Are You Sure You Want to Start a Nonprofit?

By Travis Townsend Jr.

Is there anything more fulfilling than volunteering or engaging in community service? That warm and fuzzy feeling you get from helping change the world for the better is like no other. Some people participate in church-organized community service activities, while others support organizations like the United Way, Project Open Hand or Habitat for Humanity. With all the needs of people of the world, there is still a great need for more non-profit institutions geared toward solving humanity’s problems. So when I get a phone call from an aspiring non-profit organization entrepreneur telling me they want to get started I get excited! And when the client goes on and on in a fiery passion about his or her particular cause and all the things planned to provide assistance to the world I get wound up and ready to go. But I always have that little bird on my shoulder telling me to temper my enthusiasm with some counsel to the client on whether they really want to take on the task of organizing and running a nonprofit.

While nonprofits are usually based in high-minded ideals, they should be approached like serious business and require hard work. The organizational requirements are very similar to those of a for-profit business. The typical form for a non-profit organization is a corporation and it must be formed by filing articles of incorporation with the local organization authority just like with a for-profit corporation. Bylaws must be adopted, and a board of directors must be elected as well. However, in addition to following basic corporate organization steps, non-profit organizations desiring tax-exempt status must complete and file a Form 1023 application for tax-exempt status with the Internal Revenue Service (IRS). Many states also require a tax-exempt application be filed with the state’s taxing authority.

As a practical matter, raising money is the bane of a nonprofit’s existence. Unlike a for-profit corporation, nonprofits cannot simply sell ownership interests or issue debt to obtain operating capital. Instead, non-profit corporations must basically beg big-hearted people and institutions for money to operate. As a consequence, there are strict rules regarding the financial management of the organization that must be followed. Nonprofits must ensure that no funds raised by the organization inure to the benefit of the corporation’s directors, officers, agents or any individuals. Nonprofits must also ensure that funds donated for specific purposes are used just for those purposes. A best practice for non-profit corporations is to establish a restricted account for sponsorship dollars and other specially allocated donations. Another best practice is to implement a clear and strict conflicts of interest policy that outlines when the corporation can engage affiliated individuals for paid products and services.

Garnering support and awareness for your organization’s cause is difficult enough, but when you add on the financial management and governance requirements, operating a non-profit organization can be herculean endeavor. Do not embark upon the undertaking lightly as it will unquestionably require a lot of attention to detail, hard work and effort.