So You Want To Start a Nonprofit – Part 1
By: Pete Kennedy, CPA, Director
“How do I start a nonprofit?” is a question I get asked with some frequency and the answers might not be what you expect. If you are considering starting a nonprofit, there are a number of factors to consider. We’ve put together a four-part series of posts and accompanying videos to provide you with a baseline of information as it relates to key considerations to setting up a nonprofit, steps to setting up a nonprofit, selecting the appropriate tax exempt status, and, finally, obtaining exempt status.
Part 1: Key considerations to setting up a nonprofit
Before you start the process of forming a nonprofit, you need to do some introspection. The key question here is “What do you really hope to accomplish?”
The wrong answer is “dodge taxes”. There are plenty of legitimate charities that do wonderful work out there. If all you want is a tax deduction, you don’t need to go to the trouble of setting up your own nonprofit.
If the idea is that funders will be so blown away by your mission, they will beat a path to your door – that’s probably wishful thinking. Anecdotally, I can say that foundations that provide a large amount of the funding locally have many times more requests for funds than they can fulfill, so competition for those funds is tough.
Other key questions you should ask in the consideration phase are:
- What is the mission and how will it be accomplished?
- Will it be qualified as publicly-supported? In order for an organization to qualify as public supported it must have a base of public support and not just a few large donors.
- Do you have commitments?
- If you build it will the donors come?
- Who will run it? Will they be compensated? How will compensation be determined?
- Will it do something no one else is doing?
- Would it be better to partner with an existing organization?
Finally, similar to setting up a business, you need a business plan. As the saying goes, “Hope is not a strategy”. It takes a significant amount of time and effort (and some $$) to set up a nonprofit. Setting it up to watch it fold a few years later is a waste of both time and money!
Other paths to consider
Rather than forming a separate nonprofit, there are some other possible paths to consider. For example, if your idea is to raise funds for a cause, either one-time or ongoing, you really don’t need a separate nonprofit organization to do that. You can partner with an existing organization.
There are 1.6 million nonprofit organizations in the US. In Delaware there are 5,500. Chances are pretty good with a little research you can find one with a mission close to what you want to do.
Another path to consider is to use a Sponsoring organization. Without a recognized 501(c)(3) status, no matter how terrific your cause is, you will have difficulty attracting funding. A sponsoring organization allows you to raise tax deductible funds without going through the hassle of establishing your own organization – at least initially. Locally, I know the Delaware Community Foundation and the United Way both can do this.
The sponsoring organization can collect contributions, issue receipts, and pay expenses while you apply for and await approval.
It takes time and effort to set up a nonprofit and get it qualified with the IRS. The thing you want to avoid is going through all the effort of setting up a separate nonprofit organization only to have it fold. You don’t want to go through all that effort if it won’t be sustainable.
Learn More through our So You Want To Start a Nonprofit Video
Other topics covered in this four-part series:
Part 2: Steps to Setting up a Nonprofit
Part 3: Understanding Nonprofit Tax Exempt Status Types
Part 4: Obtaining Tax Exempt Status
Pete Kennedy is a Director at Cover & Rossiter and is one of the leaders of our Audit practice. He has developed an expertise in nonprofit accounting, auditing and tax issues and is privileged to work with many of the region’s leading institutions.