Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law. They are, with minor exceptions, the only group of tax-exempt organizations that can receive contributions that are tax deductible for their donors.
The Internal Revenue Code describes the allowable purposes of 501(c)(3) nonprofit organizations, which include serving religious, educational, charitable, scientific, and literary ends.
Not everyone thinks that nonprofit sector is the best name. That’s because of the array of organizations with different types of nonprofit status. Some of these organizations are formed to benefit their members – such as fraternities and labor unions – and don’t share a broad public-serving intent. Another reason nonprofit sector may not be the best choice of terms is its negative connotation. After all, what’s worse than not making a profit? But, as we point out earlier, and we remind you again in later chapters, not making a profit isn’t the determining factor. Alternative terms that you may hear include the following:
• Voluntary sector: This term emphasizes the presence of volunteer board members and the significance of voluntary contributions and services to the work of 501(c)(3) organizations. In this definition, the organizations alone don’t represent the meaning of nonprofit; the definition includes the vast web of supporters who participate as volunteers and donors.
• Independent sector: This term emphasizes the public-serving mission of these organizations and their volunteers and their independence from government. (Independent Sector is also the name of a nonprofit organization that provides research, advocacy, and public programs for and about the nonprofit sector.)
• Charitable sector: This term emphasizes the charitable donations these organizations receive from individuals and institutions.
• Third sector: This term emphasizes the sector’s important role alongside government and the for-profit business economy.
We use the term nonprofit sector throughout this book, but we want you to understand its limitations and be familiar with other commonly used terms.
Knowing Your Mission Before Entering the Nonprofit World
People form nonprofit organizations in order to work toward changing some condition in the world, either for a specific group of people or for society in general. The overall goal or purpose of a nonprofit is known as its mission. Taking the time needed to clearly outline a nonprofit’s mission is time well spent because the mission guides the activities of the organization, helps the nonprofit’s directors decide how to allocate resources wisely, and serves as a measure for evaluating the accomplishments of the group. We think developing a mission statement is so important that we devote an entire chapter (Chapter 3) to guiding you through this process.
It’s also important to examine your personal mission before launching a nonprofit. You’re creating a legal entity that has responsibilities for reporting to both the state and federal governments. If the organization grows to the point where you must hire employees, you’re responsible for paying regular salaries and providing adequate benefits. And although you can be compensated for your work as a nonprofit staff member, you can’t develop equity in the organization or take away any profits at the end of the year. Chapter 2 has more information to help you make this important decision.
Setting up a nonprofit
Nearly all nonprofit organizations are established as corporations under the laws of a particular state. If you’re located in Iowa and you plan to do most of your work in that state, you follow the laws in Iowa to set up the basic legal structure of a nonprofit corporation. Although you’ll find some differences from state to state, in general, the process requires writing and submitting articles of incorporation to the state and developing bylaws, the rules under which the corporation will operate.
After your nonprofit is established under your state laws, the next step is applying for 501(c)(3) status from the IRS. This step requires completing and submitting IRS Form 1023 or Form 1023-EZ. If you submit Form 1023, you will need to specify in some detail the proposed activities of the new organization, and you’re asked for projected revenue and expenses for the year in which you apply and two years into the future. To be honest, you can’t complete this form in one afternoon. It requires substantial time and thought to develop the necessary material and should be reviewed by an accountant and legal representative before filing. We discuss the incorporation and IRS application process in Chapter 4.
Making plans and being flexible
After you start managing a nonprofit organization, you’ll discover that planning is your best friend. Every task from budgeting to grant writing requires that you make plans for the future. And you need to do a substantial amount of planning before you’re ready to send in your IRS application for tax exemption.
Don’t be frightened by this recommendation to plan. The act of planning fundamentally comes down to thinking through what you’re going to do as well as how and when you’re going to do it. Your plan becomes the map that guides you toward achieving your goals and your nonprofit mission. Planning is something that you should pay attention to every day.
The nonprofit sector is larger than many people realize. Here are some figures from the National Center for Charitable Statistics, based on IRS data, and the Independent Sector, regarding 501(c)(3) public charities in the United States:
• Nearly 1.2 million organizations were registered as public charities with the IRS in 2015.
• Assets held by these groups in 2013 totaled more than $3 trillion.
• The number of public charities increased by nearly 23 percent between 2008 and 2015.
• Nearly 30 percent of public charities that reported to the IRS in 2012 had annual expenses of less than $100,000.
Being Inspired and Inspiring Volunteers
The nonprofit sector