Mistakes to avoid with nonprofit organizations

By Jean Kruse / Guest Column

Designation as a nonprofit organization (NPO) does not mean that the organization cannot make a profit, but rather that the organization has no “owners” and that any profits made cannot be used to benefit any person — the legal documents that incorporated the entity spell out that if the organization is dissolved, the remaining funds must be transferred to another IRS Code Section 501(c) (3) organization.

In my CBJ article last month, I discussed the reasons some entrepreneurs decide to start a NPO. This article will discuss the mistakes that some charitable NPOs make, as follows:

1. A person who is passionate about a cause often does not realize that starting a nonprofit is extremely complicated. As a result, they do not do enough research. For example, there may already be a charity with a similar mission. Do extensive research to determine if your idea can be combined within another already organized similar organization. It would also be a good idea to volunteer for or become employed by a similar nonprofit in order to get management experience and become aware of the time commitment required. Or you could serve on a nonprofit board.
2. Underestimating the paperwork. Each of the five steps mentioned last month requires a considerable amount of paperwork. The Form 1023, Application for recognition of exemption under IRS Code Section 501(c)(3), is about 25 pages long and includes complex questions and the answers require extensive detail. It may take six to nine months before your nonprofit status is approved by IRS. Meanwhile, it may be difficult to get donors without that official status. Paperwork also includes accounting for the receipts and disbursements and filing tax forms.
3. Lack of proper insurance. The board members may be on the hook for an organization that has a fundraising event but fails to consult an insurance agent about coverage.
4. Choosing the wrong board members. Most nonprofit organizations require each board member to donate money to the NPO and also to volunteer their time. It is important to choose board members who can volunteer their time in meaningful ways, such as an attorney who will prepare the organizing legal documents, an accountant who can do or supervise the bookkeeping and a skilled fundraiser.
5. Not realizing the importance of fundraising. A NPO must operate like a for-profit business in that systems must be set up and a business plan prepared that includes a marketing plan. Many nonprofits are so involved in planning for the charitable programs they do not spend enough time on planning for how they will convince donors to donate, or how they will even find donors.

What are the possible “funding sources” of NPOs? I suggest making a chart in an Excel spreadsheet with three columns: funding source, funding level (the dollar amount you plan to receive from each funding source), and the percent of total funding of each of the funding sources. Here are some possible funding sources:

• Government (local, state, federal)
• Foundations (private and public)
• Corporations (grants, contracts, in-kind, partnerships)
• Annual giving by individuals (direct mail, telemarketing, membership, special events, donor clubs, capital campaigns)
• Planned giving by individuals (endowments, bequests)
• Bonds (pooled issue, pooled pension, private offerings)
• Social lenders (community loan, banks, insurance companies)
• Enterprise (fee-for-services, investments and unrelated joint ventures)

To complete the assessment, ask yourself these key questions regarding your organization’s planning process and its relationship to fund development:

• Is there a shared commitment by the board, management and staff to support fund development activities?
• Has your organization established clear and measurable fund development goals? Are these goals reasonable and cost effective?
• Is your nonprofit young or a well-established, mature organization?
• Does your organization have name recognition?
• Are you known in the community, visible to your constituencies and respected as an organization that delivers?
• Is your organization building on its donor capacity? Donors with a history of contributing to your organization, especially major donors, are more apt to consider an endowment arrangement with you.

In my next article I will discuss business income that the IRS may consider unrelated to your charitable reason for existence, why the entrepreneurial spirit is important, and how a nonprofit organization might survive over the long term. Meanwhile, contact SCORE if you want an experienced mentor: www.scorecr.org.

Jean Kruse is a SCORE counselor and SCORE Iowa district president. She operated her own CPA firm for 13 years and in 1988, joined RSM McGladrey, a national firm, where she provided accounting and tax services to small business.