Businesses of all shapes and sizes are formed when an individual, or group of individuals, identifies an unmet need. The founding of a nonprofit (also known commonly as not-for-profit) organization often stems from a similar desire to meet the needs of others. Indeed, to be sustainable – meaning to be able to operate independently through its own management and funding – a nonprofit organization must adhere to all the practices of good business management while adhering to specialized ethical and legal responsibilities.
What is a Nonprofit Organization?
In its 2008 “The Nonprofit Sector in Brief,” the Urban Institute explains the differences between three categories of nonprofit organizations.
- Public charities designated as 501(c)3 organizations by the Internal Revenue Service. “Public charities include most organizations active in the arts, education, health care, and human services. They are what most people mean when they use the term nonprofit organization,” states the brief. This category also includes religious congregations.
- Private foundations, also designated as 501(c)3s. An individual, family or corporation often endows a private foundation, which then funds public charities and other good works.
- “Other” nonprofits include clubs, trade associations, labor unions and advocacy organizations, among others. These nonprofits are unincorporated.
Benefits and Disadvantages of Forming a Nonprofit Corporation
In his well-respected 2007 legal guide How to Form a Nonprofit Corporation, attorney Anthony Mancuso offers these benefits of legal nonprofit status:
- Tax exemptions
- Receiving public and private donations
- Protection from personal liability
- Separate and perpetual legal existence
- Employee benefits
- Formality and structure
- Miscellaneous benefits, such as lower postal rates and discounts on advertising and memberships
Mancuso counters those benefits with a list of disadvantages:
- Official paperwork, including incorporation documents and annual tax returns
- Incorporation costs and fees
- Time and energy needed to run a nonprofit
- Restrictions on paying board members and executives
- Restrictions on dissolution
- Restrictions on political activities
- Oversight by the attorney general
Alternatives to Forming Nonprofit Organizations
Before starting a nonprofit, individuals might consider alternatives to creating a new organization:
- Donating time, money and/or expertise to an existing nonprofit
- Using a specialized giving vehicle – such as a donor advised fund or a giving circle – to fund a particular facet of an existing nonprofit’s work
- Organizing an unincorporated association
- Seeking the fiscal sponsorship of an existing nonprofit with a complementary mission
Where to Begin in Forming a Nonprofit Organization
Naomi Wolf, in Give Me Liberty: A Handbook for American Revolutionaries (2008), outlines 10 steps for starting a nonprofit:
- File a certificate of incorporation
- Build the board of directors
- Draft a vision statement and a mission statement
- Establish bylaws and board policies
- Get an employer identification number for hiring staff
- Open a bank account and establish financial procedures
- File for federal tax exemption status
- Hire staff
- Establish a payroll system
- Develop a fundraising plan
In recent years, the number of nonprofits in the United States has climbed past 1.4 million organizations, according to the Urban Institute in its 2008 brief. Individuals wishing to advance their passion may choose to incorporate as a nonprofit corporation, build an unincorporated association or invest time and money in an existing nonprofit organization. Each of these paths will strengthen the vital nonprofit sector.
Molly Schar - With more than a decade of experience in fundraising, communications and nonprofit management, Molly Schar has worked with mission-based, ...
