Starting a non-profit organization can do good things both for the community and the entrepreneur. Dennis Zink interviews SCORE mentor and non-profit expert Jack Dunigan on the details of starting and maintaining a non-profit organization.
Published: Monday, June 29, 2015.
It is my experience that most people don’t understand why someone would start a non-profit business. In my nationally syndicated podcast series, “Been There, Done That! with Dennis Zink,” I interviewed an expert in non-profits, Jack Dunigan, chapter chairman of SCORE’s Southwest Florida chapter, which is in Ft. Myers.
Q: What is the difference between a non-profit and a business?
A: Non-profit organizations often have the idea that in order to be a non-profit they don’t have to make money. Non-profit organizations, like any business, have to make money. They have to be able to meet budgets, including payroll. They have to pay for the objectives and the activities of their mission.
A big difference between a non-profit organization and a business is that, if I own a business and there is money left over (quarterly, semiannually or annually) then, as the owner, I can take some or perhaps all of that money as a bonus or distribution. In a non-profit organization, I cannot do that. That money belongs to the organization. The IRS regulations are specific that there can be no inurement to the benefit of an individual, which means I can’t take that money. I can get paid for the work that I do, but the money always belongs to the organization. If you decide to close a non-profit, that money has to be given to another non-profit. Non-profits are permanent and are never allowed to distribute the funds or any assets to the members. It has to remain in the non-profit sector. They do have to make money. Their revenues have to exceed their expenditures, or they ultimately will fail in their mission.
Q: What is a 501(c)3?
A: 501(c)(3) is the IRS number for those tax-exempt organizations of religious, charitable and educational institutions. It is the most prevalent type of non-profit organization recognized as a tax-exempt organization by the Internal Revenue Service. One of the problems with tax-exempt organizations is understanding where they qualify as taxexempt. There’s one guiding factor, and that is the intent to spend a major portion of money influencing legislation. 501(c)(3) organizations are expressly prohibited from spending a major portion of their revenues influencing legislation. The IRS is rather reluctant to define what “major” means. It’s usually around 10 percent. Exceed that percentage and risk being in danger of losing your tax exemption.
Q: What if you lose your non-profit, tax-exempt status?
A: If you lose your tax-exempt status, you cannot give tax-deductible receipts to any of the donors. Revenues that you receive will be treated as income and will be taxable at a normal corporate or business rate. Depending where you are in the United States (it varies from state to state), you would owe federal and local taxes. This very seldom happens. The IRS is reluctant to remove an organization’s tax-exempt status and provides ample room to correct any default.
Q: What are some of the factors to consider in starting a non-profit versus a business?
A: There are about 1.6 million non-profits in the United States. The first question to ask is “Do you really need to do this?” It’s not only complicated, it can be expensive to start a non-profit. Is there a non-profit that might parallel what it is you want to do? Perhaps you could either work for them or in conjunction with them. The second question is, “Are you suited for a non-profit?”
Q: Are you required to have a Board of Directors?
A: Yes, it is required by law to be managed and overseen by a board of directors of no less than three people. Board members are responsible for the fiduciary responsibility to the IRS and to all of the constituents, to execute the non-profit according to its purpose that got them the taxexempt status. The board oversees the organization and makes sure that it remains consistent with its vision. Its financial responsibility means funds have to be spent in accordance with the stated purpose of the organization. Board members may not be paid to be on the board; however, they may receive reimbursement for travel and other expenses.
Q: Are you seeing more non-profits moving towards earned-income?
A: Yes, but money earned from non-related business expenses can be subject to tax and must be reported differently.
Q: How does one make money?
A: The Catch 22 is you can’t do anything till you get some money and you can’t get anybody to support you until you do something. You’re probably going to have to work and fund the start-up yourself. It is exceedingly difficult these days to raise money. With the proliferation of nonprofits, there’s a huge demand for money and fewer places to get it.
Q: What forms do I need to file with the state and IRS?
A: Articles of incorporation. You can have an attorney draft them or review sample non-profit forms at the Secretary of State website. Include some rather broad statements about what it is that you’re going to do. Always include the clause that you are going to pursue any and all activities authorized and allowed for tax-exempt organizations. As you evolve, you may want to take on things that you didn’t think of in the beginning.
To meet IRS regulations, include a statement that says, “No profits can inure to the benefit of an individual.” There also must be a clear statement of non-discrimination against anybody.
File an application form 1023 for tax-exemption with the Internal Revenue Service. The IRS will not grant tax exemption permanently for at least two years. They will grant a temporary tax exemption. They want to see that you’re actually going to do something and that what you’re doing is consistent with what you said you were going to do.
Form 990 is a tax return for tax-exempt organizations. This form has to be filed every year in your state and to the federal government.
Q: What does it cost to start a typical non-profit?
A: Estimated legal fees for the Articles of Incorporation will run $1,500 and up. Depending upon the state, you may have to reserve the name. Filing the articles with the state costs approximately $75. The filing fee to the IRS for form 1023 (to gain recognition as a tax-exempt organization) is $400 to $800. You will also have normal business costs, such as advertising, business cards, brochures, public relations, etc.
We are beginning to see a big push toward more earned-income initiatives. People get tired of being asked to donate limited funds to numerous organizations. Here’s to sustainability!