By Cliff Ennico
“I am looking to set up a nonprofit organization with some friends to help raise funds for an obscure but devastating disease.
“I’ve been looking over the IRS forms for getting a tax exemption under Section 501(c)(3) of the Internal Revenue Code and they look pretty daunting. My friends and I all have full-time jobs and are not sure we will be able to comply with all of the IRS requirements.
“Is there any easier way for us to ‘do good’ without having to quit our day jobs?”
In my law practice, I receive at least one inquiry a week from people looking to start nonprofit organizations. I wish more of them looked like this email.
A lot of people are under the impression that in order to do good, you have to be a nonprofit, as if making a profit were somehow illegal or immoral. I have to remind my nonprofit clients periodically that the first obligation of any newly formed nonprofit organization is — to make a profit!
Being a nonprofit does not mean you don’t make money. It means your profits are not distributed to the owners of the organization (nonprofits have no owners as such) as dividends or a return of capital. Profits earned by a nonprofit must, by law, be used to further the organization’s tax-exempt goals, whatever they may be.
For a primer on how to set up a nonprofit organization, see my two-part YouTube video on the subject (search “Cliff Ennico nonprofit” on YouTube).
Before you set up a nonprofit organization, here are five tough questions you need to ask yourself and your fellow founders:
Who Will Run the Organization? Lots of people will tell you they will help you run the nonprofit once it’s set up, but don’t believe them. Many, if not most, will disappear into the woodwork once the organization is up and running and you ask them to devote X hours of their time each week to help out. Most nonprofit organizations are run by one, two or (at the most) three people who do 95 percent of the work. If you have not identified those people, be assured you will end up doing everything.
Will We Have the Time for This? Make no mistake: Nonprofit organizations are time vampires. They will demand every spare waking hour of your life. If you are working full-time jobs, then consider hiring someone to act as the executive director of the organization and devote himself or herself full time to running the organization. Keep in mind that this person (unless retired and looking for something to do to stave off dementia) will want to be paid. You will have to withhold taxes on his or her paycheck, etc., etc.
Are We Good at Fundraising? People who run nonprofits spend at least 80 percent to 90 percent of their management time on fundraising activities.
Nonprofits by law can generate income in only three ways: charitable donations by people looking for tax deductions; government grants; and fundraising events such as bingo games, walking/running/bicycle races, silent auctions and car washes.
Finding the donors, writing the grant applications and running the events may well leave you little time left over for anything else. Consider working with a fundraising consultant who can help you write the grant applications, find the donors and select the right fundraising events for the particular mission you are trying to serve.
Are We Disciplined Enough to Comply With the Law? As this reader points out, there is a fair amount of paperwork you have to file with the IRS and state regulators to keep a nonprofit on life support. If you are consistently late filing these, sooner or later, you will lose your tax-exempt status.
If you do not have the patience to deal with legal paperwork and the thought of doing yet another tax return each year (called an annual report for nonprofits) makes you gag, you will need to hire — and pay for — a good local accountant who works with nonprofits and will stay on top of you to get the information needed to do his or her job.
Are We Committed Enough to Stick Around for the Long Haul? Running a nonprofit is a thankless job: It involves long hours, dealing with difficult people, lots of paperwork and lousy pay. Being passionate about your cause to the point of insanity is the only way to put up with all the nonsense and get you through the tough weeks (or months) when nobody returns your phone calls, the government rejects your grant applications and you can’t get your board members to show up at virtual meetings.
If you have any doubts about how passionate or committed you are to the cause you want to serve, you probably aren’t passionate or committed enough to run a nonprofit. Find another organization that’s already been set up for this purpose, and either donate money or volunteer what time you have available to that organization. You will be doing good, feeling good about yourself and staying sane.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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