TACS - The Foraker Group



Key Questions:

• Who will benefit from the activity?  If the answer is that you or your family will benefit, then it's a good idea to start a for-profit company rather than a nonprofit organization. If your answer is that the community or the public at large will benefit, then a nonprofit structure may be the best route. The second question to ask is, "Will I allow the board of directors to set policy, including my salary, benefits, and even my employment by the organization?" If your answer is "No, I want to keep control of the organization," then you want to make your corporation for-profit. If, however, you want the board to be autonomous, then a nonprofit organization can be a good fit. Remember, you can sit on the board and you can have a vote when it comes to determining policy. However, on issues that affect your employment, salary, benefits, you must excuse yourself from voting.

• Am I cut out for this? Starting a nonprofit is very much like starting a business. It's just that you have to find donors instead of investors. However, donors today demand that nonprofits be run like businesses. You will need a business plan plus produce measurable results later. You will, just like a business owner, have to put in long hours, probably without pay, until you can get the new enterprise up and going. Some people who start NPOs have to keep paying jobs during the startup period. You will need not only passion for your cause but a big dose of entrepreneurial spirit.

• Do I have an original idea? Before forming any nonprofit organization, a founder should review the external environment that the organization will operate in. With so many nonprofits already in existence, it is likely that there is one, or even a few, that have already claimed your idea. Do your research and locate other NPOs that are similar to the one you propose. If there are organizations out there that have the same mission and they do a good job, it is going to be very difficult for you to attract donors, foundation grants, or any other support. You may be passionate about your cause, but the nonprofit "market" will not bear much redundancy. Ask others if they know of an existing organization that, someone sensing an unmet need, could partner with you to meet the need.

• Is a new nonprofit necessary? You don't have to start a new NPO to make a difference. You might be able to work with an existing organization to establish a new focus for that NPO. You might, also, work out your passion by volunteering with an existing organization. Perform a needs assessment to make sure that your organization is really needed. Ask yourself questions like: Ask yourself questions like: “Have I explored collaborations, partnerships or becoming part of an existing nonprofit rather than establishing a new organization?”

• Have I written a detailed, multi-year business plan showing how you will deliver services, where the money will come from, how the organization will establish and maintain management and reporting systems and all other aspects of operating the nonprofit, in addition to delivering services? How much money will I need in the first year and for what types of expenses? Do the financial projections demonstrate that the organization can generate sufficient financial resources to thrive?

• What programs, services, or projects will my organization provide?

• What are the results that I hope for?

• Who will the nonprofit benefit/serve? Who is your audience? Review the client/customer market for the perceived need. A founder should always identify potential users of any service to make sure the service will have sufficient clientele to support the effort.

• And, what is its demographic profile? Are they low income? Where do they live? How do they get around (public transport etc)? How many people are there who need your service? What are this group's needs and desires? [pic]You may think they need one thing but they may actually need and want something else.

• Who will do the work? How will I appropriately manage administrative work, accounting, record keeping, tax filing, evaluation, reporting, external communication, fund development, planning etc.? Does the plan include professional leadership (paid or volunteer) who have the management expertise to guide the organization and implement the plans and policies of the Board of Directors?

• Are there willing people to serve as a Board of Directors who share passion for the mission and who are not family members? Do the members of the board have past board experience and the ability to steward a start-up business?

Structure

Nonprofits differ significantly from partnerships or sole proprietorships:

• A nonprofit is controlled by a board of directors

• There is no private ownership or personal financial interest

• Success is more likely if a nonprofit is started by a group rather than an individual

• If you want sole control and decision-making power this is not a good choice

• You cannot sell a nonprofit

Funding

Many people think it is relatively easy to obtain grant funding to support a nonprofit. This is not necessarily true.

• A nonprofit must have tax-exempt status to apply for grants or solicit tax-deductible contributions

• Funders prefer to fund organizations with a track record

• Competition for grants is high

• New organizations should plan for several years of low/no funding unless a funder has already stepped forward

Community Support

Nonprofits are often created by individuals with a strong personal vision. This can be a tremendous help but sometimes ends up a hindrance:

• Nonprofits are intended to fill a community need

• Most successful nonprofits are started by a group of people who share the vision AND the responsibility

• Individuals who want to start a nonprofit will be more successful if they can involve others in their vision

• The Internal Revenue Service (IRS) looks for evidence of community support in evaluation of applications for tax-exempt status

Maintenance

Since most people who start nonprofits are motivated by the desire to provide a particular program or service they often fail to realize that there is a significant amount of administration required:

Areas you must attend to if you hope to succeed:

• Board support & development

• Fiscal management

• IRS & state reporting requirements

• Insurance and risk management

• Grant writing & other fund raising

It is critical to have enough active participants to share the responsibility for these tasks. Organizations that depend on one or two people for these tasks have a high rate of failure.

If you have done your research and are convinced that your idea needs to find its life in a new nonprofit, go ahead, but, make sure you are prepared for the tough road ahead. You will need energy for the first steps and the passion to get you over the hard spots.

More Information to help in your decision making process:

Income Potential: Many founders assume that there will be an angel waiting to give them all they need to operate such a needed service. While we have seen and known a few of those angels, they are not as easy to recruit as some may imagine. All founders should understand funding for services prior to assuming financial liability for their effort.

▪ There are four basic income streams for nonprofit organizations with a 501(c)(3) tax status. They are earned income, charitable gifts, grants, and events. Understanding how each works, and determining where each could be secured is the most important steps to take.

o A founder should identify comparable services in other areas and review what is being charged for the services/product. This would be the first step in determining how much earned income is possible for the services. Earned income is that income that an individual, organization, or governmental entity will pay your organization to provide a service. At times, funding called a grant by a government source may be earned income, if that funding is to provide a service and has been identified as sustainable into the future, pending legislative approval. Example would be how the government funds some arts programs through arts councils, or funds social services such as domestic violence program funding. When an organization is advanced enough to have a large fund balance, or endowment, the interest income could be considered earned income. Whatever the source, a nonprofit should only consider earned income opportunities that are connected to its mission.

o Events can be a source of funding. Many Alaskans consider this option as their best for raising funds for their cause. In reality, events can raise some money, but for the amount of time invested by volunteers and staff, events are rarely the “best” way to generate ongoing income. Very few, if any, events will continue to grow and thrive into the future. Too many variables such as competition from other events, a bad economy, or weather can greatly impact this funding. Events can, however, be a great source for building friendships for your organization.

o Another Alaskan bias is to look at grants as the primary source for their funding. While grants are very useful when buying equipment or a building, and can also be used to start a new program or initiative, there are few grants that can be used for operations and be maintained into the future. The sources for grants include the government, private foundations, and corporations. In most cases these funding sources are more than glad to support a new, innovative idea; they are rarely interested in ongoing funding. Social services agencies can receive ongoing support from their local United Way in the form of a grant. The State Arts council will also make small grants to organizations that can fund operations.

o Charitable giving is the only other source, besides earned revenue that can be sustained over time. If done the right way, it can become a sustainable source of income. Charitable giving is when an organization develops relationships with individuals, over time, and secures annual or planned gifts from those individuals. While an organization can begin a successful development process with an event, or use and event to recognize donors, the development process is one that will take time and an organizational commitment from the board, volunteers and staff in order to build sustainable income beyond an event structure.

▪ While many people may wish there were other ways to generate income for their great ideas, the fact is that there are a few ways to find money to start a program; any of the four methods listed above would work. However, if an organization is to survive, it must determine which earned and charitable tactics are used to fund ongoing operations.

Organizational Structure: Most founders can create new organizations on pure zeal. Some founders can maintain that early commitment for years, even decades, but eventually, the founder will need to move on. Developing the vision of a sustainable organization is more than services and income; it lies in its structure.

▪ Nonprofit organizations are unique in that they can be formed by and can be staffed by volunteers. It has been our observation that eventually, nonprofits need the ongoing time and commitment from staff to be sustained. While the nonprofit sector was built on the vision of volunteerism, it has grown and must been maintained by its staff leaders.

▪ Mature nonprofit organizations have a well-defined partnership between the governance board and the professional staff. This partnership does give specific roles to both the board and the staff, in the current environment; the board and staff must have a relationship built on trust and competence to work together. There is no chicken or egg when it comes to this modern partnership. Both the senior staff and the board must work together in a flowing relationship where each assumes leadership roles and each assume follower roles as the needs emerge. They must always be together to succeed.

▪ While it is still the fact that boards hire and supervise the agency’s CEO, (current titles include President, Executive Director, General Manager, Chief Professional Officer or CPO), the CEO also can maintain his/her autonomy by “divorcing” from the organization if the partnership is not honored. Of course the board can get a “divorce” from its CEO by asking the CEO to leave.

▪ There are always major social and legal issues concerning the role of the founder when it comes to the organizational structure.

o IRS rulings for 501(c)(3) organizations seek to ensure that no individual or family can benefit financially from their service on a charitable nonprofit board. The concerns grew from how any board member, through their role in governing the organization, could create unfair advantages to reap personal financial gain. Since many founders use immediate family as board and others as staff, IRS would keep a close eye on attempts to use charitable gifts in a way, other than in the manor intended.

o As long as the founder is on the board, there is no problem. When the founder also serves as a compensated staff, there are often issues relating to this conflict, so we typically advise against that strategy. If the founder does serve as the staff, the board should:

▪ Never have immediate family of the founder on the board

▪ Should strive to recruit board members that are not subservient to the wishes of the founder

o Founders can serve on the board, founders can serve as the staff, but founders can never serve on the board and the staff.

▪ Boards must have a minimum of three persons in order to become incorporated in the state of Alaska. We advise that most boards be larger, depending on its mission and funding strategies. Organizations that can generate earned income for ongoing operations could have as few as 6 members of the board. Organizations that plan on raising funds from individuals, corporations, and foundations should strive to have no fewer than 9 board members.

▪ While it is always useful to have input from consumers on boards, if organizations need to raise charitable funds, it may be better to have the consumers on an advisory board, rather than on a governance board. Often there can be conflicts of interest on boards dominated by consumers.

Legal Process: Once founders, and their friends, envision whom the organization will serve, how it will generate income, and how it will be structured and after the founders understand their true need to incorporate a new, independent organization, then they should proceed with the legal incorporation.

▪ Articles of Incorporation: The Articles describe what the organization will do, where it will do it and who is involved in its formation. The Articles are filed with the state.

▪ Bylaws: The Bylaws are the organizational constitution. They again describe what it is there to do. In addition, it describes its rules of operation. It will define who and how many serve on the board, how they are elected, the officers and their roles, standing committees, quorum, how to amend polices, and many other rules of operation. Bylaws should be long-term, ten years or longer in vision. Therefore, we have determined that it is better to structure the minimums, rather than maximums on board numbers, committees, and meetings.

▪ Policies: Polices are additional rules needed for ongoing operations. Boards should have sufficient policies to provide structure, but should attempt to not have too many policies that may become cumbersome to organizational flexibility. Organizations need policies for personnel, financial controls and for program structure.

▪ Tax Status: If the organization is to seek federal recognition as a nonprofit corporation, the board should determine which of the current IRS tax statuses makes the most sense. The only tax status that will allow an organization to receive charitable contributions is a 501(c)(3).

▪ Minutes: Organizations need to keep minutes of all meetings. These minutes do not need to be exact conversations during the meeting. Minutes should only give specific language when a motion is made; otherwise, the intent of the conversation is sufficient.

While there are many specific issues to address during the development of a nonprofit organization, we would suggest having a good understanding of the issues outlined in this paper would be useful for any individual or group organizing a nonprofit in Alaska.

Some of the terms used in the following checklist are:

▪ Founder: The person(s) involved in developing a nonprofit organization

▪ Not-for-Profit organization: A legally recognized organization by the state, with no recognition from the federal government (IRS).

▪ Nonprofit organization: A legally recognized organization by the state as well as the federal government (IRS) as a nonprofit.

▪ Articles of Incorporation: Legal filing to incorporate in the state.

▪ Bylaws: The constitution of the organization.

▪ Tax Status: In order to operate as a nonprofit organization, founders need to seek a tax status with the IRS. All nonprofits recognized by the IRS have a code of 501 (c). A number will follow the (c) designating what type of nonprofit recognition is noted.

▪ 501(c)(3): The tax classification for a charitable organization. The only tax status that allows individuals and foundations to contribute with tax benefit.

Special Thanks to Nonprofit Association of Oregon, Montana Nonprofit Association, Idaho Nonprofit Association, and The Nonprofit Center for their input into the key questions checklist.[pic][pic][pic][pic][pic][pic][pic][pic][pic][pic][pic][pic]

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