Previously, we talked about the mechanics of starting a nonprofit which included writing and filing various documents with both state and federal agencies, in other words, we answered the question of “how.” You can read it here. Today, we will discuss the questions of “why” and “who.”
Why Start a Nonprofit
The IRS is very clear that nonprofits must organizations must be organized and operated for one or more of the approved tax exempt purposes. According to the IRS, tax exempt status is granted to organizations that are; charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
The next question is how does the IRS define charitable? Again, looking at their guidelines, charitable includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
Once you have determined that your organization fits into one or more of these areas, the next step is to analyze why you are starting a nonprofit. If your rationale for starting a nonprofit is to create a position for yourself or to “make lots of money,” then your motivation is wrong and you are likely to end up in trouble with the IRS.
You see, nonprofits do not belong to an individual, they actually belong to the public….because it is the individual taxpayer’s resources being used to give tax exemption.
After you have determined that the new organization will fall into one of these categories, spend some time really thinking through the reason you are starting an organization. Before you get started, study your targeted community—are there others doing similar work? How will your work be unique? Is there a need for the services and programs you will be providing? If others are doing similar work, it may be best to partner with them so that you are not duplicating resources that are already stretched thin.
Successful nonprofits are organizations that pay attention to details, get instruction and guidance from experts AND fill a need in their community.
When approving an organization for tax exempt status, the IRS looks closely at an organization’s board of directors. Ultimately, in exchange for tax exempt status, the IRS requires a board of directors. The board of directors will be responsible for the organization and ensure that it is acting in the best interests of the organization and the American people. We usually recommend that the board of directors have at least five individuals who are not related and who have an interest in the mission of the organization. There are some states that will allow fewer board members, but I always recommend that new organizations form with at least five. The IRS knows that with five board members, it is highly unlikely that one board member, or the founder, will manipulate and control the organization and personally benefit from its work.
The next question becomes, “what qualities and skills do I look for in board members?” Next week, we will discuss in depth how to select effective board members.
Are you starting a nonprofit and feeling a bit overwhelmed? Nonprofit work can be very rewarding, but it is also challenging—we are here to guide you each step of the way, providing direction and support. Feel free to contact us.