nonprofit status by exceeding them.

Also, there is the type of organizational structure that you are considering. There are tax-deductible limits on certain types of organizations and rules for distribution of funds applicable specifically to certain types of organizations that need to be considered as well. The fundraising program is part of the charitable organization application process, which is why it is foundational in the initial stages of consideration.

It may seem like I've spent a considerable amount of effort telling you why you shouldn't start a nonprofit organization, and that's partly correct.  A nonprofit is a public trust, subject to fiduciary requirements, and should be undertaken advisedly.  Seeking the advise of nonprofit professionals, public needs, and private concerns.  Once you're completely certain you're ready to proceed, then we can move on to the basics.