To start a business or operate as a nonprofit organization? That is often the question for some entrepreneurs.
With a 501 (c)(3) status —meaning, a public charity that has been approved by the Internal Revenue Service as a tax-exempt, charitable organization— the nonprofit advocates a cause, educates the public, alleviates social issues or provides some type of healing to those in need. Unlike a for-profit business, the primary mission of a nonprofit is to solve a problem rather than make a profit. However, nonprofits still require a lot of revenue and a meticulous business strategy.
Some may assume this model is a hassle-free setup that is eligible for tax exemption, but there are so many caveats to consider to avoid pitfalls. For example, tapping into marketing, savvy business sense and fundraising skills are inevitable.
Liberate talked to Mechele Mills, president and chief executive officer at Better Business Bureau — Central East Texas, about what people should know before entering the nonprofit world.
Q: What are some key steps to follow before forming a nonprofit organization?
A: It’s a good idea to make sure you are not duplicating a service that is already being provided, as it can be confusing for donors and tough on a new nonprofit to compete with an established organization who may already have name recognition. Study best practices. A good guide is to use BBB’s 20 Standards for Charity Accountability or Robert’s Rules of Order.
Q: Do you need to hire or consult with an attorney, accountant or other professionals before creating a nonprofit? Is this something you can do yourself through research?
A: Educate yourself on nonprofit laws and accounting rules, although, it’s always a good practice to hire a great attorney and CPA. Hiring a trustworthy professional is always a good idea. The process of creating a nonprofit is more involved than most people think. A good first step would be to visit the IRS website and read through their materials and tutorials.
Q: Is the process of naming and/or trademarking the nonprofit name the same as a regular business?
A: Yes, for the most part, but just to be safe, this may be the area you would want to consult with an attorney on.
Q: Do you need a business plan?
A: Absolutely. Operating a charity needs to be approached as if you are running a business, because essentially, that’s what it is. It is just a different kind of business. A business plan, strategic plan, marketing plan, plus all of the additional measures that a nonprofit must take to receive a 501 (c) (3) designation must take are all of utmost importance for nonprofit success.
Q: What should people keep in mind when fundraising for a nonprofit?
A: Running a nonprofit is very hard work; harder than most people realize. If you think you will be able to ask people for donations year after year, and money will begin pouring in, you are mistaken. Competition is high and there are many established and respected organizations out there which may already be providing the service you are considering.
Q: And what should you keep in mind with ongoing compliance?
A: Regularly consult with your attorney and accountant.
Q: Are there any resources available for people with limited funds who want to start a nonprofit?
A: Seek out local nonprofit fundraising organizations, such as the Association of Fundraising Professionals (AFP). Find out what the process is for local foundations who might provide funding to your organization, hire a trustworthy grant writer and/or take a grant writing class. The IRS also provides helpful materials which can lead you in the right direction.
Q: What are the most common mistakes people make when starting a nonprofit organization?
A: Entering into the nonprofit arena thinking that starting a charity is easy and that people will just throw money at you. Many people start nonprofits because of their passion for a cause, life experience, etc. However, it’s important to remember that passion alone will not guarantee success. Set up a good foundation, do things the right way, hire people who are smarter than you and trust them to do the job. Stay focused, and of course, apply for BBB Accreditation once your charity has established itself.