By Jean Kruse / Guest Column
The definition of entrepreneur is “a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.” Entrepreneurship is defined as “the capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit.”
Recently, SCORE mentors have had several clients who have stated their desire to organize a nonprofit business. My first question usually is, “Why do you want your entity to be a nonprofit, rather than a for-profit business?” I ask that question of those who want to start a business that is typically operated as a for-profit business, such as consulting or retail.
The frequent answer is that the person is very passionate about a particular cause and want profits to benefit that cause, or they presently work in an environment that is not operated up to their personal standards of behavior and they want to be in the same type of business, but they do not want profit to be the prime motivator.
A nonprofit organization (NPO) is known as a non-business entity and is an organization with purposes other than making a profit. A NPO might be dedicated to furthering a social cause or advocating for a particular point of view. A NPO uses its surplus revenues to achieve its purpose or mission and cannot distribute its surplus income to any shareholders. The NPO can pay salaries to those who work for the entity – so the organizer can be paid for the work performed, assuming the entity has enough funding to pay adequate wages.
A charitable organization will want to apply for income tax exemption by filing a Form 1023 application for recognition of exemption under Internal Revenue Service Code Section 501(c)(3) within the first 27 months of its existence. All other nonprofit organizations will file Form 1024 to apply for recognition of exemption under IRS Code Section 501(a).
Section 501(c)(3) organizations can receive charitable contributions. This means that persons who donate to the organization are allowed to take a tax deduction for the amounts contributed. For some donors, being able to deduct a contribution is important and without that benefit may not contribute.
Most entrepreneurs who start their own for-profit company expect that company to provide a means for them to create wealth. They often expect that when they sell their business, it will provide a stream of retirement income. In addition, many business owners look forward to passing the entity down to their heirs; they want to make sure that the business will continue after they are gone.
If you are passionate about wanting to make a difference in your community, and do not want to build a company that will eventually be an asset that you can pass to your heirs or the tool to provide retirement income for you or your family, then perhaps, starting a nonprofit entity is an excellent idea.
What do you need to do to start a nonprofit company? Here are the first steps to starting such an organization:
Organize a team of individuals who share your goals and are passionate about your purpose. These individual must understand that much of the time they need to provide will be on a volunteer basis. Have a meeting to decide who is going to be in charge of fundraising; who will take care of the legal paperwork, such as the filing with the Secretary of State and Form 1023.
The team you gather may become your first board of directors; they will become the incorporators who will file the articles of incorporation with the state to legally form the corporation. This team will decide on a name for the entity that will describe your purpose.
Incorporate the entity as a nonprofit corporation. The articles of incorporation and bylaws must include specific language stating the charitable purpose of your nonprofit and it must state which nonprofit organization will receive the remainder of funds on hand if the organization is dissolved at some future time—those remaining funds cannot be transferred to any individual.
Choose a registered agent from among your team and hold an official meeting at which you will officially adopt the bylaws and elect the directors and officers needed to run the nonprofit.
Get a Federal Employer Identification Number by filing Form SS-4 with the IRS. This can be done online at www.irs.gov.
Prepare and file the Form 1023 with the IRS.
Start fundraising. Contributors may not want to donate money until the IRS approves your Section 501(c)(3) status, so discuss alternative funding arrangements, because it will take a considerable amount of time for the IRS to respond to your Form 1023.
If your organization needs to accept Medicare and Medicaid payments for services, then you need to find someone who is an expert at completing the volumes of paperwork that entails.
The above is just the beginning. In my next article I will discuss the mistakes that many charitable startups make, provide more information on starting a nonprofit, the entrepreneurial spirit and feasibility study needed as well as how a nonprofit organization might survive for the long term.
Meanwhile, contact SCORE if you want an experienced mentor, either in person or via email, who will assist you and listen to your ideas without judgment; SCORE services are free and confidential at 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.