Nonprofit Start-up Series #1: Before You Start€¦ · As you work through your needs assessment, you will identify the nonprofit’s purpose. Corporate purpose is the purpose of

1

Nonprofit Start-up

Series #1: Before You Start Legal Center for Nonprofits, Inc.

Linnea R. Michel, Esq.

© 2014 Legal Center for Nonprofits, Inc. Information provided herein is not legal advice & is intended for informational purposes only. Consult an attorney before acting on the information contained herein. Attendance at this program does not result in an attorney-client relationship.

2

This program will:

Provide a basic understanding of the nonprofit

sector;

Present basic concepts and terminology;

Identify key issues to consider before forming the

nonprofit organization;

Identify alternatives to a “stand-alone” nonprofit.

Goals for this program

3 Roadmap

Nonprofit Sector

Essential Concepts

Steps to Success

Alternatives

Fiscal Sponsorship

3

4 4

Charities

501(c)(3)

Tax-exempts

Nonprofits

Other 501(c)

A few nonprofits

are not tax-exempt (very rare).

All charities are tax-exempt nonprofits.

The Nonprofit Sector

All tax-exempts are NOT charities; e.g., social clubs, fraternal organizations.

5 Essential Concepts

Nonprofit: An entity whose profits (net earnings or income) do not benefit private persons (organizations or individuals), esp. those who control it (i.e., directors or officers).

Tax-exempt: A nonprofit organization that is exempt from one or more federal, state, or local taxes, especially income tax; recognized as exempt from tax under section 501(c) of the Internal Revenue Code (IRC).

Charity: A nonprofit organization that is organized and operated for a charitable purpose; recognized as tax-exempt under section 501(c)(3) of IRC.

6

Among nonprofit organizations, the majority are determined

by IRS to fall within IRC section 501(c)(3), termed “public

charities”; religious, educational, scientific, literary, and other

types fit here.

Must be organized and operated for an exempt purpose

within meaning of 501(c)(3);

Private inurement is prohibited;

Lobbying & influencing legislation allowed “insubstantially”;

Campaign involvement prohibited;

Must demonstrate public benefit and public support.

Gifts are deductible on donors’ taxes.

Essential Concepts

7

Organizations that are not 501(c)(3) may be some

other type of tax-exempt organization, depending

on their purposes:

Social Clubs – 501(c)(7)

Industry groups, Chambers – 501(c)(6)

Social Welfare, Action organizations – 501(c)(4)

Veterans’ organizations – 501(c)(19)

These organizations have differing requirements.

Gifts to most of these are not deductible on donors’

taxes.

Essential Concepts

8

“Charitable” is a term of art not explicitly defined in federal law but characterized in statute and case law as including: ▫ Relieving the poor, distressed, or underprivileged;

▫ Advancing religion, education, or science, or literature;

▫ Lessening the burdens of government;

▫ Beautifying or maintaining a community, or eliminating “blight”;

▫ Preserving natural beauty, protecting monuments;

▫ Promoting health, social welfare, environmental conservancy, arts, patriotism;

▫ Caring for orphans or animals;

▫ Promoting or sponsoring amateur athletics;

▫ Maintaining public confidence in the legal system.

Essential Concepts

9 Essential Concepts

Massachusetts’ Nonprofit Corporation Law allows a

variety of purposes (ch 180 §4): “Any civic, educational, charitable, benevolent or religious purpose;

Any antiquarian, historical, literary, scientific, medical, chiropractic, artistic,

monumental or musical purpose; establishing and maintaining libraries;

Any missionary enterprise; promoting temperance or morality

Fostering, encouraging or engaging in athletic exercises or yachting;

Encouraging the raising of choice breeds of domestic animals and poultry;

For societies of Free Masons, Odd Fellows, Knights of Pythias or other

charitable or social bodies of a like character and purpose;

Reading rooms, libraries or social meetings;

Boards of trade, chambers of commerce and bodies of like nature;

Nonprofit credit counseling services

Encouraging agriculture or horticulture; improving and ornamenting the streets

and public squares of any city or town by planting and cultivating ornamental

trees … improving the physical aspects of such city or town and furthering the

recreation and enjoyment of the inhabitants thereof;

Burial grounds…”

10 Step 1: What will the nonprofit do?

Step 1: What will the nonprofit do?

For example, will it:

Provide care for children while parents work?

Rescue abused cats?

Pick up neighborhood trash?

Coordinate toboggan trips?

Teach english as a second language?

Operate an art gallery?

Provide meals for the homeless?

Provide a place for veterans to gather?

Facilitate professional networking?

11 Step 2: Is there a need?

Step 2: Is there a need? Begin by assessing the NEED for your idea. How? Talk to people already working in the area related to

your idea. ◦ United Way ◦ University or community college faculty & staff, other

educators ◦ Specific nonprofit staff ◦ Mayor’s office, city councilors, state reps, etc.

Reference librarians can point you to books, articles, & studies related to your idea.

Internet searches

12 Step 3: Identify the Purpose

Step 3: Identify the nonprofit’s purpose.

As you work through your needs assessment,

you will identify the nonprofit’s purpose. Corporate purpose is the purpose of the

corporation under state law. The overarching reason

for the corporation’s existence, it must be broad

enough to encompass all envisioned activities.

For example, a nonprofit called Homeplace, Inc., might

state this purpose in its Articles of Organization:

“To build and operate a homeless shelter.”

13 Step 3: Identify the purpose

Identify:

Exempt purpose is a purpose that can be found

exempt from tax under IRC section 501(c)(3) for

charities, or other subsections.

Homeplace, Inc., as a homeless shelter, fits

within the purpose of “charitable” – relief of

the poor.

It can apply to IRS for recognition as a 501(c)(3)

charity.

14 Step 4: How will work get done?

Step 4: How will the nonprofit do its work?

Mission is the focal point of the nonprofit’s work,

what it intends to do. As such, it will be more

explicit and precise than the corporate purpose.

For HomePlace, Inc., the mission is

“To provide a comfortable, secure shelter for our

community’s homeless population.”

15 Step 4: How will work get done?

Step 4: How will the nonprofit do its work?

Activities are the things—tasks, programs,

projects--ORG will do to carry out its mission, but

each must fit within the exempt purpose.

For HomePlace, Inc., its activities might include

building and opening the shelter, providing

breakfast and evening snacks; making clothing

available.

16 Step 5: Who will do the work?

Step 5: Who will do the nonprofit’s work?

Are PEOPLE available and willing to help you?

Potential supporters include neighbors, friends,

colleagues, professionals, such as accountants,

lawyers, religious leaders, teachers.

A core group of supporters who share your

passion will usually become the founding

Board of Directors, listed in the Articles of

Organization.

Others will be volunteer workers, staff, donors.


What skills, knowledge, ability or experience do you (or

someone working with you) need to bring your idea to

reality?

Persistence, detail-orientation, “people skills”,

entrepreneurship

Math skills, financial, bookkeeping, Excel

Time management, project management, organizational,

planning

Persuasion, fundraising, sales

Supervisory, personnel/human resource management

Verbal, writing, communication

Technical, computers, email, word processing, spreadsheets,

social media

Subject matter expertise


What is YOUR role in the nonprofit?

Do you want a hands-on role? Prefer to actually

do the work? (Implementation/staff role)

Would you rather guide the nonprofit’s growth

and development? (Board/Policy role)

Do you expect to be paid for your work?

(Implementation/staff role)

Are you satisfied to be a volunteer?

(Board/Policy role)

19 Step 6: What will it cost?

Step 6: What will it cost? How will it be paid

for? How much FUNDING is needed to carry out your idea? Where will funds come from? Is the idea likely to attract people who will give money to

support it? Is grant money available to support it? Will it generate fees for services? Do not expect grants or loans to cover start-up costs! Do not expect to earn a living from the nonprofit within the first year!

FACT: Most nonprofit start-ups are funded out-of-pocket!

20

How do you figure out costs and likelihood of

funding?

Create a rough budget using info you know or

can access online. [Reference librarians can

point you to employment & other data.]

Use Foundation Center Databases to research

possible grants (available at Community

Foundation of Southeastern MA).

Look at grant-makers’ Forms 990 to see typical

grants made in a year.

Step 6: What will it cost?

21 Should you consider alternatives?

As you work through your needs assessment, you

may discover an existing nonprofit is already doing

the work you envision. What then? You can volunteer with an existing nonprofit in one of their existing programs. Works best to explore an idea, “test the waters”. Start here if you’ve never been involved with

nonprofits. To find nonprofits in your interest area, visit: ◦ www.idealist.org has searchable database of worldwide

organizations ◦ www.volunteersouthcoast.org points you to local orgs in

need of volunteers (some post paid staff needs too).


You can approach an existing nonprofit whose mission is related to your idea but your idea would be a new program for them. Pitch your idea to the executive director or a

board member of a nonprofit doing work related to your interest.

Form a committee or task force to carry out your idea under the umbrella of the established nonprofit.

Works best if you have a couple of people already willing to help you do the work.


You may want to choose an alternative if:

You’ve never been involved with nonprofits

before.

You’re not sure that people will get involved

with your idea, either to volunteer or to support

it financially.

Your idea is not fully fleshed out.

You’re not sure you want to pursue this idea for

the long term.

24 Fiscal Sponsorship

Fiscal sponsorship may be an option.

Fiscal Sponsorship is a formal relationship

between two entities, one of which is a recognized

tax-exempt 501(c)(3) charity (the “Sponsor”) and

the other is smaller, usually not recognized as tax-

exempt (the “Project”).

By virtue of their relationship, tax-deductible

contributions and grants can be made to benefit

Project.


When is fiscal sponsorship appropriate?

When organizational start-up requires

immediate fundraising to ensure success.

When a project is short-term.

When a group wants to test the viability of their

project idea.

May also bridge the gap between formation and

determination letter.


How Fiscal Sponsorship Works

IRS regulations allow a tax deduction for charitable

contributions. Gifts directly to Project will not be

tax-deductible to their donor, because Project is

not itself recognized as a charity.

In a Fiscal Sponsorship relationship, Sponsor

receives the gift and re-grants it to Project. Donor

receives tax-deductibility.


But Sponsor must:

Ensure Project is in furtherance of Sponsor’s

exempt purpose; Retain discretion & control over Project’s funds; Maintain records documenting funds’ use for

501(c)(3) purposes. Select for Sponsorship those Projects that are

short-term, or that will seek their own 501(c)(3) status at some future point.


IRS has recently recommended fiscal sponsorship as a suitable alternative to forming the nonprofit corporation, in view of lengthy IRS charity determination process. Fiscal Sponsorship is especially useful in disaster situations or for memorial funds, when the fund is

expected to be of short duration.

See: IRS Pub. 3833, “Disaster Relief:

Providing Assistance Through

Charitable Organizations”


Tips for successful fiscal sponsorship Both parties perform due diligence:

◦ Sponsors carefully assess Projects before taking them

on;

◦ Projects find appropriate Sponsors in harmony with their

goals and purposes; and

◦ Both Sponsors & Projects understand their relationship.

Memorialize relationship in a written agreement;

Plan for exit or “spin-off” of Project and state explicitly in

the written agreement.


A written agreement between Sponsor and Project will: Define clearly the relationship between Sponsor &

Project;

State that Sponsor retains full control and discretion regarding Project funds;

Reference Sponsor’s policies and requirements for reporting, fundraising plans, grant proposals, financial expenditures, etc., as appropriate;

State Sponsor’s fee (usually a few percent per transaction);

Provide for termination of Agreement.


Fiscal sponsorship is NOT a guarantee of

fundraising success.

Sponsor is not promising to do all fundraising

work for Project.

Project may still need to do “legwork” on grant-

seeking. (The parties must be sure to

understand their responsibilities on this point.)

Sponsorship may help Project attract gifts and

grants, but does NOT ensure them.

32

Resources

The Urban Institute, The Nonprofit Sector in Brief:

Public Charities, Giving & Volunteering, 2012 ,

available at http://www.urban.org/UploadedPDF/412674-

The-Nonprofit-Sector-in-Brief.pdf

Bruce Hopkins, Starting and Managing a Nonprofit

Organization. John Wiley & Sons, 2013.

Wiley and its imprint, Jossey-Bass, publishes many books

on nonprofits:

◦ http://www.josseybass.com/WileyCDA/Section/id-

131453.html

◦ http://www.wiley.com/WileyCDA/Section/id-350161.html

BoardSource. https://www.boardsource.org/eweb/

Independent Sector. http://www.independentsector.org

http://www.wiley.com/WileyCDA/Section/id-350161.html



https://www.boardsource.org/eweb/

33 Resources

Massachusetts Attorney General’s Office Non-Profit

Organizations/Public Charities Division.

http://www.mass.gov/ago/doing-business-in-

massachusetts/public-charities-or-not-for-profits/

Massachusetts Secretary of State.

http://www.sec.state.ma.us/cor/corpweb/cornp/npfrm.htm

Community Foundation of Southeastern

Massachusetts www.cfsema.org (access to Foundation

Ctr Databases)

34 Upcoming Programs

Repairing & Maintaining Tax-exempt Status

Friday, March 7, 8:30-10:00 am (FREE!)

Compliance requirements for tax-exempt organizations, overview of

reporting requirements, dealing with automatic revocation of tax-

exempt status.

Nonprofit Annual Filings: What to File & When

Thursday, April 17, 8:30-10:00 am

Nonprofit organizations—from smallest to largest—must file annually

with state and federal agencies or risk serious consequences. Do you

know what your nonprofit’s filing obligations are? Lisa Aldrich CPA

will join us for this important topic.

Nonprofit Start-up Series – see next slide.

Nonprofit Start-up Group – Call for next meeting date.

35 Upcoming Programs

Nonprofit Start-Up Series – Biweekly, Tuesdays at 6:00 pm

Session 2, March 11 — Incorporation & Bylaws

Pros & cons of incorporation; steps to incorporate, creating bylaws,

corporate reporting.

Session 3, March 25 — Is It a Charity?

Charity registration, in Massachusetts, and beyond.

Session 4, April 8 – Getting Tax-exempt

Preparing to submit the IRS Form 1023, assessing readiness, key

concepts, overview of application, drafting the narrative, assembling

the 1023 package.

Session 5, April 22 – Governance

Understanding the board’s role in nonprofit organizations, defining

governance, overview of nonprofit board’s policy-making & decision-

making responsibilities.

Legal Center for Nonprofits, Inc., 412 County St., New Bedford, MA

(508) 264-5996 [email protected]

Documents

Nonprofit Start-up Series #1: Before You Start€¦ · As you work through your needs assessment, you will identify the nonprofit’s purpose. Corporate purpose is the purpose of