So You Want to Start a Non-Profit

The conversation usually starts like this with a client saying, “I want to start a nonprofit.”

That’s the beginning of a process of asking yourself, “What is the mission that I’m trying to accomplish and who benefits?” In fact, the very term Nonprofit is falling into disfavor because of the misconception that these organizations are not allowed or supposed to earn a profit. The nonprofit label is being replaced by the more descriptive Community Benefit Organization or (CBO). We’ll talk about that later.
The characteristic feature of all nonprofit organizations is that they are exempt from Federal, State and Local Income Taxes. The major categories of tax exempt organizations are:

1.    Charitable organization, which must be operated exclusively for a religious, charitable, scientific, public safety, literary or educational purpose, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. No part of the net earnings of which inures to the benefit of any private shareholder or individual, and no part of the activities of which is carrying on propaganda or trying to influence legislation, or participating in any political campaign on behalf of a candidate for public office. IRS Code [Sec. 501 (c) (3)]

2.    Clubs organized for pleasure, recreation, and other nonprofitable purposes (swim clubs, country clubs etc.) [Sec 501 (c) (7)]

3.    Business leagues, associations, chambers of commerce. [Sec. 501 (c) (6)] It might interest you to know that the National Football League (NFL) is a (c) (6).

4.    Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which is itself exempt.

Once you have identified the organizational mission (feeding the homeless, counseling services, social welfare etc.) the next question is who benefits. If the answer to that question is you or your family, then it’s best to start a for profit company. If the answer is the community (hence the term CBO) or the public at large, then your answer is the nonprofit structure. Once you’ve decided this is the route you prefer, you must be prepared to allow the board of directors to set policy, including your salary, benefits and term of employment.

Now that you have decided to proceed with starting your CBO, what are the next steps?

Following are the essentials to getting your organization started:

1.    Define the purpose and mission of the organization. The mission statement should identify purpose of your organization, the constituency that will be served or who the recipients of services will be, and why donors and volunteers would want to become invested in the organization.

2.    Form the board of directors.

3.    Prepare and file articles of incorporation with the Secretary of State (or other department in your state with the oversight authority for exempt organizations). It is advisable to form the organization as a corporation to shield the board members, officers and other individuals in the organization from personal legal liability in the event of a lawsuit.

4.    Prepare the organization’s bylaws. The bylaws are the organization’s governing rules.

5.    File Form 1023 with the IRS. This form is the application for recognition as an exempt organization. IRS Publication 557 and the Form 1023 are available for download from the IRS: www.irs.gov.

6.    Develop strategic and fundraising plans.

7.    Establish a system for financial accounting and record keeping.

8.    Once you have received your recognition as an exempt organization, register with your State’s bureau of Charitable Organizations. It should be noted, that each state has its own requirements as to when an exempt organization must register.

As I mentioned at the beginning, one of the prevailing myths about nonprofit organization is that they should not earn a “profit”. That type of thinking will see certainly lead to the organization having a very short life cycle. In future posts, I’ll explore the concept of running your CBO like a for-profit business.

In closing, here are some resources for those interested in forming a Nonprofit or Community Benefit Organization.

1.    National Council of Non Profits

2.    Board Source

3.    Community Accountants

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