The Everything Nonprofit Toolkit: The all-in-one resource for establishing a nonprofit that will grow, thrive, and succeed

Introduction

In 1831, ALEXIS DE TOCQUEVILLE wrote Democracy in America after a nine-month visit to a fledgling nation, the United States. He wrote about the uniquely American phenomenon of forming associations of all types, including professional, social, civil, and political groups.

Today, even in times of economic uncertainty, people continue to organize groups around common interests or professions. The exact makeup of these groups will be as different as their members, but they all share a common characteristic: that is, people coming together to collaborate. The purpose of this book is to provide a solid foundation, indeed a toolkit, for community organizers who work with groups that may be considering formal incorporation in their state or possibly becoming a federally recognized nonprofit.

Nonprofits often take on responsibilities that were once the domain of government agencies. As a result, nonprofits are assuming an exciting and dynamic role throughout the country exactly as they did during the Great Depression in the last century. It has become even more important that people understand the basic requirements of organizing within their communities so that their group can remain viable and sustainable long after the original founders have moved on.

This book begins with the assumption that the reader is in some way connected to a small organization in its early formative stage. You may have heard the term nonprofit organization, but you probably have never had to apply for federal nonprofit status.

Because every state has developed its own system and process for incorporation, each state has different forms—and a few states don’t have standard forms at all. If you live in a state that requires you to create forms, use the sample Articles of Incorporation—you are welcome to modify it to suit your needs.

This book will guide you through the process of organizing, starting with those early meetings, working through the maze of local and state forms, and finally building the application for federal tax exemption. Becoming a nonprofit is not a magical path to financial wealth. It is, however, a way for an organization to remain true to its principles of community service while conducting basic business functions, such as having a bank account, signing contracts, hiring staff, and owning property.

Becoming a nonprofit organization is one of the best ways to guarantee that your club or organization will be able to continue its business well into the future. Organizing a group to prepare for incorporating and eventually applying for nonprofit status is a lot of work. It will require a clear understanding of what a nonprofit organization can and cannot do, based on the simple, yet precise requirements of the Internal Revenue Service.

This guide will help you understand the core requirements for every nonprofit. It involves a lot of common sense, and as you will see, it is not that difficult. However, it is impossible to cover every possible detail related to forming and operating a nonprofit organization in one book, so in some instances there will be recommendations to seek advice from either a legal or nonprofit tax professional. Nonprofit regulations can and do change with amazing frequency.

Forming a nonprofit is an exciting process from beginning to end. You will work closely with many people in your community you might never have met as you take your ideals and your effort and pour them into an entity that will guarantee that work can continue forever. The aim of this guide is to help you do your good work.

Chapter 1

Organizer to Organizer—Let’s Talk!

The essence of creating a successful nonprofit organization is to understand your community’s needs and to navigate with the daunting federal tax-exempt status, perhaps for the first time in your life. As an individual or one of a group of people whose passion is your organization, focusing on your community is the first step. This chapter will help you understand the community your organization intends to serve.

Living in Interesting Times

There is a very old expression: May you live in interesting times. Together, we are living through the most serious financial crisis of our lifetimes. Interesting times indeed! Banks are closing, families are losing their homes to foreclosure, and while the employment picture will improve, it is a multiyear process with few guarantees. Each day, more details of the challenges facing our communities are presented, the tax base continues to erode, and essential services are eliminated.

Although we face challenging times for global, national, state, and local economies, it is a very exciting time for the careful, deliberate, and focused organizer of a nonprofit organization. This is a time to re-examine exactly who you are as an organization and what you want to do, ever-mindful of an economic environment unlikely to improve for a number of years.

It is a time to study the history of the world’s economies during and after the Great Depression of the early 1900s, and understand that in that time, just as now, the government was simply unable to fund many of society’s most basic needs. It was during that earlier set of interesting times when the soup lines and missions, now remembered through the remarkable photography of the period, were often set up by private charities to simply provide the basic food and shelter needs the government was unable to meet. Likewise, many community improvement groups, established to maintain parks or gardens, or enhance through art and music, filled the void created by a government essentially out of money.

That financial crisis of the 1930s led to the boom in the nonprofit sector, as community groups were established to assume those core responsibilities, and in exchange the federal government recognized those efforts by relieving organizations meeting basic standards of their tax liability. If you look around any city in the country, you will see evidence of that earlier time. Many of the lodges and fraternal orders now known for their aging structures in many inner cities were the centers of life and culture at a time when money was scarce and people had to rely on one another to survive.

Core Values and Purpose

Although the regulations governing every aspect of forming and operating a nonprofit organization have become terribly complex over the years, and many people become focused solely on those regulations and reams of fine print, the core values and purpose of your mission will determine whether you and your organization are going to make it through this sour economy—exactly as it did in the last century.

In 2009, as the economy was well into the current crisis, more than 46,000 new nonprofit organizations were registered with the Internal Revenue Service. This clearly shows that many people are seeing an urgent need in their communities and setting about to create solutions!

Small Nonprofits Are Vital, Too

According to one school of thought, in times of economic hardship, the smaller nonprofits should step aside in favor of the larger, more established organizations able to utilize contributions more efficiently. This terribly shortsighted approach effectively eliminates the huge need that exists and is growing in every community.

Many of the people who are starting nonprofit organizations for the first time are people coming out of the corporate world, bringing the same drive and energy to their new organization they once contributed in business. They are seeing a need and putting to good use their many years of experience in the private sector—or doing exactly what people more than sixty years ago were doing during the Great Depression, an earlier interesting time.

We’re Not All MBAs

Many people act as community organizers. Along the journey, organizers decide there is a need to bring together like-minded people. For any group of individuals to survive beyond the first burst of excitement, some type of recognized structure must exist that will enable them to raise the necessary money to actually do the work over the long term.

Most people have heard the term nonprofit organization in one context or another. They often don’t truly understand what it means or what the process entails, but they know intuitively that a nonprofit is the route to go.

The Passion That Drives Us

You may not think of your group as businesspeople; you probably see yourselves as members of a community who share a passion to make things happen. You are certainly not involved in organizing for any personal gain, so the usual profit motive does not come into play. Instead, you are looking at taking on the huge task of forming an organization to serve a purpose that is important to you. It is a passion ultimately for and about the community in which you live and work. Because of that passion, it makes sense to form a legal entity in which all profits are returned to the organization and the community it serves, rather than to any individual or group.

Throughout this book, the terms nonprofit organization and nonprofit corporation will be used interchangeably. All state and federal legal filings will refer to nonprofit corporations. As the organizer working in your community, however, it is perfectly acceptable to refer to your group as an organization, society, or whatever terminology you have been using.

Unlike many of their for-profit counterparts, the majority of the thousands of nonprofit organizations that start every year have their roots in a core group of activists in their home communities. They are formed by friends or neighbors who share a common interest. To a large degree, the founders of nonprofit organizations do not come from the business community, but they care so deeply about their cause that they decide that they must organize. Although a formal business education or background is expected when starting a for-profit corporation, it has been acceptable not to have that background when starting a nonprofit since the earliest days of public charities.

In Perspective

When public charities first came into being, the government was relieved of some of its responsibilities to the community. No one questions the need for many of the services that nonprofits or charities assume as necessary for healthy, vibrant communities, so the government grants a lot of leeway in recognition of the sacrifices that individuals involved in nonprofits are willing to make. The government understands that nonprofits exist because their members are passionate about a cause. As a result, the lack of business skills is occasionally overlooked.

A growing cottage industry of business professionals are stepping up to offer their assistance to start-up nonprofits. Although you may not have a background in business, don’t worry. There is an entire support system of MBAs to show you the ropes.

A master’s in business administration (MBA) is generally awarded after completing two years of graduate-level study at an accredited business school. In the commercial business world, MBAs are valued for their training and understanding of how markets and businesses function.

As you move forward, you may find it helpful to engage businesspeople for their advice or to enroll in business courses to become a better organizer.

The Political Atmosphere

You must consider the political atmosphere in your community from the very beginning, and it must remain part of your strategic, long-range planning. Even if you don’t think your mission and planned area of service will be controversial, the fact that you are interested in becoming a public charity and will be seeking donations to carry out your mission will invite scrutiny. Although nonprofit corporations pay fees and taxes (other than corporate income tax), as do their for-profit counterparts, the perception remains that nonprofits have a free ride.

Pay Attention to Any Pending Tax Law Changes

Every adjustment to state or federal tax codes can bring the entire concept of the nonprofit corporation to the forefront, which becomes a highly charged political issue. You need to stay on top of these potential changes. It is a good idea to connect with and join affiliated organizations that are able to effectively track legislation or ordinances that might affect your ability to carry out your mission.

Build Alliances

If your mission may be seen as controversial for any reason, build the necessary alliances that will help you organize and continue your work from the beginning. Although you may think that addressing the major problems in our society such as homelessness, substance abuse, hunger, violence, or accessible health care may not be controversial, the way you address those issues may bring you attention you never expected. You need to be prepared before that attention focuses on your nonprofit.

Exactly how you enter into this public discourse is determined by whether you apply for and receive a 501(c)​(3) or a 501(c)​(4) determination from the IRS. That difference may well affect how involved you become in the political process and what you may (or may not do) to affect that process.

Meet the neighbors—literally! Invite your immediate neighbors over for lunch or a casual meeting so they understand what you are planning to do and exactly who they can contact if there is trouble or if they have any concerns, no matter how minor. Being proactive now will save untold aggravation later.

Neighbors

Where and how you choose to set up your organization’s office and operations may affect your neighbors. You may never have given traffic and parking a second thought until now, but they are issues every organization with public or walk-in traffic comes to know well. Parking is, without question, the biggest source of problems in neighborhoods where a new organization sets up.

Every time you hold a meeting or a public event, your attendees will take up parking on the street or park in a spot that was reserved. If you have access to off-street parking, you are well ahead of the game, but the vast majority of groups do not have that option. Reaching out to engage the immediate community so that everyone understands what you are planning to do will help neutralize much of the opposition and fear of the unknown that plagues many nonprofits.

Meeting with City Hall

Meeting with local political leaders and introducing yourself to personnel in your city and county administrative offices before you need them shows everyone that you are willing to work with the community, even those who may have reservations about your plans. This is an area where your skill as an organizer who is comfortable meeting with strangers is going to help in many ways.

So much of organizing a nonprofit comes down to establishing and building relationships with not only those people who are supportive of your plans but also those who oppose your organization. If your plans involve zoning or occupancy regulations, all your skills as an organizer and negotiator will come into play. By working with—rather than confronting—local review boards or citizen groups, you should be fine.

The Citizens United Ruling—How It Affects Nonprofits

In January 2008, at the height of Hillary Clinton’s presidential campaign, Citizens United, a nonprofit organization, released a ninety-minute documentary titled Hillary. The movie expressed opinions about whether Senator Clinton, a candidate for the Democratic presidential nomination, was fit for the presidency. The nonprofit produced advertisements promoting the film and wanted to show them on broadcast and cable television and video-on-demand. To pay for the video-on-demand distribution and the advertisements, Citizens United planned to use its general treasury funds. This became very important in regard to ramifications of this court decision.

The term general treasury funds means all of the assets of an organization that it spends as a normal part of doing business. General treasury funds generally do not include any special solicitation or effort; they derive from regular, planned-for, and ongoing revenue streams or sources.

Until this time, federal law prohibited corporations and unions from spending their general treasury funds on electioneering communications or on speech that expressly advocated the election or defeat of a candidate close to an election, which everyone agreed this video did. Concerned that spending money in support of the production and distribution of the movie close to an election day might be found to be illegal, Citizens United sued the Federal Communications Commission (FCC) to prevent it from enforcing this law.

Although suing a federal agency to stop it from enforcing what is considered an unlawful rule is unusual, it does happen from time to time. The high profile nature of this case made it almost certain to move quickly through the federal court system.

The case finally made its way to the U.S. Supreme Court in January 2010. In a 5–4 decision, the Court ruled that corporations and unions have the same political speech rights as individuals under the First Amendment. It found no reason to prohibit corporations and unions from using their general treasury funds to make election-related independent expenditures close to an election or at any time they chose. Thus, it struck down the McCain-Feingold law banning this practice. The federal law had been named for the two senators, John McCain (R-Arizona) and Russ Feingold (D-Wisconsin), who drafted it.

Citizens United and 501(c)​(3)s

The Citizens United ruling does not impact a 501(c)​(3) nonprofit. Regardless of the changes in election law, the federal tax law that prohibits 501(c)​(3)s from supporting or opposing candidates still applies. A 501(c)​(3) still cannot endorse candidates or make independent expenditures suggesting who is the better candidate.

What the ruling will do, however, is complicate the environment in which many nonprofits operate by opening the doors to corporate interests whose policies may be at odds with those of the nonprofit. As an example, if a nonprofit organization conducts nature classes for school children in a nearby forest, or develops programs to teach about water quality, and the surrounding lands are part of a larger land use debate, the unlimited corporate money that can now be spent in that debate may mean the forest or watershed will be changed, as well as the curriculum of the educational organization.

Political Advocacy

The Citizens United decision does allow nonprofit, issue-based 501(c)​(4) or 501(c)​(6) organizations to make independent expenditures furthering political advocacy using the organization’s general funds to support or oppose candidates for the U.S. House, the U.S. Senate, and the presidency. By extension, this decision will allow the same opportunities at state and local levels. Previously, these independent expenditures for political purposes had to be made through Political Action Committees (PACs) using voluntary donations, rather than general treasury funds.

An independent expenditure for the purposes of this situation is a communication that urges someone to vote for or against a candidate. This type of communication typically includes words like support, oppose, elect, defeat, or vote for a candidate. It is the type of communication that floods your mailbox and television during every election cycle. Everyone has seen them.

Electioneering Communications

The Citizens United decision allows organizations—in our case, nonprofit organizations other than those determined to be 501(c)​(3) organizations—to make electioneering communications. This type of communication is defined as a broadcast ad that refers to a federal candidate and is distributed within thirty days of a primary or convention and within sixty days of a general election—as well as throughout the year.

Great News for Nonprofit Advocacy Groups!

Any landmark Supreme Court decision gives rise to a variety of opinions. The Citizens United decision opens up tremendous opportunities for nonprofit advocacy organizations—those groups that do not have the 501(c)​(3) determination—to become more actively involved in the political life of their communities. This decision may in fact help further the overall mission of many nonprofit organizations as well as increase the direct, positive impact of your group on your community. How you and your organization decide to avail yourselves of this opportunity will require careful thought and deliberation, but the fundamental rules regarding political financing have changed forever.

It is important to understand that even with the Citizens United decision, nonprofit corporations remain subject to federal tax law, including a primary purpose restriction, namely that political activities cannot be the primary purpose of a nonprofit organization. Further, all reporting requirements not only remained unchanged; they were reinforced through the wording of the decision.

Reaction to the Citizens United Decision

It is difficult to say what steps, if any, are going to be taken with respect to this controversial opinion. A number of national organizations are planning to prepare methods that range from legislation to a constitutional amendment to reverse what some people consider an unsettling decision. How any of these plans materialize remains to be seen over the next few years, but every nonprofit organization or even a group planning to file for federal recognition would do well to keep an eye on developments that occur as this story evolves.

Evaluating Your Capacity Honestly

Capacity, when used in the context of a nonprofit organization, is used to describe the ability of a group to accomplish the work it has set out to do. When people are accustomed to a traditional business approach, including relying on capital to finance the production of items for sale, having to adjust to not having that capital presents a real challenge. Newer nonprofit organizations, especially those driven by a more traditional business focus, often have mission statements and other materials that lay out tremendous plans but actually end up requiring more time, energy, and resources than are available. If you are not aware of your actual capacity or you pretend it is greater than it really is, expect frustration among the group members. Try to avoid this situation at all costs.

Approaching the matter from a community organizer’s perspective may help. Community organizers must develop relationships that are not financial, so many of the capacity-building issues melt away.

Nonfinancial relationships include in-kind contributors, or people who have a unique skill the group would otherwise lack. This also includes venue managers and arts commissioners if yours is a cultural organization, other school administrators if you are in the education field, or professional service providers if you are filling a gap in health care delivery.

It’s about Your People

The ongoing task will be to develop internal capacity by selecting people within your group to maintain the organization as well as develop and execute your projects and programs. During the formative stages, much of the work will fall on the board of directors. They will need to determine what tasks they can realistically assume and see through to their conclusion.

Growing Slowly Is Perfectly Okay

Helping the group develop a realistic multiyear work plan and allowing the internal capacity to build slowly to the point where more and more ambitious projects can be undertaken will also greatly reduce the frustration of not being able to do everything at once.

The topic of capacity building will invariably come up in any conversation among members of different nonprofits. It is an extremely important element in your planning.

Time Commitment

One of the overlooked elements involved in starting a nonprofit organization, especially a community-based one that will rely in large part on volunteers, is the time commitment for everyone involved. In a mature organization with paid staff, everyone has a set time to start work and a set time to leave. When you are relying on volunteers, the scheduling depends on the other things in everyone’s lives. The time people can commit to the organization will by necessity take a lower priority, with a combination of planning and compassion, however, your people will find a good mix of personal and organization time. Of course, if you are one of the main organizers or a member of the board of directors, the new organization will become your constant mental companion during every waking hour.

Delegate, Delegate, Delegate!

There are a number of tricks you can employ to avoid letting the organization take over your life and make you a far less effective organizer. Many of the tricks involve delegating responsibilities. As much as you may think you can do everything, you can’t! You will need to become comfortable asking other people to take on more responsibilities once you believe they are up-to-speed on whatever task they’re doing.

Running on Empty Is Not an Option

Many organizations suffer as the lead organizers try to do too much, become run down in the process, and grow less and less effective. Such a situation hurts the individuals involved and can cripple the organization. As the organization grows and more people become involved, it is essential to ensure that members step back when they are overworked and are no longer fully engaged. Encourage