What is a Nonprofit Organization?
The difference
between nonprofit and for-profit organizations is that nonprofits use their
profits to advance their programs, while for-profits distribute their profits
to their owners or stockholders. Nonprofit organizations fall into five main
categories:
-
1) Trade
associations, organized to advance a group of people who have a
profession in common (for example, Association of Research Librarians,
International Association of Meeting Planners). This group also
includes chambers of commerce and unions.
-
2) Charitable
organizations, which must generally demonstrate a benevolent
component. This is a diverse category, including religious groups,
museums, environmental and educational organizations, libraries, and
the many helping groups referred to as "charities." They are
also referred to as 501 (c)(3) organizations, because that is the
number of the IRS Code under which they are described.
-
3) Social
clubs, such as country clubs and fraternal organizations.
-
4) Governmental
groups, including city, county, state, and federal agencies.
-
5) Political
groups, generally organized to promote certain policies, issues, or
candidates for political office.
Click
here to view an IRS chart detailing characteristics of types of
nonprofits. Again, you will note that each type is designated by the
IRS Code under which it appears.
Should I Start a Nonprofit Organization?
The key
question to ask yourself is, "Who will benefit from the
activity?" If the answer is that you or your family will benefit,
then it's a good idea to start a for-profit company rather than a nonprofit
organization. If your answer is that the community or the public at large will
benefit, then a nonprofit structure may be the best route.
The second question
to ask yourself is, "Will I allow the board of directors to set policy,
including my salary, benefits, and even my employment by the
organization?" If your answer is "No, I want to keep control of the
organization," then you want to make your corporation for-profit. If,
however, you want the board to be autonomous, then a nonprofit organization
can be a good fit.
Remember, you can sit on the board and you can have a vote
when it comes to determining policy. However, on issues that affect your
employment, salary, and benefits, you must excuse yourself from voting.
What are the First Steps to Starting a Nonprofit?
Here are
the basic things you need to do to get started:
-
Define
your organization's purpose and form, and write a mission statement. Your
mission statement should explain why people will want to invest in your
organization (as donors, volunteers, or recipients of service).
See "Your Mission Statement Has a Mission" and
"Demystifying
the Mission Statement", reprinted from Nonprofit World, which explores this step in
detail.
-
Form a
board of directors.
See
"Build a Team, Not Just a Board" and "Cultivating Next-Gen Board Members", reprinted from Nonprofit World, for
an idea of what you should look for in your board members.
-
File
articles of incorporation. If you don't incorporate, board members and
other individuals in your organization may be held personally liable in
case of a lawsuit. Articles of Incorporation should be filed with your Secretary of
State (or other department that has authority for this filing in your
state).
Click here for more information.
-
Write
your organization's bylaws, or the rules you will adhere to. An excellent source for sample bylaws
and other forms needed to start a nonprofit organization is a book called
How to Form a Nonprofit Corporation: With Forms ,
by Mark Warda *.
-
Apply
for nonprofit status from the IRS. (Ask your local IRS office for IRS
publication 557 and IRS form 1023).
-
After
you have received your letter of determination from the IRS, apply to your
state department of revenue and your state department in charge of
regulations (often called the Department of Regulation and Licensing).
-
Register
your organization with the state. Contact the Secretary of State
(Corporate Division) and Attorney General (Charities Division).
-
Apply
for a solicitation license from your city. Check to see if your city
requires you to have such a license before you can solicit funds.
-
Apply
for sales tax exemption from your state.
-
Apply
for nonprofit bulk mail permit from your post office.
(See "Do
You Qualify for Postal Discounts?",
reprinted from Nonprofit World, or visit USPS.com
-
Obtain
liability insurance, including Directors' and Officers' (or D & O)
insurance. D & O liability
insurance is necessary to protect your board members' assets. See
"Do You Need D & O / EPL Insurance?" (reprinted from Nonprofit World) or Irwin Siegel Agency.
Do I Need a Lawyer? How Do I Choose One?
You can
do most of the work of starting your organization on your own, but you should
have your paperwork checked by an attorney. It's important to get an expert's
help in setting things up as the law requires. To choose a lawyer, find
someone with a good local reputation and experience in the nonprofit sector.
Get referrals from nonprofit leaders you respect. You can also check with the
American Bar Association (800-285-2221), your state or local bar associations,
the Christian Legal Society (703-642-1070), lawyer referral services, or the Foundation Center.
How Can I Get a Head Start on Managing a Nonprofit?Register for membership with the Society for Nonprofits, and access over 1,000 articles on nonprofit leadership and management from Nonprofit World magazine. The subject matter covered is extensive: accounting, board development, communication, computers, fundraising, law, management, marketing, personnel, and volunteers. The authors are some of the field’s best: Brinckerhoff, Ellis, Hopkins, Martinelli, Tesdahl, Warwick, and Weisman, among others.
Where Can I Get Money to Start My Organization?
See "Starting a Fundraising Program Without Any
Funds", reprinted from Nonprofit World, which addresses this question.
How Should We Apply for Grants?
See
the resources listed in the Links section of SNPO.Org for information on applying
for grants. You
might also consider joining the Foundation Center's Associates Program, which
will help you define your needs and understand the basics of the grant
process. For more information, contact the Foundation Center, 79 Fifth Avenue,
New York, N.Y. 10003-3076 (800-424-9836) and ask about the Associates
Program.
Remember that while it's
useful to investigate applying for grants, your organization
will be stronger and more self-sufficient if you think of grant money as only
one part of a broad base of funds.
How Can We Be Sure We Start Off on a Good Financial Footing?
It's
crucial to have a good, solid budget and to run your organization like a
business from the very beginning. In his excellent book Mission-Based Marketing
*,
Peter Brinckerhoff explains that a businesslike philosophy does
not mean ignoring your mission - just the opposite. It ensures that you will
"get more mission for your money," doing more with the limited
resources at your disposal. Other useful books on budgeting and
accounting
include The Simplified Guide to Not-for-Profit Accounting, Formation and Reporting
*, and Streetsmart Financial Basics for Nonprofit Managers
*.
Must We Register in Other States if We Plan to Receive Contributions in Other
States?
If
someone from another state wants to send you a contribution, it's not
necessary for you to register in that state. On the other hand, if you plan to
send a direct-mail marketing piece to the general public in another state, you
may find it prudent to register with the Department of Regulation in that
state. Then, people can call their Department of Regulation to be sure you're
a bona fide charity. If they call and you're not registered, they may be
reluctant to contribute to your organization. Thus, it's a good idea to
register (and costs little or nothing to do).
When Can I Start Soliciting Donations?
Wait until you receive your incorporation papers and letter of nonprofit status.
It's too risky to start soliciting donations before you have those official
documents in hand. Until you're incorporated, you're personally liable for
what you do with donated money. If you were later sued, it could wipe out your
personal assets. After you're incorporated, you have the corporate shield to
protect your assets. For another thing, until your organization receives its
letter of determination from the IRS, donors cannot be sure that their
contributions will be treated as deductible. See "May
We Say Our Donations Are Deductible?",
reprinted from Nonprofit World. If you want to start raising
funds before you receive your papers, another alternative is to designate a
fiscal agent. A fiscal agent is another nonprofit organization willing to
handle your donations for you.
Are There Certain Standards We Have to Follow?
There
are two watchdog groups
which set standards for charities. See
"Are
You Meeting the Standards?", reprinted from Nonprofit World, for the names of these watchdog
groups and a brief description of principles you need to follow as a nonprofit
organization.
Where Can We Find Support and Resources to Help Us?
As a
first step, we recommend joining the Society for Nonprofits
($49-150/yr). For a sampling of
other resources that we've
found especially helpful for nonprofits,
see the Links
section of this Resource Center and check out the following books:
Where Can I Find More Information?
Next
|
, by Bruce R. Hopkins
, by Anthony Mancuso
, by Stan Hutton & Francis Phillips
, by Darian Rodriquez Heyman
