Starting a nonprofit is a lot of work and requires an immense amount of planning. Here are five areas that any non-profit founder should consider before incorporating their non-profit organization. Although consulting with an attorney or other professional might be advisable, these considerations will be helpful irrespective of whether a founder is working with a legal professional or chooses to go it alone.
1. Clearly Define The Organization's Purpose and Activities
The organization's purpose and the activities it engages in to achieve those purposes will reverberate throughout the life of the non-profit. Indeed, the broad or limited scope of the non-profit's purpose will inevitably determine the available channels of implementation, the affiliate partnerships it might form, and the tax-exempt status of certain funds it accepts.
First, clearly defining the organization's purpose will give the organization its character. Think long and hard about who the organization is attempting to help, why it is helping its beneficiaries, how the non-profit organization will be funded, and what activities will best benefit the community at large. Clearly defining the organization's purpose and mission will not only keep the organization focused but will also ensure that the delivery of goods or services will create the greatest community benefit.
Second, a clear definition of the organization's mission will ensure that the organization does not stray from its charitable purpose. Without getting into technical definitions and with some limited exceptions, tax-exempt organizations must comport with their "charitable purpose". Therefore, a non-profit that has a charitable purpose of bringing financial education to low-income households, is not tax-exempt for community beautification efforts. These tax implications demonstrate that it is important for founders to carefully contemplate the scope of its charitable purpose.
2. Carefully Choose The Organization's Structure & Personnel
A pre-formation founder should approach the organization's incorporation as a planning event. The founder or founders must carefully assess who will be a part of the team, how the day-to-day operations will be run, and who else might be involved in the organization.
The founder or founders must contemplate who will be on the Board of Directors. Often, it is useful to have strategic appointments (ie: inviting individuals to serve on the Board of Directors who might contribute expertise, relationship, funds, etc. to the organization). Additionally, the founders will need to determine if the organization will have members (the closest thing to shareholders in a non-profit organization). Moreover, the founders will need to decide whether the members will have actual voting rights to determine how the organization will be run or whether their input is merely advisory. Finally, the founders will need to determine who the executive director will be and, if necessary, where they might find staff. Indeed, the executive director usually implements the broad policy enactments by the Board of Directors so choosing a diligent and competent executive director is imperative to overall success.
Finally, today there are many "hybrid" organizations known as social enterprise organizations. These organizations are either non-profit organizations with some business purposes or for-profit organizations with some charitable elements. Determining the purpose of the organization and what activities the organization will prioritize is a critical component of the founding process.
3. Safeguard Against Potential Intellectual Property Conflicts
Before incorporating, consider the potential intellectual property conflicts that might arise while the organization is starting up or further down the line after the organization has been in operation for a while. Although the chances of copyright or trademark issues may appear remote while the formation process is under way, it is still important to do some research. Do a quick search to determine if there are any other organizations or businesses that have a similar name or that are substantially similar such that a third-party might be confused. Additionally, the U.S. Patents & Trademarks Office has a free database on their website so it is a good idea to consult it before choosing a name, domain name, etc.
It may seem cumbersome or unnecessary to enact these safeguards; however, imagine what a pain it will be to incorporate the organization, buy a domain name, file for tax-exempt status and then find out that your organization's name infringes on an existing trademark and can no longer be used.
4. Consider IRC 501(c)(3) Designation When Creating The Organization's Plans
Although a nuanced understanding of the tax code is not necessary, obtaining tax-exempt status under IRC 501(c)(3) is probably the most important element of any non-profit. Whether the organization can secure 'tax-exempt" status will likely determine whether it can raise the funds necessary to carry out its purpose. Founders should ask themselves where they plan to secure funding, whether any of their funds might be obtained through non-charitable revenue streams, and what the scope of their charitable purpose is. Contemplating these questions will better prepare the organization for discussing tax-exempt status with a professional with more substantive expertise in the area.
5. Consider Consulting An Attorney Familiar With Non-Profit Organizations
Consulting with an attorney may appear unnecessary or too costly at the outset but, as previously outlined, there are many different legal issues that could potentially arise. Planning for potential legal issues is easier than dealing with a problem after it has already cropped up. Additionally, there are free legal clinics that might be a good place to secure quality counsel during non-profit formation. Moreover, consulting with an attorney becomes more useful as the complexity of the non-profit increases.
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