Don’t start a nonprofit organization because it’s easier than starting a for-profit business.
Don’t start a nonprofit organization because you want to avoid paying taxes.
Don’t start a nonprofit organization because you think you can do this better than anyone else who’s ever tried.
Start nonprofit organization
- when you see a gap in the community that needs filling,
- when you have a realistic way to address that gap,
- when you’ve figured out a solid business plan for making the organization sustainable,
- when you’ve begun to attract the resources needed to pull off this endeavor, and
- when you’ve attracted others who will complement your skill set and are equally committed to making a shared vision into a reality.
Getting to that point can be a lot of work, and it’s not for everyone.
The process for starting a nonprofit organization is legally complicated, and it also requires a fair measure of collaboration with others, some good business sense, and the ability to measure your impact and relate that to your community as a compelling story. It’s a lot of work!
Yes, an incorporated tax-exempt nonprofit organization offers some protection for you and your co-founders. It has some great tax advantages for your organization and your donors. It helps you when applying for foundation grants. It helps get your recognized by other businesses in your community. And there are a lot of other advantages as well.
So it’s worth doing, at least sometimes.
But there are disadvantages as well, and in some cases these outweigh the positives. Here are three alternatives to starting your own nonprofit organization.
(I should note here that when I say “nonprofit organization” I mean an incorporated organization that is applying for or has received a tax-exempt status from the IRS).
Option One: Just Do It
One alternative to incorporating and filing for tax-exempt status is to just do your work without all that bother. If you work as a group and haven’t incorporated then the IRS will probably consider you an “unincorporated association,” and you might want to stay that way.
Think about the advantages of a nonprofit organization. There are several types of projects that come to mind where those advantages don’t matter very much. For example, if you want to provide tax-deduction receipts for donors, you should first make sure your donors actually need those tax deductions. Many small donors don’t itemize their taxes and can’t really use the deduction come tax time. If this describes your donor base, the tax advantage is irrelevant.
Or let’s say your idea is to run a neighborhood yard sale once a year and send the money earned off to fund a school in the developing world. The risk in such an activity is fairly low, especially if the amount of money collected is nominal. There’s a good argument here to skip the bureaucratic steps associated with starting a nonprofit organization. Instead, you can just do the work.
You will need to use individual resources to do things. For instance, you won’t be able to get a bank account or some other business services as an organization. Those activities will need to go through individuals, so your group will need to be made up of people who are trustworthy and accountable. But this is the easiest way to start your work.
Option Two: Less Bureaucracy, More Control
If your main motivation is that you don’t want to work for “the man” you might want to skip starting a nonprofit corporation and create a for-profit business such as a sole proprietorship or an LLC.If you think dealing with a board is like working in a straight jacket, don't start a nonprofit. Click To Tweet
Some founders want to go it alone, or they want a lot of control over how things are done. Establishing a nonprofit corporation requires that you form a board of directors and that board has ultimate control over the organization. For some personalities, dealing with these extra people feels like working in a straight jacket. If that describes you, an option is to form a for-profit business of some sort. You get much more say in how things go, and the paperwork is easier to deal with. On the downside, you have no access to tax-exempt donations and foundation grants, and you will need to pay taxes on any profit. But you are your own boss. You get to run the show.
There’s no rule that for-profit businesses must try to make millions. You will need a positive cash flow, but that’s true for incorporated nonprofit organizations as well as for-profit enterprises.
Option Three: Outsource Your Bureaucracy
An existing nonprofit can act as a sort of intermediary between your organization and the IRS. This nonprofit would be called a fiscal sponsor, and becoming a program of a fiscal sponsor cuts out a fair amount of the day-to-day paperwork for you, letting you get down to business. The fiscal sponsor takes a negotiated cut of any income, but this is likely less than what a for-profit would pay in taxes, and in return for this, the sponsor deals with your bookkeeping, banking, and accounting. They file the IRS forms, and you get to work on your programs. It’s like outsourcing that work.
Think of it like the decision to buy or rent a home. In one case you give up some control but month to month you don’t need to deal with the leaky roofs and broken windows. That’s a landlord’s job. Alternatively you can buy the house and take on the risk and work associated with owning. Having a fiscal sponsor is a lot like renting. The sponsor owns your programs, but they take on a lot of that bureaucratic work. There are situations that this is a great option.
You do want to be careful, and shop for a fiscal sponsor that knows what they are doing and whose mission and style are compatible with your own.
This is a great option for people wanting to try the nonprofit idea out before formally setting up shop. If the project doesn’t work out, it’s way easier to abandon a project like this than it is to properly wind down an incorporated nonprofit organization.
It’s also a good option for ongoing nonprofits that operate at a low level once in a while but need the ability to apply for grants or for those who solicit tax-deductible contributions.
Or Start a Nonprofit Organization
Those are only three of many alternatives to starting a nonprofit organization. After considering these options it may be that a tax-exempt nonprofit corporation is the most appropriate option after all. In that case, be certain to take the time and effort to do it right. There’s a lot of work involved in doing this. Several online resources focus on the legal form, but before starting that work, be sure to thoroughly vet your idea. Understand how it benefits society and what programs you intend to offer. Also, develop a business model that will keep it sustainable, attract a few people to your cause, and consider what systems you need to have in place before establishing your legal structure. This upfront work will help you whatever legal form you decide to go with.
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