How to Form a Nonprofit
Thank you! We don’t know what kind of non-profit you’re setting out to start but, your service and your impact will be greatly appreciated. Now, we put this concise information regarding how to form a non-profit together to help address the basic concerns of those who’re REALLY just starting.
The focus is to answer some common questions we get from our readers without going too deeply into any of the legalities or specifics regarding corporate formalities. Sound good? Enjoy!
This can be a difficult question to answer as there are many reasons why people form non-profit corporations (also known as non-profits).
Some are government funded or meant to give back in fields like the arts or athletics, while others provide more widespread services for humanity, such as the YWCA and Girls’ Club. Currently the IRS recognizes more than 25 categories of organizations that can attain “charitable” 501(c)(3) status and a ton can fit under the non-profit corporation umbrella.
The IRS recognizes so many non-profits as viable business entities because there’s such a huge variety of purposes that drive non-profits. Examples include public interest, religious, educational, scientific, literary, public safety testing, fostering national/international sports competitions and the list goes on.
There are four main categories of non-profit corporations set forth within this article:
- Public Charities: must document they receive at least 1/3rd of their annual income from the public, a unit of government, or an organization formed to raise money for a specific school, hospital, governmental unit or publicly supported charity.
- Private Foundations: derive their primary financial support from the contributions of individuals, family, or a corporation. That said, foundations are subject to substantially more restrictive rules governing their operations, including how much they must distribute for charitable purposes, and their donors receive less favorable tax treatment for donations.
- Member Serving: mutual societies, cooperatives, trade unions, credit unions, industry associations, sports clubs, etc. Essentially, these types of non-profit corporations benefit a specific group of people.
- Community Serving: These include services such as human service programs, medical research, education and health services, etc. These non-profits serve specific communities or geographical areas.
Keep in mind that non-profits can lose their tax-exempt status and must meet a certain amount of criteria over time to remain compliant on state and federal levels. We won’t dive into all that complexity right now but here are some elements of importance for non-profits.
- Management Provisions
- Accountability & Auditing Provisions
- Provisory for the amendment of the statutes/bylaws or articles of incorporation.
- Provisions for Entity Dissolution
- Tax Statuses of Corporate & Private Donors
- Tax Status of Founders
And finally, some type of affiliations may also be taken into account in as much as they may reflect the non-profits stated purpose.
What's the difference between a member-run as opposed to a non-profit run by volunteers?
In essence, a member-run non-profit is really a corporation, so it has a board of directors and officers (official members) who manage through an Operating Agreement and Bylaws.
Whereas a purely volunteer-run non-profit usually doesn’t have an official board of directors or officers that have serious fiduciary responsibilities. That doesn't mean that a particular corporation, group or agency doesn't have accounting and other legal responsibilities. They do. They just differ from member-run corporations. The bottom line here is that someone, whether it be a group or individual or government agency, is funding money for this non-profit and they have a reasonable expectation of accountability for monies expended and the tax authorities will require that you account for those monies and the non-profit’s time.
Can you have a volunteer-run non-profit with a board of directors? Yes. The big difference is usually with volunteers no one’s getting paid. Make no mistake though, there are TONS of all volunteer organizations (AVOs) but for some crazy reason they’re often treated and regarded differently than corporate non-profits.
Is One Type of Non-Profit Better Than Another?
The answer is "not necessarily." The better question is what's best for goals and needs of your particular non-profit.
When venturing into the non-profit world, it's essential that you do so with your eyes open to:
- What the needs of the corporation are.
- Which individuals are competent and qualified to hold particular positions or power or administration.
- The overall plan as to how the corporation will be managed in terms of visions and goals.
- How each individual within will help the corporation meet its goals, be accountable, and how each individual, even the managers, will be managed to meet those goals.
These are some examples of how the failure to clarify goals and responsibilities can lead to trouble for a fledgling or seasoned non-profit corporation. Be sure that this doesn’t happen to you!
- The individuals voted into seats of power and management have no idea as to their specific legal/fiduciary responsibilities and the problems that could occur as a result of their naivety, their inexperience or lack of competence in a particular area.
- The board of directors simply isn’t providing enough oversight to the committees, officers and staff they elect to handle certain duties. It's classic mismanagement which happens in for-profit and not for profit corporations.
- Poor conflict management skills fail to handle problems or disagreements between board members and others in the non-profit corporation food chain. Inner corporation conflict is one of the biggest reasons for a corporation’s or a business’ downfall. This happens often in people’s personal and professional lives. To say that a corporation is truly harmonious or that it's a no conflict zone is simply untrue and doesn't address the problem. The truth is that all companies experience some sort of conflict and the company that's not prepared for conflict resolution isn't prepared to run and manage a company.
- Oops, no one elected an accountant, or CPA, or tax attorney, and the board of directors have no idea as to the laws that govern tax-exempt organizations. The failure to consult with and hire the proper professionals before engaging in a non-profit or taking actions is one of the biggest mistakes that many new companies make. It can lead to litigation, legal claims, insurance claims, and a large number of other corporate maladies even if you're one of the careful companies. Be smart. Spend the money and hire the appropriate professionals before trouble starts.
You mean aside from making massive amounts of positive impact on people’s lives and our world? At the end of the day we could boil it down to these four:
- Branding: What do you think/feel when you find out a certain company has their own non-profit which they donate to and collect funds for? It’s a great way to earn extra credibility and win trust with your specific audience (along with exposing your company to everyone else interested in the specific cause).
- Limited Liability: What this means is the management of the non-profit corporation, including founders, directors, any paid employees, and other members aren’t personally liable for debts. However, notice it’s “limited” not a shield to protect against fraud or criminality. The status can be revoked, and individuals can be prosecuted if they’re found to have acted maliciously or with the intent to default on debts.
- Funding: Once you form a non-profit it opens up the doors to both public and private grants. Not to mention angel investors, different kinds of funds, etc. Non-profits can solicit charitable donations.
- Tax-Exempt! No…federal…taxes…so that these funds can instead be put towards the non-profit's mission or purpose. Also, those who donate to your non-profit are allowed to deduct them from their yearly income which helps come tax time.
The disadvantages are rather logical and you could say these same exact things about any conventional business idea. We’ll break things down into these four just to keep this nice and tidy.
- Cost & Funding Issues: 99% of the time creating a serious non-profit is costly in terms of time, human effort/elbow grease, and yes…$$$! Remember, this is a legal entity formed under law (ideally with the help of both a lawyer and accountant) so there are dues and fees to be paid on top of everything else.
- It’s hard work for little or no pay. Even if you do get paid in a non-profit corporation, it won’t be anywhere near what you’d earn doing the same type of work in the private sector. People don’t get rich working for non-profit corporations (usually, unless it leads to other more financially beneficial opportunities).
- Corporate Formalities & Record Keeping: There’s all kinds of ongoing documentation and record keeping (and their corresponding deadlines) that needs to be in place and strictly enforced if the non-profit is going to hold onto tax-exempt status. Then of course there’s the logistics involved in making a real impact!
- Management: As we touched on earlier, a non-profit is only really as good or effective as its management. Because of the laws and regulations you’ll face, it’s essential to either have someone who understands them or take the time necessary to do all the research. Please don’t hire someone who learns as they go. Pick someone who knows what they’re doing and, hopefully, can be a mentor or train others at your non-profit corporation.
- Heavy Scrutiny: The IRS doesn't give tax breaks for nothing and non-profits are expected to live up to the hype and goals they’ve set. When we say heavy, we mean it, and on multiple levels – state, federal, local, social media, the public in general, and of course those who your non-profit impacts. Most non-profits are under a magnifying glass around the clock, 24/7/365 so be prepared!
There really is no perfect time to form a non-profit, well, unless you have access to a great lawyer and accountant! Because of how complex non-profits can get (and in a hurry) having these two professionals is going to be indispensable. Without them, to be frank, you’re adding a TON of risk.
Here are five easy questions that can help you figure out if this is the right move in general:
- Is there already an organization filling this need, and if so, could you do it much better?
- How many people are truly involved and already on board for this initiative?
- Are you sure this mission wouldn’t be better/more productive as a for-profit corporation?
- How vital is this situation you want to address? Consider how long it can take to officially form a non-profit and then begin having an impact.
- Keeping a non-profit funded is half the battle, if not more so. Take a good look at your cause and see what the funding landscape looks like.
Startup Savant has a TON to offer just about anyone interested in founding their own non-profit organization. Feel free to browse around the site and start taking it all in, or here are two great places to begin.
- State Guides: To be prudent, bookmark our page to explore options state by state.
- Services Guides: Start with our, “4 Best Non-Profit Filing Services” article.
This content on Forming a Non-Profit is not a legal document or legal advice. It is for informational purposes only and the information is subject to change over time. For specific questions and concerns regarding how to form a Non-Profit, please consult an accredited attorney or a qualified professional.