Nonprofit Kit For Dummies®, 5th Edition
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It may sound corny, but we feel a certain sense of mission when it comes to nonprofits. We’ve started them, directed them, raised funds for them, consulted for them, volunteered for them, given money to them, and written about them. We’ve worked with nonprofits in one way or another for more years than we care to remember.
Why have we continued to work for nonprofit organizations? Yes, we care about others and want to see the world become a better place — our values are important to us. But, to be honest, that’s not the only reason we’ve worked for nonprofit organizations for so many years. We believe the reason is that we can’t think of anything more interesting or more challenging to do.
Starting a new program is exciting. Getting your first grant is thrilling. Working with the multifaceted personalities that come together on a board of directors is fascinating. Learning a new skill because no one else is there to do it is fun. Seeing the faces of satisfied clients, walking along a restored lakeshore, hearing the applause of audiences — all are gratifying.
That’s why we do it.
When we refer to nonprofit organizations, unless we say otherwise, we’re talking about organizations that have been recognized as 501(c)(3) nonprofits and are considered public charities by the IRS.
We try to cover the gamut in this book — everything you need to know to start and manage a charitable organization, from applying for your tax exemption to raising money to pay for your programs. We include supplemental information at Dummies.com, including forms to help you create a budget, examples of grant proposals, and links to websites where you can find more help.
We also attempt to give you a bird’s-eye view of the economy’s nonprofit sector. When you look at financial resources, for example, nonprofits are much like the rest of the world: Most of the wealth is held by relatively few nonprofit organizations, a certain number of them are in the middle, and many, many more struggle to make ends meet.
We try to be honest about the difficulties you’ll sometimes face. You probably won’t be able to achieve everything you set out to accomplish, and you’ll always wish you had more resources to do more things. Still, we can’t imagine doing anything else. Maybe you’ll feel the same way after you jump into the nonprofit world.
As you’re reading, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
When writing this book, we made some assumptions about who may be interested in reading it. Here are some of the readers we imagined:
If you’re one of these people, we’re confident that this book will answer your questions and give you the information you’re seeking.
We use the following icons throughout the book to flag particularly important or helpful information.
The Remember icon emphasizes important information that you should be ready to put into practice.
You may not need this technical stuff today (and can skip over it), but — who knows? It may be invaluable tomorrow.
This icon is posted next to little hints and suggestions gleaned from our experience over the years.
Warnings are just what you think they may be. We alert you to information that can help you avoid problematic situations.
In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the free Cheat Sheet for a list of steps that are necessary for securing nonprofit status from the IRS, a rundown of the roles and responsibilities of people who sit on the board of directors for a nonprofit organization, and ideas for raising money for your nonprofit organization. To get this Cheat Sheet, simply go to www.dummies.com and type Nonprofit Kit For Dummies Cheat Sheet in the Search box.
You can also go to www.dummies.com/go/nonprofitkitfd5e for samples, forms, and lists of helpful websites. We mention many of these files within the chapters; we also include a file of web resources for most chapters. All digital files are labeled with the chapter number and the order in which the element appears in the chapter. For instance, the first digital file in Chapter 2 is labeled File 0201. For a complete list of digital files, turn to Appendix B at the back of the book.
If you’re new to the nonprofit world, we suggest beginning with Chapter 1, where you find fundamental information to get you moving in the right direction. If you’re familiar with nonprofits already but want to better understand your responsibilities as a board member, you can find the answers you need in Chapter 6. If you’re a new board member and want to understand the organization’s finances when spreadsheets are passed out at board meetings, we provide guidance about both making a budget and understanding financial statements in Chapter 11. If you need help to publicize and market your programs, we offer some suggestions in Chapter 12.
If you’re like many nonprofit workers or volunteers, you want to know how to get money for your organization. Chapters 13 through 18 cover this topic, so they’re good places to begin.
Whether you are new to the nonprofit world or a seasoned professional, we think you’ll find helpful and valuable information in this book to get you started or continue your good work.
Part 1
IN THIS PART …
Peek inside the nonprofit sector and get a glimpse of the role that these organizations play in our society and economy.
Get an overview of everything that goes into starting and running a nonprofit organization.
See what goes into a mission statement and get pointers on how to write one that will serve your organization well into the future.
Discover what you need to do to incorporate your new nonprofit. After that task is completed, apply for tax-exempt status from the IRS.
Make sure you maintain your nonprofit status by filing the required IRS reports.
Chapter 1
IN THIS CHAPTER
Defining the nonprofit sector
Getting started with a nonprofit
Encouraging volunteerism
Getting the resources your nonprofit needs
It’s a typical day in your hometown. Your alarm wakes you from a restful sleep, and you switch on your radio to hear the latest news from your local public radio station. You hear that a research institute’s study reports that economic indicators are on the rise and that a health clinic across town is testing a new regimen for arthritis. Plato, your Golden Retriever/Labrador mix, adopted from the animal shelter when he was 5 months old, bounds onto your bed to let you know it’s time for breakfast and a walk. Plato is followed by Cynthia, your 4-year-old daughter, who wants to help you walk Plato before she’s dropped off at her preschool housed in the community center. You remember that you promised to bring canned goods to the food bank that’s next door to Cynthia’s school. You haven’t even had your coffee yet, but already your morning is filled with news and services provided by nonprofit organizations.
You know that your public radio station is a nonprofit because you hear its pledge drives three or four times a year, and you volunteer a few hours each month for the food bank, so clearly it’s a nonprofit. But you may not know that the research institute is probably a nonprofit organization, just like the health clinic where the arthritis research is being tested and the animal shelter where you found Plato. It’s likely that Cynthia’s preschool and the community center where the preschool rents its space are nonprofit organizations, as well. Whether we realize it or not, all of us — rich, poor, or somewhere in between — benefit from the work of nonprofit organizations every day.
Nonprofits get revenue from a variety of sources in order to provide services. Because most nonprofits serve a need in the community, tax-deductible donations are an important revenue source. Sometimes nonprofits charge a fee for what they do. Other nonprofits may sign contracts with your city or county to provide services to residents. Usually, nonprofit organizations get their income from a combination of all these revenue sources.
The nonprofit sector isn’t a distinct place — it isn’t some plaza or district that you come upon suddenly as you weave your way through your day. It’s more like a thread of a common color that’s laced throughout the economy and our lives. No matter where we live or what we do, it’s not easy to get through the day without being affected by the work of a nonprofit organization. So, in this chapter, we help you understand exactly what a nonprofit organization is and how to start and manage one.
Check out File 1-1 at www.dummies.com/go/nonprofitkitfd5e for a list of web resources related to the topics we cover in this chapter.
People hear the term nonprofit and picture Mother Hubbard’s cupboard, as in awfully bare with a zero bank balance. But in fact, some nonprofit organizations turn profits on their operations, and that’s good, because surplus cash keeps an enterprise humming, whether it’s a for-profit business or not.
The main difference between a for-profit and a nonprofit enterprise is what happens to the profit. In a for-profit company like Walmart, General Motors, FedEx, or your favorite fast-food chain, profits are distributed to the owners (or shareholders). But a nonprofit can’t do that. Any profit remaining after the bills are paid has to be plowed back into the organization’s service programs, spent to strengthen the nonprofit’s infrastructure, or kept in reserve for a rainy day. Profit can’t be distributed to individuals, such as the organization’s board of directors.
What about shareholders — do nonprofits have any shareholders to pay off? Not in terms of a monetary payoff, like a stock dividend. But in a broad, service (not legal) sense, nonprofits do have “shareholders.” They’re the people who benefit from the nonprofit’s activities, like the people who tune in to public radio or enroll their children in a nonprofit preschool. These people are often called stakeholders because they are committed to the success of the nonprofit.
When we use the term nonprofit organization in this book, for the most part, we’re talking about an organization that has been incorporated (or organized formally) under the laws of its state and that the Internal Revenue Service (IRS) has classified as a 501(c)(3) and determined to be a public charity. If the term 501(c)(3) is new to you, add it to your vocabulary with pride. In no time, “five-oh-one-see-three” will roll off your tongue as if you’re a nonprofit expert.
Private foundations also have the 501(c)(3) classification, but they aren’t public charities. They operate under different regulations, and we don’t cover them in this book.
Other kinds of nonprofit organizations do exist; they’re formed to benefit their members, to influence legislation, or to fulfill other purposes. They receive exemption from federal income taxes and sometimes relief from property taxes at the local level. (Chapter 2 discusses these organizations in greater detail.)
Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law. They are, with minor exceptions, the only group of tax-exempt organizations that can receive contributions that are tax deductible for their donors.
The Internal Revenue Code describes the allowable purposes of 501(c)(3) nonprofit organizations, which include serving religious, educational, charitable, scientific, and literary ends.
Check out File 1-2 at www.dummies.com/go/nonprofitkitfd5e for a more detailed list of the activities that 501(c)(3) nonprofits take on.
Being a nonprofit organization doesn’t mean that an entity is exempt from paying all taxes. Nonprofit organizations pay employment taxes just like for-profit businesses do. In some states, but not all, nonprofits are exempt from paying sales tax and property tax, so be sure that you’re familiar with your local laws. Also, check with the appropriate office in your state to learn if you’re required to apply for a state tax exemption.
People form nonprofit organizations in order to work toward changing some condition in the world, either for a specific group of people or for society in general. The overall goal or purpose of a nonprofit is known as its mission. Taking the time needed to clearly outline a nonprofit’s mission is time well spent because the mission guides the activities of the organization, helps the nonprofit’s directors decide how to allocate resources wisely, and serves as a measure for evaluating the accomplishments of the group. We think developing a mission statement is so important that we devote an entire chapter (Chapter 3) to guiding you through this process.
It’s also important to examine your personal mission before launching a nonprofit. You’re creating a legal entity that has responsibilities for reporting to both the state and federal governments. If the organization grows to the point where you must hire employees, you’re responsible for paying regular salaries and providing adequate benefits. And although you can be compensated for your work as a nonprofit staff member, you can’t develop equity in the organization or take away any profits at the end of the year. Chapter 2 has more information to help you make this important decision.
Nearly all nonprofit organizations are established as corporations under the laws of a particular state. If you’re located in Iowa and you plan to do most of your work in that state, you follow the laws in Iowa to set up the basic legal structure of a nonprofit corporation. Although you’ll find some differences from state to state, in general, the process requires writing and submitting articles of incorporation to the state and developing bylaws, the rules under which the corporation will operate.
After your nonprofit is established under your state laws, the next step is applying for 501(c)(3) status from the IRS. This step requires completing and submitting IRS Form 1023 or Form 1023-EZ. If you submit Form 1023, you will need to specify in some detail the proposed activities of the new organization, and you’re asked for projected revenue and expenses for the year in which you apply and two years into the future. To be honest, you can’t complete this form in one afternoon. It requires substantial time and thought to develop the necessary material and should be reviewed by an accountant and legal representative before filing. We discuss the incorporation and IRS application process in Chapter 4.
After you start managing a nonprofit organization, you’ll discover that planning is your best friend. Every task from budgeting to grant writing requires that you make plans for the future. And you need to do a substantial amount of planning before you’re ready to send in your IRS application for tax exemption.
Don’t be frightened by this recommendation to plan. The act of planning fundamentally comes down to thinking through what you’re going to do as well as how and when you’re going to do it. Your plan becomes the map that guides you toward achieving your goals and your nonprofit mission. Planning is something that you should pay attention to every day.
You should always begin with a plan, but that doesn’t mean that plans shouldn’t be altered when the situation calls for it. Circumstances change; flexibility and adaptability are good traits to nurture if you’re running a nonprofit organization. Chapters 7 and 11 cover planning and budgeting. Chapters 12 and 13 discuss planning for marketing and fundraising. Chapter 8 addresses how to evaluate your work and know if your plans are achieving the results that you want to see.
The nonprofit sector is exciting. It encourages individuals with ideas about solving social problems or enhancing arts, culture, the environment, or education to act on those ideas. It creates a viable place within our society and economy for worthy activities that have little chance of commercial success. We think that it combines the best of the business world with the best of government social-service programs, bringing together the creativity, zeal, and problem solving from the business side with the call to public service from the government side.
We also find volunteerism inspiring. Everyone has heard stories of tightly knit communities where neighbors gather to rebuild a barn. That spirit of pitching in to help is the best part of living in a community in which people share values and ideas.
Many people these days live in diverse communities with neighbors who come from a wide variety of places and cultures. The nonprofit sector provides institutions and opportunities where everyone can come together to work toward the common good. Volunteerism gives everyone the chance to pitch in to rebuild “the barn.”
Applying the term voluntary sector to nonprofit organizations came about for a good reason. The Urban Institute estimates that in the United States, 62.8 million people volunteered at least once in 2014.
When you’re working in a nonprofit, you’ll likely be supervising volunteers — and they’ll likely supervise you. What we mean is that (with very few exceptions) nonprofit boards of directors serve as unpaid volunteers. And if you’re the executive director, your supervisors are the trustees or board members of the organization. At the same time, you likely depend on volunteers to carry out some or all the activities of the organization. You may serve as a volunteer yourself.
The word “supervision” sounds harsh, and we don’t mean to suggest that nonprofits are or should be run with an iron hand. The board of directors does have ultimate responsibility, however, for the finances and actions of a nonprofit organization, and, therefore, people serving in that capacity have a real duty to make sure that the organization has sufficient resources to carry out its activities and that it’s doing what it’s supposed to be doing.
We prefer to think of nonprofits as organized group activities. You need to depend on others to reach your goals, and they need to depend on you. We talk about boards of directors in Chapter 6 and working with volunteers in Chapter 9. If your nonprofit employs paid staff or hopes to someday, Chapter 10 provides some guidance in hiring and managing employees.
One distinctive feature of the nonprofit sector is its dependency on contributions. We devote many pages of this book — most of Part 3 — to advice about getting contributions through fundraising.
Gifts from individuals of money, goods, services, time, and property make up the largest portion of that voluntary support. This portion is also the oldest of the voluntary traditions in the United States and goes back to colonial times. Since the late 19th century, private philanthropic foundations have emerged as another source of support, and more recently — particularly after World War II — the federal government and corporations have become important income sources. Earned income through fees for service, ticket sales, and tuition charges also is an important revenue source for many nonprofits; in fact, in 2013 nearly three-quarters of the revenues for public charities was earned.
Among private, nongovernmental sources of support, gifts from living individuals — as opposed to bequests from people who have died — have always represented the largest portion of total giving, but philanthropic giving by foundations and corporations has been growing. Table 1-1 gives estimates of the sources of private contributions in 2014. The best fundraising strategy for most organizations is to take a balanced approach that includes individual giving as well as grants and corporate contributions.
TABLE 1-1 Sources of Private Contributions, 2014
Source of Income |
Amount of Total Giving in Billions |
Percentage of Total Giving |
Individuals |
$258.51 |
72% |
Foundations |
$53.97 |
15% |
Bequests |
$28.13 |
8% |
Corporations |
$17.77 |
5% |
Total |
$358.38 |
100% |
Source: Giving USA: The Annual Report on Philanthropy for the Year 2014 (2015). Chicago: Giving USA Foundation.
Nearly every nonprofit organization depends on generous donors for the cash it needs to pay its bills and provide its services. Even if you have income from ticket sales, admission charges, or contracted services, you’ll find that raising additional money is necessary to keep your organization alive and thriving.
You can see from Table 1-1 that individual giving is the largest single source of contributed income to nonprofit organizations. But you can’t just sit waiting by the mailbox for the donations to begin arriving. Two basic rules of fundraising are that people need to be asked for donations and thanked after giving one. Chapter 14 focuses on raising money from individuals, Chapter 15 covers raising money with special events, and Chapter 18 discusses campaign fundraising, which is used when you need to raise extra money for your building or your endowment.
Grants from foundations and corporations make up a smaller percentage of giving to nonprofits, but their support can be invaluable for startup project costs, equipment, technical support, and sometimes general operating costs. Keep in mind that the figures given in Table 1-1 don’t apply equally to every nonprofit. Some organizations get most of their income from foundation grants; others get very little. Chapter 16 introduces you to resources to help you find potential grant sources. Chapter 17 takes you through the process of crafting a grant proposal.
Fundraising works better if people know you exist. That knowledge also helps get people to your theater or to sign up for your programs. Here’s where marketing and public relations enter the picture. Chapter 12 helps you figure out what your message should be and how to circulate it to the world.
Make no mistake about it, fundraising is hard work, but if you approach the task with a positive attitude and make your case well, you can find the resources you need.
Chapter 2
IN THIS CHAPTER
Considering the benefits and drawbacks of starting a nonprofit
Starting off your nonprofit on the right foot
Understanding who owns a nonprofit
Surveying the different types of nonprofit organizations
Comparing and contrasting nonprofits and for-profits
Enlisting a fiscal sponsor to help you provide a service or complete a project
Maybe you’ve been thinking about starting a nonprofit organization for years, or maybe an idea to solve a social problem or provide a needed service just popped into your head. It could be time to make your idea a reality. But before you file your incorporation papers, you need to understand the positive and not-so-positive factors that can make or break your new organization. Like opening any business, starting and managing a nonprofit organization isn’t a simple matter.
Take a look at the economy around you. Are existing nonprofit organizations in your community thriving, or are they struggling to find financial and volunteer support? In addition, are you equipped to manage money and raise funds — which isn’t an easy task even when business is booming — and can you inspire others to work with you whether they’re board members, staff, or volunteers?
In this chapter, we pose some questions that you should think about (and answer) before you begin the process of incorporating and applying for tax exemption. If some of your answers point to the conclusion that your idea is worth pursuing but that you want to test the idea first, we suggest you consider using a fiscal sponsor. As we point out later in this chapter, the benefits of fiscal sponsorship are many.
When we use the term nonprofit in this book, we’re referring to organizations that have been recognized by the IRS as exempt under section 501(c)(3) of the IRS Tax Code and described as public charities. Later in this chapter, we describe some of the other kinds of nonprofits to point out the distinct attributes of these 501(c)(3) public charities.
Check out File 2-1 at www.dummies.com/go/nonprofitkitfd5e for a list of web resources related to the topics we cover in this chapter.
Before you jump headfirst into making your nonprofit dream a reality, you need to understand some basic facts about nonprofit organizations. We begin with some of the pros:
Just about everyone would consider these facts to be positive, but they aren’t the whole story. If you’re thinking of starting a nonprofit to get rich or to avoid paying taxes, consider the following list of cons:
The bottom line is this: Think carefully about your motivation for launching a nonprofit organization. Remember that nonprofit organizations are given special privileges because they’re formed to benefit the public, not specific individuals.
Beyond thinking about the challenges you’ll face in starting and running a nonprofit organization, you also need to apply some common sense. Nonprofits don’t operate in a vacuum, and neither should you. Personal commitment and inspiration can take your organization far, but you also need to find out how your community will receive your particular idea. So before going full steam ahead, investigate your competition, get community support, decide how to fund your organization, determine whether you’re really ready to run a nonprofit, and develop a game plan. Read on to find out how to get your nonprofit off to a great start.
Just as if you were starting a business, you should examine your competition before starting your nonprofit organization. If you wanted to open a grocery store, you wouldn’t choose a location next to a successful supermarket, because the market can bear only so much trade. This principle holds true for nonprofits, too. You may have the best idea in the world, but if someone else in your community is already doing it well, don’t try to duplicate it.
On the other hand, if your area doesn’t have a similar program, ask yourself why. Maybe your community doesn’t have enough potential clients or audience members to support the project. Or maybe funders don’t perceive the same needs in the community as you do.
Assessing the needs of your area is a good way to evaluate the potential market for your nonprofit’s services. You may want to use some or all of the following methods to determine your community’s needs:
For more details on assessing your community’s needs, see Chapter 7.
Your chances of success increase if you begin with support from others, and the more help you have, the better. Sure, you can probably find an example of a single-minded visionary who battles alone through all sorts of adversity to establish a thriving nonprofit, but starting and running a nonprofit organization is essentially a group activity.
When starting a nonprofit, you need to find people who will serve on the board of directors and support your efforts with donations of money and volunteer time. The first people you usually identify as supporters are family and friends. How can they turn you down? In the long run, however, you need to expand your supporters to others who believe in the organization’s mission (and not because you personally created it).
Some people hesitate to share their idea with others because they believe someone may steal it. We think this fear is largely unfounded. No matter what your idea is, you’ll be better off if you invite others to join you in making it a reality.
To find people to help you and support your organization, take every opportunity to speak about your idea before civic groups, religious groups, and service clubs. You can pass out fliers or set up a booth at a volunteer fair. Set up a Facebook page and invite your contacts to spread the word. Talk to your friends and coworkers. Put on your salesperson’s cap and convince the community that it needs your program.
If you’re having a difficult time drumming up support, it may be a sign that you need to refine your idea or that others view it as impractical. You may need to go back to the drawing board.
Funding your nonprofit organization is a big issue. Even if you begin as a volunteer-run organization and work from a home office, you still need funds for letterhead, a website, supplies, equipment, postage, and insurance. You also have to pay filing fees for your incorporation and tax-exemption applications. Many nonprofit startups are funded by the founder in the beginning. Are you able to pay all the startup expenses before revenues start flowing to your new nonprofit?
Putting together a budget can help you decide whether the startup expenses are manageable for you. You’ll be creating lots of budgets sooner or later, so you may as well get an early start. Flip to Chapter 11 for details on budgeting and other financial issues.
If you can’t fund the operation by yourself in the early months, you need to make a compelling case that your new organization will provide an important service to the community and then convince donors that you have the knowledge and experience to provide it. You can solicit contributions from individuals before the IRS grants the organization tax-exempt status, as long as you reveal that your exemption is pending (and will be deductible to the donor if the exemption is granted), and you have met state charitable solicitation registration requirements. These contributions become deductible to the donor if you file for your exemption within 27 months of the date you incorporated and receive tax-exempt status. If your exemption is denied, the contributions won’t be deductible and you may be liable for income tax on the money you’ve received. Startup grants from foundations or corporations are rare and next to impossible to obtain before the IRS recognizes your organization’s tax-exempt status, so don’t plan to receive any grants from outside organizations.
New organizations can avoid the awkward period between starting up and receiving tax-exempt status by beginning as a sponsored program of an existing nonprofit organization. This arrangement is known as fiscal sponsorship. We discuss fiscal sponsorship in detail later in this chapter.
You also can try out your program on a small scale before filing for tax-exempt status by partnering with an existing nonprofit organization to test the success and need of your idea. For example, if you want to start a summer arts program for low-income children, talk to a local church or community center that serves that population and ask if you can teach an art class one day a week for a month. This enables you to try out your idea, demonstrate the need, and set up benchmarks for success.
Ask yourself whether you’re the right person to start a nonprofit organization, and try to answer honestly. If your organization offers a service, especially in the health and social-service fields, do you have the educational background, qualifications, or license necessary to provide those services? In addition to being professionally qualified, you need to consider whether you feel confident about your management, fundraising, and communication skills.
When starting and working in a new nonprofit organization, you need to be able to stretch yourself across many different skill areas. You may be dressed to the nines one day to pitch your project to the mayor or to a corporate executive, and the next day, you may be sweeping the floor of your office or unplugging a clogged toilet. In other words, you need to be versatile and willing to take on just about any task that needs to be done.
When potential donors are evaluating grant proposals, they certainly look to see whether the organization’s leadership has the background, experience, and knowledge necessary to carry out the proposed program. This doesn’t necessarily mean that you need to be an experienced nonprofit manager, but try to assess your background to see how you can apply your experience to the nonprofit that you hope to start.
If there were ever a time to plan, this is it. Planning is what turns your initial idea into a doable project. Planning is also a good way to find potential holes in your thinking. For example, you may believe that your community doesn’t have adequate animal rescue services. You may be right, but when you begin to break down the idea of starting an animal shelter, you may find that the project costs more money or requires more staff or facilities than you first thought it would. When armed with that knowledge, you can adjust your plan as necessary or scrap the idea altogether.
To begin planning, write a one- or two-page synopsis of your nonprofit idea. In your synopsis, include why your organization should exist, what you’re trying to do, and how you plan to do it. It’s a good idea to outline both short-term and long-term goals and the resources needed to meet those goals. The list of resources should include money, volunteers, and an appropriate space to carry out your activities. After you’ve prepared your synopsis and list of resources, talk to as many people as you can about your idea, asking for help and honest feedback about your project. The purpose of this planning process is to think through your nonprofit idea step by step. (If you need help in the planning process, take a look at Chapter 7.)