Many of the same principles of running a good business apply, but the magic is in what sets not-for-profits apart. The following information answers many of the misconceptions surrounding nonprofit 501 C (3) organizations.
Not-for-profits can’t make a profit. This is probably the biggest misconception. As my accountant said, “A nonprofit and a not-for-profit aren’t the same.” If your venture is not profitable, it’s not pulling in sufficient revenue to cover expenses–in which case, it won’t exist for long. In a not-for-profit, profits fund the charity’s programs and cover basic administrative expenses. There are no shareholders or owners and therefore no dividends or disbursements.
You launch it, you own it. You can start a not-for-profit, but you can’t own it. In lieu of ownership there’s a governance structure in which the senior officers serve at the board of directors’ discretion. Typically the founder will remain as an executive leader as long as she is successful in achieving the charity’s mission; that person’s passion is vital to the organization’s success. But the board’s job is to continually monitor and assess the leadership’s effectiveness. If its members think you’re no longer up to the task–you’re out.
Can you draw a salary? Many charities are volunteer-only, but that’s not a requirement. In reality, the responsibilities of a full-time executive staff are considerable and merit compensation. The executive director can recommend compensation to the board but is not allowed to vote on it. For new charities the point is often moot, since it takes awhile to achieve sufficient cash flow to support salaries. Nonetheless, it’s important to include compensation for key staff in budgets and financial projections.
Beyond misconceptions, what should you do? Here are my most valuable lessons:
Write a business plan. “But it’s not a business,” you say. True enough, but it’s still an organization that needs a clear mission; solves a specific problem; has identifiable recipients, management structure and plan for developing revenue; and understands how it will create market awareness. As a business owner already, you have a tremendous advantage in launching a not-for-profit because you know how all of these elements work together. Take the time to write a plan.
Ask for free help. I was fortunate to receive top-flight assistance for legal work, website design, identity development, marketing, and launch planning, and financial controls–all pro bono. You’ll need good legal counsel when you apply for your tax-exempt status from the Internal Revenue Service; the government doesn’t make anything easy (or clear). Many large law firms have a pro bono coordinator and even require their attorneys to devote a certain amount of time each year to charitable work. In the end, you don’t get what you don’t ask for. Ask–the worst that can happen is that someone turns you down. Also, share your idea with a trusted network; you’ll be surprised by how many people will offer their expertise for free.
Consider alternatives to your own tax exemption. Many startup charities don’t have the money to apply for their tax-exempt status–the IRS filing alone can cost up to $750–or prefer the support of an existing charity to help them get on their feet. With fiscal sponsorship, a would-be charity operates as a program under the umbrella of an existing tax-exempt organization, in exchange for a small fee for processing its donations. If you go this route, approach a charity whose mission is aligned with yours, and have a clear exit plan. For example, decide that you’ll apply for tax exemption within one year. It’s a great option that, in many cases, can get you started more quickly and less expensively.
Build the board you need. Most early-stage not-for-profits are exclusively focused on donations, which is understandable. Without money flowing in, there won’t be much in the way of good works flowing out. However, it’s much more important to have a board that helps you create and sustain a well-functioning organization. If the charity doesn’t have a strong foundation, it will squander what donations it does receive, fail to execute on its mission and prove to be unsustainable. Early-stage boards require serious people who bring real-life credentials and know-how to the table, and who complement your skills. For the not-for-profit I founded, I chose people with demonstrable capabilities in communications, marketing, public relations and financial management, as well as a member with strong military and veteran advocacy credentials.
There are a thousand smaller lessons I’ve learned along the way, but these stand out as the most important and enduring.