Nonprofit Q&A
Here are answers to some common questions related to US nonprofits. Click a plus sign below to read an answer or listen if your device supports that option. If you don't see your question, submit yours HERE.
What is a nonprofit organization?
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A nonprofit is an organization that is mission-driven, rather profit profit-driven. The organization is created to serve a charitable, religious, educational, civic, or other "non-commercial" cause. Unlike for-profits, nonprofit organizations cannot be owned by anyone. Instead, they must be overseen by a board -- typically, a board of directors or a board of trustees.
How do I create a nonprofit?
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To create a U.S. nonprofit, you must create a corporation in your state -- or the state in which you'd like to operate the nonprofit. Different states have different terms for a nonprofit, including non-stock corporation, not-for-profit, public benefit organization, and non-profit corporation.
To find information in your state for forming such an organization, you should be able to search for "forming a nonprofit in _____," with your state's name in the blank.
Expect to submit "Articles of Incorporation," a document with a series of paragraphs (article) that provide basic information about your organization. This includes the organization's legal, purpose, location, and founder, among others. Rules for the content and format of the Articles of Incorporation vary from state to state. So do the application fees and the length of time needed for the state to approve your submission.
Once approved by the state, the Articles of Incorporation serve as a kind of birth certificate for the new nonprofit.
No one can own a nonprofit, so before you submit the Articles, you'll need to appoint a governing body, often called the board of directors. Your state's rules will tell you the number of directors that are required, as well as, their qualifications. Even though one person may be the organization's founder, the board has legal responsibility for the organization.
If you're like most nonprofit founders, you'll also want to apply to the Internal Revenue Service to be exempt from federal income taxes after the state has approved your new corporation.
Once IRS has approved your application, you'll have a tax-exempt nonprofit--or in IRS language--a tax-exempt public charity.
That is, unless you intend to create a foundation. Charitable foundations often carry out the same functions as public charities, but the IRS rules and tax treatment are considered less favorable for foundations.
How long will it take to create a nonprofit?
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No one can tell you exactly how long it will take to create a nonprofit, but if there are no complications you can probably create and submit Articles of Incorporation and receive your state's approval within 4 to 6 weeks.
Keep in mind, though, that this is only an estimate. Here's the reason:
Your nonprofit will need a board of directors. And you'll need the minimum number of directors required by your state. Though these may be directors who will serve only to help you start the organization, you still need time to identify candidates, invite them to serve, and receive positive answers.
You can't simply ask a group of relatives to serve, and some of your board prospects may decline.
After you submit your Articles of Incorporation, you'll have to wait for your state's approval. All of my clients have received approval in less than one month, but states don't generally guarantee the turnaround. The exception is that some states offer optional express processing, which requires an additional fee. Express turn-around is often immediate or within 24 hours.
What is an "EIN"?
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EIN is short for Employer Identification Number. This is a 9-digit number issued by the Internal Revenue Service (IRS) to companies, and corporations--nonprofit and for-profit. It's also called Tax Identification Number, or TIN. An organization's EIN is similar to an individual's social security number and is used on IRS forms like the 1099 and for banking.
What is a nonprofit board?
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A nonprofit board (board of directors or board of trustees) is a group of people who have legal responsibility for the oversight of the nonprofit corporation.
No one can own a nonprofit, and so the board acts in a similar role, ensuring that the organization has the needed resources, safeguarding its interests, and securing its future.
State laws describe the eligibility requirements for board members and the minimum number that each nonprofit must have.
What are the Legal Duties of Boards?
Nonprofit boards have three legal duties:
- The Duty of Care: Board members must act honestly and reasonably, paying attention to business and making prudent decisions as any ordinary person would in similar circumstances.
- The Duty of Loyalty. Board members must place the interests of the organization above all other interests--especially their own--when making board decisions.
- Duty of Obedience. Every corporation is subject to a host of laws and regulations covering numerous matters from personnel law and licensing requirements to zoning restrictions and contract obligations. Every board and staff must comply with all local, state, and federal laws that apply to the organization. This typically calls for help from legal and other professionals who specialize in various legal disciplines.
How many board members must a nonprofit have?
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Each state has its own rules for starting a nonprofit. That includes the minimum number of board members. For example, as if this writing, the state of Maryland requires at least one board member, while Rhode Island, Tennessee and the District of Columbia require at least three.
Who should we invite to serve on our board?
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The Rules
Typically, state corporations laws require that each nonprofit have a governing board. That is a board of directors or a board of trustees.
But who should be on your board?
Eligibility
First, know that the directors or trustees make up a body of decision-makers. These are people who accept legal responsibility for the organization's well-being. This is NOT a social club or a family reunion. This is business.
The law in your state will likely give you some basic requirements for directors. For example, some states require that a director be at least 18 years old. Others require directors to be residents of that state. So be sure to learn your state's basic eligibility requirements.
Other Director "Assets"
Beyond basic eligibility, though, there are other considerations. You want directors who are dedicated to serving the organization's mission and committed to donating time and resources to help the nonprofit succeed.
Consider seeking out people with industry knowledge and experience who can advise you about your programs. It also helps to seek out folks who can help with organization-building and sustainability. That might include people with finance and accounting skills, program development expertise, fundraising experience, and marketing talent.
And don't forget to look for directors who can represent the kind of people you hope to serve when that's practical. So, for example, if you're serving people with differing physical abilities, search for board candidates who have differing physical abilities so that you're planning WITH, not just FOR your target participants.
Work For It
Nonprofits across the U.S. tend to have a common problem: attracting and keeping good board members. There's no magic bullet answer for this, but you can do a few things to keep moving in the right direction:
1) Create a Governance Committee to oversee recruitment, vetting, and training of potential new directors.
2) Have that committee develop and give ongoing attention to a board recruitment strategy.
3 Ask your board members to encourage eligible folks in their circles to consider serving a term on the board.
4 Connect with organizations in and related to your industry and make it known that your organization welcomes suggestions for new board candidates.
5) Check out local agencies that recruit and mobilize volunteers for good causes, and
6 Advertise in your local newspaper, industry publications, on your nonprofit's social media platforms, and in online portals like Idealist.
Bottom Line
The big takeaway here is that having a solid board is not only a legal requirement; it's just good business. A good board can make or break a nonprofit organization. So if you need help with board development, get help. One source of help is my company LaCharla Figgs Consulting.
Do US nonprofits pay taxes?
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Yes and no. Being a nonprofit corporation does not automatically exempt an organization from paying taxes.
Most U.S. nonprofits seek exemption from federal income taxes through the Internal Revenue Service. Having this tax-exempt status is an achievement because it shows potential supporters that the IRS sees the organization as mission-driven, rather than profit-driven.
Achieving this tax-exempt status may also make the organization eligible to apply for exemption from some state and local taxes as well. Jurisdictions are different, though, so check the rules in your state, county, and city to get every kind of exemption possible.
You'll find that the rules tend to be more relaxed for houses of worship. For example, the IRS considers them exempt from federal income taxes, whether or not they apply for tax-exempt status.
When you're making purchases or traveling on behalf of the nonprofit, be sure to ask in advance about potential sales tax savings or other benefits available only to tax-exempt nonprofits.
What kinds of funds do nonprofits receive?
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U.S. nonprofits receive different kinds of funds from different kinds of sources. Here are some of the most common sources of funds for U.S. nonprofits:
- Donations from individuals
- Grants from foundations
- Government grants
- Contracts for services
- User fees
- Fundraising event proceeds
- Federated campaigns (like United Way)
- Endowments
- Planned giving (gifts left by donors in their wills), and
- Crowdfunding
Three Other Sources
Some nonprofits launch for-profit businesses that contribute some of their profits to the nonprofit.
Faith-based nonprofits often receive contributions from related congregations.
And, finally, membership nonprofits receive membership dues.
Can a US nonprofit earn profit?
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First, what is "profit"?
Both for-profits and nonprofits need resources to operate. Except for all-volunteer nonprofit operations, the primary resource is money. Profit is calculated annually and is equal to the revenue received minus operating expenses for that year.
Is Profit Permitted?
To answer the original question, yes!
Nonprofits can and should generate more revenue than they need for that year's operation.
The confusion comes from the name "nonprofit" or "not-for-profit." These give the impression that earning a profit is off-limits for these organizations.
A Better Question
The real question is "What can a nonprofit do with its profit?"
When a nonprofit generates more revenue than it needs for the operation, that profit must be used to forward the nonprofit's mission. It cannot be used to enrich the founder, the board, or the executive staff.
Yes, nonprofits can pay staff salaries and reimburse board and staff expenses. And some states allow nonprofits to pay board members for actual service. But these expenses should be "reasonable" and should be included in the operating budget.
IRS uses Form 990 to learn about the way 501c3-designated organizations spend their money--to make sure none of the leaders receive excessive benefit from their service. Getting this wrong could result in the loss of 501c3 status.
Like other organizations, nonprofits need reserves and savings. These would be available for the predictable repairs and replacements organizations experience over time and also for unexpected expenses and new business opportunities.
So profit is not only allowed for nonprofits, but it's desirable. To have those profits, though, nonprofits must generally raise what's known as "unrestricted funds" because grantmakers and contracting agencies are generally unwilling to fund anything that looks like profit.
What is fundraising?
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Nonprofit organizations are purpose-driven rather than profit-driven corporations. Charitable nonprofits address needs that are not being addressed well enough by the government or business sectors or by the larger society.
Homelessness is, unfortunately, a good example of that kind of need. To put it bluntly, there is no profit to be made by addressing certain needs in our society. And so charitable nonprofits step into the gap.
The solutions that nonprofits bring to society cost money, and fundraising is one way charitable nonprofits attract the needed funds. Fundraising is a set of ongoing activities that attract funds into the organization to support its programs and operations, to help the organization weather financial downturns, and to prepare for future opportunities.
Nonprofits engage in different types of activities to generate the funds they need. Here are 5 of the most common fundraising activities:
- Events (marathons)
- Annual appeals to supporters (mailings)
- Grant proposals
- Receiving fees for services delivered, and
- Merchandise sales (museums)
One popular way a nonprofit can generate income is through an annual “signature” fundraising event. Done well, a signature event can attract interest, support, and financial contributions.
The key is to generate buzz and excitement so the community anticipates this event every single year. The event doesn't have to be elaborate, and it might help if the signature event relates to the mission.
An example of this would be a children’s literacy nonprofit holding an annual book reading and book signing party featuring the authors of popular children’s books.
What is a grant?
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A grant is an amount of money that's typically awarded by a nonprofit organization, a grantmaking foundation, a business, or a government agency.
Grant funds are usually not repayable if they're used according to the grantmaker's terms. The terms typically spell out the length of time the grantee has to spend the funds and any conditions that apply to the use of those funds.
Some grantmakers make general awards that the nonprofit can use in any way it wishes. Other grantmakers restrict their grants to specific purposes and budget line items.
Nonprofits typically conduct research to identify grantmakers that support programs and causes like theirs. Each grantmaker has requirements for grant seekers. Typically, a grantmaker will ask for a written proposal that describes the organization, its program(s), and its budget and that details the way the nonprofit plans to use the grantmaker's funds.
Some grantmakers are lenient with their grant terms, while others are not. Government agencies, for example, tend to be very strict about their grant terms. If a recipient does not spend their grant funds on time and according to all restrictions, the grantmaker may demand repayment of their funds.
Grants can be small or large, provided for one year or multiple years, and be one-time-only or renewable grants.
