Non-profit organizations are crucial entities in every community. Non-profits often provide stability, resources, and services to many communities in need that local governments cannot, or will not, provide. The most common non-profit organizations are:
- Religious organizations, making up 16.7% of all non-profit entities;
- Schools and other educational institutions, making up 13.8% of all non-profit entities; and
- Foundations and grantmaking organizations, making up 9.2% of all non-profit entities.
When starting a non-profit, there are many things you need to consider to operate successfully and achieve your non-profit's goals. This article dives into 10 of the most important considerations you should keep in mind when starting a non-profit company.
If you have any questions about starting your non-profit, contact us today so that we can answer any of your questions.
1) The Difference Between a Non-Profit and a Not-For-Profit
Many people may not realize that there are many differences between a non-profit and a not-for-profit organization. Before starting your non-profit, understand what a non-profit is and how it is different from a not-for-profit company.
A non-profit essentially runs like a business, attempting to earn a profit, increasing revenue and margins along the way. The main difference between a non-profit and a regular business is how the organization uses those profits. For this reason, understanding your non-profit's mission is crucial so that it is clear where profits go and why your non-profit exists.
On the other hand, a not-for-profit company operates as a “recreational organization” that does not operate with the ultimate goal of earning revenue. Instead, all of the money that a not-for-profit organization makes is donated to the organization to pursue the organization's goals. These are typically charities or other forms of public welfare entities.
The scope for non-profits is much broader than the scope for not-for-profit organizations and is often larger. Another significant difference is tax-exempt status: non-profits benefit from tax-exempt status under the 501(c)(3) tax designation, whereas not-for-profits do not qualify under 501(c)(3) tax-exempt status but rather can be considered under the 501(c)(7).
2) Determine Your Mission
One of the first things you should do when starting a non-profit is conduct a needs analysis. Why would your non-profit exist? Who will benefit from this non-profit, and who are you trying to help? What will the organization do to achieve your goals? Where will you provide these services?
The mission statement you create can help focus these goals. Though the mission statement may only be two sentences, you should always focus on honing in on exactly what you do and why you are doing it. You will likely use this mission statement in marketing materials, on your website, for events, and when fundraising. Therefore, take the time to ensure you clearly show what your mission is.
3) Naming Your Non-Profit
Choosing a name for any business is a crucial step when forming your entity. However, for non-profits, the name should be unique while also shedding light on what the non-profit exists for. It is helpful to use powerful words reflecting your mission that will leave an impression on people.
When selecting a name, you should also check the IRS's Tax Exempt Organization Search to ensure that another tax-exempt entity is not using the name you hope to use.
4) Legal Status and Filing Accurate Paperwork
As we mentioned before, a non-profit organization can be exempt from taxes under Section 501(c)(3) so long as it meets specific federal and state requirements, which include that the organization:
- Has a “Charitable Purpose”;
- Qualifies as a “Religious Group”;
- Is considered a “Scientific Organization” or serves a “Literary Purpose”; or
- Qualifies as an “Educational Organization”
None of the organization's earnings may inure to any individual or private shareholder. However, if you receive tax-exempt status under Section 501(c)(3), it is vital that you confirm your tax-exempt status in your state of residence or incorporation as well.
Section 501(c) also lays out other tax-exempt entities, besides just in section (3). Therefore, you may find a different section more attractive for your tax-exempt status, such as section 501(c)(6), 501(c)(4), or 501(c)(5). For example, Section 501(c)(4) includes:
“Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.”
When filing for tax-exempt status, you should always consult with an experienced non-profit lawyer to ensure that you are filing with your non-profit's best interests in mind.
5) Intellectual Property (IP)
Intellectual property considerations are just as crucial for a non-profit as they are for for-profit companies. Intellectual property includes trademarks, copyrights, and patents associated with your business. Whether you launch a website, develop software, create a logo, you should (a) be careful with any images you get from the internet and (b) ensure that you protect your IP once you create it.
Besides protecting your IP to protect your brand and ensure that there is no confusion with your non-profit's brand and another brand, there are other additional considerations around IP you should be aware of:
- Since you are a tax-exempt organization, your IP must only be used to further your mission. You cannot use your IP to benefit anyone or any other entity. Therefore, licensing your IP for profit must be done so carefully. You must be sure that you do not use your IP as a "private benefit" and ensure you receive full value for another entity's use of your IP.
- If you received any grant funding to create IP, be sure you review the terms and conditions of that grant and how you may use the IP that the grant was given to you to create.
- Ensure your volunteers understand the value of your IP and have agreements in place to protect your IP. You want to avoid losing any of your IP rights, even mistakenly.
This is an area of law that can often become confusing, especially when considering your tax-exempt status and the value of your IP. It is crucial to consult with a non-profit attorney who can help walk you through all of the considerations you need to protect your IP while maintaining compliance successfully.
6) Building Your Non-Profit Team
Building your leadership team, often in the form of a board of directors, is one of the most essential aspects of ensuring your non-profit's success. The leadership will set the tone for the organization, helping the organization stay on track while always moving towards its goals.
When selecting your team, you want to make sure you have a motivated, intelligent, productive, and compassionate team with members who enjoy working together. Connect with individuals who believe in the mission and have passion for the non-profit's goals.
Depending on your non-profit, you may need to hire people for fundraising, event organization, account management, marketing, or any other role that your organization may need. Be sure that you are selective with who you bring on and ensure that each member is inspired and passionate to work towards the non-profit's goals with enthusiasm.
7) Practicality – Can you survive tough times?
One of the most challenging questions a non-profit has to ask is whether or not its goals are practical. At the outset, create estimations for both expenses and expected revenue/donations. Understand what your startup costs are and how much money you will need to reach your goals. Also, consider how you will create revenue or solicit donations, what your margins will be, and who you need on board to help you stay on track with your financial goals.
8) Funding Your Non-Profit
Most non-profit organizations depend on donations in order to fund their operations. Therefore, fundraising is a key component for your non-profit. Determine what your primary source of fundraising will be and how you will achieve your fundraising goals.
Some questions you should ask yourself before planning to fundraise include:
- Will you need to hire someone to lead a fundraising team?
- Will the organization solicit potential donors via emails, calls, social medial, or direct mail?
- Will you put together events to raise money, and if so, how will you raise money to host the event?
- Will you host auctions? What will you sell? Where will you get the items or products to sell?
Other questions you need to ask are:
- Who are your ideal donors?
- Where can you find these donors?
Some non-profits seek out funding from large corporations with a budget for donations to non-profits or may solicit contributions from their employees.
Further, you may want to consider applying for grants on both the state and national levels from the government. Grants.gov is a great resource to find some of those opportunities.
9) Management Systems
Like any for-profit business, you will have to determine what management systems you need in place in order to operate. Whether you have employees, volunteers, or board members operating the organization on a day-to-day basis, you should try to separate these duties to maximize efficiencies.
Determine who the best person is for each operational process of the entity and let those individuals take on the leadership roles for operating the daily management tasks. Many tools exist (man with free versions) that centralize an organization's day-to-day operations. These include:
10) How to Stay Compliant
Finally, to successfully operate any non-profit organization, you must always ensure compliance with both federal and state non-profit laws. This includes:
- Filing all required tax forms each year, including IRS Form 990 series (990-N, 990-EZ, or 990-PF) on time.
- Ensure you maintain your tax-exempt status.
- Document all unrelated income activities and pay all unrelated income taxes not related to your 501(c)(3) status.
- File any required state-specific business licenses.
- File corporate annual reports in the state you incorporate in and the states you operate in.
- Make sure you are registered to solicit fundraising in all states that you ask for donations from.
- Include all written disclosure statements for all written solicitations for fundraising.
- File an annual report demonstrating expenses, revenues, program outcomes, and goals for each year.
- Always adhere to the non-profit's bylaws.
- Elect any officers, directors, and/or committee members only in accordance with your bylaws.
- Ensure all board members understand and abide by all of their fiduciary duties.
- Conduct regular board meetings.
- Beware of any conflicts of interest that may arise.
- Ensure you properly classify all employees.
- Maintain all records that your state and the federal government requires.
- Determine which specific documents you must make public to the general public and ensure you do so.
This is a non-exhaustive list of some of the ways you can ensure compliance with non-profit laws. It is always essential to consult with an experienced non-profit law firm to determine any steps you need to take to ensure your non-profit's compliance.