How to Start a Nonprofit Organization
First, congratulations!
Creating something out of your passion and desire to take action is exciting. The next few articles will address the nuts and bolts of setting up a nonprofit, but thinking through the why and understanding what it means is a step that should not be skipped.
With almost two million nonprofits in the United States, it is clear that a nonprofit is easier to create than it is to grow. We want yours to be one that thrives, and in order to do that you must plan for success. Before rushing to incorporate, take the time to understand what a tax-exempt organization is and is not. You may find that you want a business and not a nonprofit organization after all.
How to Create a Mission Statement for Non-Profits
Most people have a general idea (or many ideas) of what they want to do but distilling your ideas into a clearly articulated mission statement can be harder. A mission statement is how you introduce yourself to other organizations and donors. You will use it in grant applications, when you register with organizations like CharityNavigator, and it will be on your Form 990 (tax return). Boardsource provides some good information on how to think about your mission statement and we’ll dig into that as well in subsequent articles.
Nonprofit vs. Tax-Exempt Organization
You will hear these terms being used interchangeably, but there is a difference. A nonprofit is the organizational structure under state law. It is a business form like a corporation or an LLC. The majority of nonprofits are also tax-exempt organizations, however there is a separate process required in order to be considered a tax exempt organization and this determination is done by the federal government via the Internal Revenue Service (IRS). This is what enables you to apply for certain grants and allows donors to obtain allowable deductions for donations made to your organization. For our purposes, we will use the terms interchangeably and assume that your nonprofit will be seeking tax-exempt status.
Who Owns the Nonprofit?
While this organization is your baby and you will spend many hours laboring over it with little to no compensation, the trade-off for tax-exempt status is that you are not the owner. In fact, nobody is the owner. You are a custodian of funds, a fiduciary. This can be a really hard concept to understand for founders.
You are creating a nonprofit for the public good. That means if you grow your shoestring budget organization to a multi-million dollar charity, you cannot sell it or benefit from it personally. Even if you choose to close it down, you must transfer the funds left in the organization’s account to another 501(c)(3).
Who’s in Charge of a Nonprofit?
The nonprofit is governed by officers and a board of directors. Each state has rules for how many you must have, that number is usually between 3 and 5. Unlike a sole-proprietorship, you cannot run the organization yourself. You need a board and must be willing and able to collaborate with them. You may find yourself outvoted or feel undervalued at times. That’s alright, it’s part of the process. But you must be ready to recalibrate, work together, and find solutions.
Ask yourself why you want to do this. There is nothing wrong with creating a business for personal gain or self-promotion. If that is an important part of why you are doing this, you will inevitably be disappointed or find yourself jeopardizing your tax exempt status. Perhaps you are better served starting a for-profit business. If I haven’t scared you off and you are still excited to get started, the next question is who do you recruit for these often unpaid positions that comes with a fiduciary obligation, meetings, and lots of work if you want to be successful?
Building a Board for a Nonprofit
There is the law and there are best practices. While building a board of family and friends is common as a practical matter and not illegal per se as your organization grows, this can become a best practices issue. The primary concern is having a board that can demonstrate independent thought. The IRS has issued guidance on this here Governance and states:
“Irrespective of size, a governing board should include independent members and should not be dominated by employees or others who are not, by their very nature, independent individuals because of family or business relationships.”
While the IRS does not prohibit family members or employees from serving together on a board, they do review the composition of boards in order to protect from insider transactions and misuse of charitable funds.
Take a look at the IRS Publication linked above, and share it with your board. It has good guidance on a variety of these topics.
You should be seeking to fill the positions of President, Vice President, and Treasurer at a minimum. State laws differ as to which roles are required and the names vary (executive director, chairperson etc.). Send me a message if you would like a link to your state’s website for nonprofits if you cannot find it. These are a wealth of information.
As you recruit, be mindful of who shares your vision and mission. Look at how your communication styles and personalities mesh. Take time getting to know people before you ask them to join the board and check your ego at the door. That old adage, “if you are the smartest person in the room, you’re in the wrong room,” while perhaps not always appropriate, holds some truth. You want to find people who have skill sets that will enhance what you bring to the table. If you are a financial whiz, perhaps you need someone more creative, or a better writer on your team. Seek out those things, because your small team will need to cover a lot of area. If you give people space to shine and grow, you are more likely to attract and retain board members.
There are other ways to develop a board beyond the scope of this article (we’ll come back to it), however, as a starting point, find people you like and respect who share your vision and mission, and who will tell you the truth whether you like it or not.
Most importantly, remember that a nonprofit is like that child you launch out into the world, you don’t own it, you are just there to support it and watch it grow without an expectation of getting anything financial back. Hopefully like that child, your reward will be more than you could have expected.
