Stay informed on compliance updates
Thinking of starting a non-profit? Blair Anderson, President of the National Association of Non-Profits gives an overview of best practices for forming and managing a non-profit. Key takeaways include how a non-profit differs from a for-profit business, tax considerations, how to register a non-profit, and the importance of the right management structure.
How to Start a Nonprofit Organization
Greg: Hi, I’m Greg Corombos. Our guest this week is Blair Anderson, President of the National Association of Nonprofits. Today we’re going to be talking all about nonprofit organizations, how they differ from traditional businesses, why that might be the smart path to go, and how best to structure such an organization. Blair, thanks very much for being with us.
Blair: Thank you for having me.
Greg: Let’s start with the very basics. What is a nonprofit organization, and what are the biggest differences between one of those and a for-profit business?
Blair: A nonprofit organization is basically an organization that has been formulated to fill a gap in our society—basically some type of social ill or shortcoming that someone sees, or a community sees, is missing in our society. Usually, it’s about homelessness, mentoring kids, or something like that. Usually, the government allows this designation because technically it’s not the function of the government to do that. That’s basically what a non-profit is.
Greg: You mention a couple different types of organizations that naturally form as a nonprofit. What are some others?
Blair: Actually your local government. Your local government is a nonprofit—most people don’t realize that. Most of your higher education, colleges and universities, are nonprofits. Your homeowners' associations a lot of times are non-profit. Nonprofits are wide and varied.
Greg: Let’s talk very briefly about the differences between a nonprofit organization and a benefit corporation. How similar are they and what are the key differences?
Blair: A nonprofit is basically someone or a group of people who have come together because they feel there is some type of need within the community that needs to be addressed. A [benefit corporation] is usually someone starting a business, just like any for-profit business. But rather than all the profits going towards investors or the individuals, the LLC, a good portion of the profits go into serving some type of nonprofit organization within the community or somewhere.
Greg: Blair, you addressed a couple of the financial issues, but I want to get it clear and on the record for those listening—a nonprofit organization can certainly turn a profit, correct?
Greg: What about the tax implications of nonprofits? Some people think you’re automatically tax-exempt. Other people aren’t so sure. What are the rules there?
Blair: What happens is depending on the money that’s generated, yes, normally there are no taxes on whatever income that comes in. But you do have taxes if you have employees. You are subject to all the same type of taxes that any other employer—as far as payroll tax, social security, things like that—is subject to.
Greg: Do you need any particularly unique paperwork or mission statement in order to properly qualify?
Blair: When you want to become a nonprofit with the IRS, you do have to fill out what they call a Form 1023. It’s a long, tedious application process that you have to submit, basically outlining to the IRS what your organization is about, the name of the officers who are founding this organization, and outlining what your budget will be for the next three years. The IRS recommends just for the basic 1023, they have schedules A through F. But just for the basic application they recommend ten hours just to fill that out.
Greg: Any other key ingredients in the formation process that we should know about?
Blair: When people come to me and say that they want to start a nonprofit, the first thing I want to know is, why? Starting a nonprofit is rough. It’s not easy. Usually, you have to convince people that there is a need for the program for the services they want to provide, and you’re usually not providing services in a way that people are going to want to pay for. With that, one of the things I do is ask—what is their circle of influence—because your traditional revenue model does not apply to a nonprofit. A lot of it is going to be who are you surrounded by as far as influence that can bring resources to the table to help you get this organization up and staying afloat.
Greg: Are there any different compliance rules when you’re up and running, as opposed to other forms of businesses?
Blair: Yes. The thing with a nonprofit is that you are a public entity. So anybody can come off the street and say, I want to see your financial reports. I want to see the minutes to your meetings. And if you do not let them see it, they can blow the whistle on you. You have to always make sure that all the requirements the IRS is requesting are in place. Like I said, you’re a public entity. You’re not a private organization that you can tell people to back off, so to speak.
Greg: When it comes to running the business, Blair, once it’s up and running, are a lot of the principles the same as running a for-profit business in terms of, obviously, hiring the right people, finding the most efficient ways to do things, being productive, turning the best possible profit… Is it mainly the difference [of] what you’re doing?
Blair: Yes. One of the first things I do is tell everybody if you want to start a nonprofit, make sure you put together a business plan. Just like any other business. And this is what we teach people. It is a business, although the model of how you create revenue differs, it is a business. You want people who are competent, just like any Fortune 500 company with the top CEOs, you want the top executive directors to come in and run your organization. Unfortunately, that is a problem in the nonprofit arena, because the founders...they have a passion for the project that they want to support. But they might not necessarily be the right person to run the organization
Greg: A couple of minutes left, and a couple of questions in that time. We’re talking with Blair Anderson, the President of the National Association of Nonprofit organizations. Blair, let’s first of all talk about common mistakes to avoid, specifically when it comes to nonprofits. What have you seen over the years that folks have done that makes you kind of slap your forehead?
Blair: Well, they do not put together, when they’re starting, a good team around them. They go out, they get the paperwork, they get the letter of approval from the IRS, but then they have no support. Again, I always suggest to people, before you even apply for it, you make sure that you have a team that is going to be your board of directors that has a wide range of influence before you even apply for the nonprofit 501c3 status. Another thing is the founder syndrome. The founder may not be the best person to run that organization. It’s their baby, they want control of it, and they have a hard time letting go.
Greg: Finally, what are the smartest things you’ve done personally, or seen others do? What are your tips for success for those looking to launch a nonprofit?
Blair: Understanding that once your organization gets to a certain point, you no longer—even though you’re the founder—you no longer control it, you no longer dictate every movement. It’s like a child. Once it gets to a certain point, you have to let it grow in its own way and become organic. The best thing is to surround yourself with key people who understand the mission, who believe in the mission, and who will support that mission of that organization.
Greg: Blair, fantastic advice all across the board. Thanks very much for being with us today.
Blair: Thank you.
Greg: Blair Anderson is President of the National Association of Nonprofits. For more information on that group, head to naonp.org.
More in Nonprofit Corporation
More in Staying Compliant