Category: Nonprofit Posted on Apr 06, 2015

The Pros and Cons of Running a Non-Profit

You just got laid off and need to find a job. You provide a loving home to 20 adopted stray cats, but can’t keep doing that without an income. You get a great idea that solves all your problems at once: start a cat charity; fundraise to cover the costs and hire yourself as the executive director.

Great idea, right? Well, maybe not. . . Starting a nonprofit organization is fairly easy. The organization must be incorporated as a nonstock corporation at the state level, and apply for tax exempt status under Section 501(c)(3) of the tax code at the federal level. But, sustaining and running a charity is more difficult.

Consider The 2011 Statistics:

  • The IRS listed close to 1.1 million charities.
  • 55,319 new organizations applied to the IRS for tax exempt status.
  • Over 272,000 charities lost their tax exempt status for failure to comply with newly effective IRS
  • regulations requiring almost all nonprofits to file a Form 990 information return.

To avoid becoming one of the casualties, weigh the pros and cons, ask yourself a few key questions, and consider the alternatives.

Pros:

A 501(c)(3) organization:

  • Can accept tax deductible contributions;
  • Generally does not pay taxes on income related to its charitable mission;
  • Is often exempt from paying state income and sales taxes;
  • May be eligible for grants or contracts from foundations and state and federal agencies.

Cons:

Start-up time delays. Don’t count on being up and running for at least a year. The IRS is currently processing Form 1023 applications for 501(c)(3) status it received in April 2012.If you need to launch a program quickly, or are concerned about a short-term problem, consider affiliating with an existing nonprofit.

A nonprofit must be run by a board of directors of at least 3 people. These individuals must stay active and involved, put the organization’s interests above their own, and make sure the organization adheres to its mission and obeys the law. Directors must take their job seriously, and have the variety of skills and expertise necessary to help the nonprofit succeed.

Nonprofits are subject to extensive public reporting requirements. At the federal level, the Form 1023 and Form 990 are public documents, with questions dealing with finances, compensation and governance. Filings may also be required at the state level.

Why You Should Not Start A New Venture As A Nonprofit

Here are 4 reasons not start a new venture as a nonprofit, but to create a business entity, such as a limited liability company or stock corporation instead.

1. Your goal is to maximize income. A nonprofit can pay a reasonable salary and benefits, but it must be organized for the public good, not to benefit just one person or a few people. A nonprofit organization cannot be organized or operated for the benefit of private interests, such as a founder or the founder’s family.

2. You don’t need donations or grants because most of the business’s income will come from sales or services.

3. You wish to keep the company’s activities, business model and compensation paid private.

4. You don’t want to answer to a board of directors. A nonprofit is not owned by anyone – not even the founder. Staff, officers and even directors must answer to the board of directors as a whole.

Ask Yourself Key Questions

Many potential founders of a new nonprofit venture are passionate about solving a problem and are convinced that they can succeed where others have failed.This may be true, but first, ask yourself the following questions:

Is there a need for the services? Is another nonprofit offering the same services? If we will be duplicating services, what will we offer that is unique?

What are the funding sources? Do we have staff or volunteers with fundraising experience? Many founders believe that donations are to be had for the asking. In truth, competition for donations and grants is fierce, and funders are more likely to give to established groups with track records.

What are the expenses? While some nonprofits can run successfully on volunteer power, many will incur costs similar to a business venture – start-up costs, legal and accounting fees, salaries and benefits, insurance, rent and other operating expenses.

Some Alternatives

The fastest way to get started is to run your program in partnership with another nonprofit with a similar mission, but you will share control with the other organization.

Another option is fiscal sponsorship. Under this model, the “sponsor,” another 501(c)(3) organization, generally with similar mission, accepts donations for the sponsored organization and uses the funds to support the new program. Fiscal sponsorship can take many forms and is best documented in a carefully negotiated contract. The sponsor almost always charges an administrative fee, because it takes on a large obligation, and exercises some control.

Draft A Business Plan

If you’ve made it this far, you are a good candidate to launch a nonprofit organization. In that case, call me. But before you do, draft a business plan. Like any for profit venture, a nonprofit start-up needs a robust business plan that contains the following: mission statement, detailed description of programs and activities, needs assessment, budget and fundraising plan, and a board and staff recruitment and development plan.

Bruce Stanger

My litigation experience includes family law, divorce, product liability, construction law, professional negligence, shareholder disputes, medical malpractice, legal malpractice, and general commercial litigation.