Chapter 2
Understanding What It Takes to Start a Nonprofit
IN THIS CHAPTER
Maybe you’ve been thinking for years about starting a nonprofit organization, or maybe an idea to solve a social problem or provide a needed service has just popped into your head. It might be time to make your idea a reality. But before you file the incorporation papers, you need to consider the positive and not-so-positive factors that can make or break your new organization. As with opening any business, starting and managing a nonprofit organization isn’t a simple matter.
Take a look at the economy around you. Are existing nonprofit organizations in your community thriving, or are they struggling to find financial and volunteer support? In addition, are you equipped to manage money and raise funds — which isn’t an easy task even when business is booming — and can you inspire others to work with you whether they’re board members, staff, or volunteers?
In this chapter, we pose some questions that you should think about (and answer) before you begin the process of incorporating and applying for tax exemption. If some of your answers point to the conclusion that your idea is worth pursuing but you want to test the idea first, we suggest that you consider using a fiscal sponsor. As we point out later in this chapter, the benefits of fiscal sponsorship are many.
www.wiley.com/go/nonprofitkitfd6e for a list of web resources related to the topics we cover in this chapter.
Weighing the Pros and Cons of Starting a Nonprofit
Before you jump headfirst into making your nonprofit dream a reality, you need to absorb some basic facts about nonprofit organizations. Let’s begin with some pros: You will
Receive exemption from taxes on most income to the nonprofit
Be able to receive, for most nonprofits formed under Section 501(c)(3) of the IRS Tax Code, contributions that are deductible for the donor
Have the opportunity to receive grants from foundations, corporations, and government agencies
Get to feel that you’re contributing to the solution of a problem or to the improvement of society. As the founder, your vision is unfolding for the greater good.
Just about everyone would consider these facts to be positive, but they don’t tell the whole story. If you’re thinking of starting a nonprofit to get rich or to avoid paying taxes, consider this list of cons:
Paying employment taxes: Nonprofit employees’ salaries are subject to income tax, like all other types of compensation. Tax-exempt doesn’t include payroll tax — it must be withheld, matched by the nonprofit, and deposited with the IRS on time every month (usually on the 15th day unless the 15th falls on a weekend or federal holiday).
Sharing the decision-making process with a board of directors: Even though you have the vision to form a nonprofit organization, the IRS requires it to have a board of directors. The board makes the decisions and is responsible for financial, management, legal, and operational oversight. Any decisions made by the founder or executive director must be approved by the board. (See Chapter 3 for more about the board’s role.)
Filing an annual report with the IRS: The complexity of the report increases as your nonprofit income increases. (See Chapter 6 for more information about reporting requirements.)
Competing with others for funding: Competition for grants from foundations, corporations, and government agencies is tough, and so is garnering donations from individuals. You’ll compete with more-established nonprofits that have successful track records.
Being unable to take any assets with you if you leave: If you decide to move on to other pursuits down the road, for example, you can’t take with you any assets accumulated by the organization you’ve built. Others will continue running the nonprofit, or else it will need to be dissolved and the assets given to another nonprofit. (See Chapter 20 for more about the process for closing a nonprofit.)
Doing Your Homework First
Beyond thinking about the challenges you face in starting and running a nonprofit organization, you need to apply some common sense. Nonprofits don’t operate in a vacuum, and neither should you. Personal commitment and inspiration can take your organization far, but you also need to find out how your community will receive your particular idea. Before going full steam ahead, investigate your competition, garner community support, recruit the right board members, choose how to fund your organization, determine whether you’re truly ready to run a nonprofit, and develop a game plan. Read on to find out how to get your nonprofit off to a great start.
Analyzing the competition
Just as though you were starting a for-profit business, you should analyze your competition before starting a nonprofit organization. If you want to open a grocery store, you don’t choose a location next to a successful supermarket, because the market can bear only so much trade. This principle holds true for nonprofits, too. You may have the best idea in the world, but if someone else in your community is already doing it well, don’t try to duplicate it.
On the other hand, if your area has no similar program, ask yourself why. Maybe your community lacks a sufficient number of potential clients or audience members to support the project. Or maybe funders don’t perceive the same needs in the community as you do.