So you want to start a nonprofit…Post 2

In both 2011 and 2012, Internal Revenue Service data shows that there were about 1.08 million charitable organizations in the United States.  Data from that same period shows that approximately 45,000 new applications were approved in 2012.[1]  One of the conclusions that can be drawn from this is: charitable organizations are going out of business at about the same rate as they are starting up.  As with any small business, even the most well-intentioned and well thought out organizations may not be able to sustain long-term.  However, if founders of a new organization go into the venture having thought through their options fully, they are moving forward with their eyes wide open prepared for the inevitable bumps in the road.

The following is a list of questions I always ask individuals looking to start a new nonprofit organization, along with some discussion points.  The list is by no means exhaustive, as each organization’s/founder’s individual circumstances may raise or eliminate issues.

  1. Is there a need for the service that your organization will provide, or is it duplicating services?
    1. If it is duplicating services, you may have difficulty establishing the organization sufficiently enough to get the attention of funders.  Do you have a way to do it better and/or more efficiently?  Have you seen that current providers do not have the capacity to meet current demand?
    2. Have you identified significant funders?
    3. Have you thought about approaching an already-existing organization to conduct the program within its established structure?
  2. Do you have money (or can you obtain it) for start-up costs?
    1. Have you raised funds to pay the initial start-up costs (filing fees, legal fees, etc.)?  Even if you don’t hire a lawyer, the filing fees alone will be close to $1,000.
    2. Do you have money that you want to put into the effort?
    3. If you have a significant amount of money to put into the effort, do you need to start a separate organization to meet your charitable goals? Could you instead locate an already-existing organization, or give money through a donor advised fund at a local community foundation?
  3. Who else will be working with you on this effort?
    1. Have you identified board members for the initial board?  Minnesota nonprofit organizations are required to have a minimum of 3 board members.  If applying for §501(c)(3)[2] status, a majority of the board should not be related by family or business.
    2. Do you and/or other board members have the time to put into establishing the organization or are you able to hire staff/professionals to help get it going?
    3. Do you and/or your board members have experience starting and/or running a nonprofit corporation?  If not, how do you plan on accessing that expertise?
  4. Do you need 501(c)(3) status for grants and contributions?
    1. Is your money coming from individuals/entities that are looking for a tax deduction?
    2. Is your money coming from businesses that may not be looking for a deduction (i.e., they can write it off as a business expense)?
    3. Have you thought about intermediate steps, like fiscal sponsorship?
    4. Have you talked to a tax professional about other types of tax-exemption that may work for your organization?
  5. Is this/could this be a for-profit venture, and if so, have you thought about doing it that way?
    1. Are you converting a previously existing for-profit into a nonprofit?  If so, how are you going to be operating differently as a nonprofit?
    2. Is there a product or service you are selling that is being offered by for-profit businesses?  How are you operating differently from those businesses?
    3. Are there ownership rights in the products or services that one or more individuals are wanting to retain (vs. the nonprofit owning these rights)?
    4. The primary difference between a for-profit and a nonprofit organization has to do with what is done with the profits from the organization’s operations (yes, nonprofits need to have profits too) – they are paid out to owners/shareholders (for-profit) or they are required to be spent on the organization’s activities (nonprofit).  How are you anticipating the organization would operate?
  6. What are the benefits of operating as a charitable organization? (not an exhaustive list)
    1. Able to receive charitable contributions
    2. Exemption from federal (and generally state and local) income taxes
    3. Greater accessibility to both foundation and government grants
    4. Potential for property tax exemption
    5. If incorporated, then general benefits of that: separate corporate existence from volunteers, board members, founders, etc.; limited liability; business judgment rule; credit score/bankruptcy protection; intellectual property ownership; perpetual life
  7. What are the drawbacks of operating as a charitable organization? (again, not an exhaustive list)
    1. Significantly more regulatory oversight.  The Internal Revenue Service regulates most aspects of a charitable organization’s activities (in terms of what is allowable or not for an organization holding 501(c)(3) status).  The Attorney General exhibits control over organizations holding and/or raising money for charitable purposes.  Fundraising or operating in multiple states could bring the organization under the regulation of multiple Attorneys General.  This is in addition to filing and regulatory responsibilities the organization might normally have if it were a for-profit organization.
    2. Loss of control by the founder.  Once created, a charitable nonprofit organization is no longer “owned” by anyone.  The organization now exists and operates for public purposes and any assets owned by the organization must be devoted to those purposes.  The organization, if around long enough, will grow and change (under the direction of the Board of Directors) in ways that the founder may not like.



[1] Department of the Treasury. Internal Revenue Service Data Book, 2012, at 55-6 available at (As is noted in the footnotes on the referenced charts, these numbers do not reflect the charitable organizations (churches, integrated auxiliaries of churches, group ruling subordinates, etc.) that are not required to apply for tax-exempt status.)

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