I. What is a Non-Profit Organization?
A. The basic definition of a non-profit organization is not established for the purpose of making a profit; not entered into for money: a non-profit organization (dictionary.com). In a society where everything costs, how can it be that an organization can exist that is not established for the purpose of making a profit? What is their purpose? By answering these questions, one will gain an understanding of what a non-profit organization is as well as the history of how non-profit organizations came into existence.
B. Digging a little deeper, the premise of a non-profit organization is that a non-profit organization is an organization which exists for educational and charitable reasons, and from which its shareholders or trustees do not benefit financially from. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs. Many non-profit organizations also seek tax exempt status, and may also be exempt from local taxes including sales taxes or property taxes. (investorwords.com). Bottom line, their purpose of existence is for the greater good of the community by the services they offer. A few well-known non-profit organizations are Kaiser Permanente, Easter Seals, Habitat for Humanity, the Red Cross, and United Way. Although many of the aforementioned organizations have a different look and feel, they all share the same unique key characteristics of a non-profit organization.
C. Some of those key characteristics of a non-profit organization are: 1) Purpose – there must be a surplus of profit in the organization over expenses to survive. Any profits made are used to enhance services and to benefit the community.
2) Ownership – no one person owns a non-profit. Any assets of a non-profit are for charitable, educational, scientific, literary or religious use by the community/public. Assets cannot be used for a person’s private benefit. 3) Control – a non-profit is controlled by a governing body referred to as a board of trustees or directors. It is their responsibility to exercise control over the organization. The board oversees everything and ensures the non-profit fulfills its purpose,
4) Accountability – a non-profit organization is accountable to the public. An annual return is filed with both the federal and state agencies. A non-profit must fully disclose its finances including salaries of the highest paid non-paid non-officer employee. The annual return is available for public viewing.(www.nonprofitmapping.org)
D. Non-profits may be either incorporated or unincorporated. An unincorporated non-profit cannot be given federal tax exemption due to being a 501© (3) organization defined by the IRS but incorporated organizations may be given federal tax exemption.
E. Non-profit organizations have paid and volunteer staff, but employment taxes and also federal and state workplace rules are generally no different than those given for someone who works for a profit organization. Universities, hospitals and large known charities are examples of organizations that are “non-profit” but their salary scales are different from profit organizations. CEOS of major hospitals and University presidents earned up to $500,000 to $1,000,000 dollars. CEOS in the private sector are paid much more. There are some non-profits such as local training centers and food banks make lower salaries, but the price of doing a good job and knowing they are making an impact on the community makes it worth the lower salary. A non-profit organization can have clients and they may offer a wide variety of products and services. Non-profits are typically very concerned with whether or not their clients or customers are satisfied because they want to retain a positive image and reputation in the eyes of the public. Their broad concern toward the satisfaction of the customers can extend to whether it is assisting in contributing donations in support of operations programs or providing services to a business serves the public interest. They just want to ensure customer satisfactions. A non-profit can succeed or fail depending on how it operates in the community. Its success is heavily determined on how it is viewed by community it serves.
II. What is the History of a Non-Profit Organization?
Now that we have the foundation on what a non-profit is, the real question is now how did non-profit actually start? What is the history behind the whole operation of a non-profit organization?
A. The history of a nonprofit organization may be traced as far back to ancient Egypt with some historical reference in Rome and America. Although these organizations are not referred to as non-profit, there were organizations developed which served the public interest.
1) The first non-profit is noted in Egypt. King Ptolemy I, was among one of the first to establish a non-profit institution. He established the famous Alexandria Library which is considered to be the first research institution of time. Moving down the timeline to American roots, early settlers in the United States built schools and churches to maintain public welfare. They devoted the time to support the communal efforts during that time. Early Philanthropists in the 1740s, such as Benjamin Franklin founded the University of Pennsylvania to educate the youth. Establishment of a university falls under the educational component of a non-profit organization. In the 1900s, Andrew Carnegie, a Pittsburg steel executive, donated millions of dollars to support libraries, schools and universities across the United States. (www.ehow.com)
B. Although there are many charitable, religious and educational organizations established in the United States that are thousands of years old such as the Roman Catholic Church or Harvard, the coined tern “non-profit” and the concept of non-profits as being “unified and coherent” did not come into use until the 1970s. (www.hks.harvard.edu) Prior to that, there was not a clear distinction between public and private establishments and somewhat of a mixing between the two which made the line between the two unclear. For instance, Harvard (1638) and Yale (1701) were sustained by government grants, however governed by clergymen (www.hks.harvard.edu). C. Many churches, institutions and colleges accepted donations from benefactors and held them in trust to maintain. Citizens would often just pitch in to help with roads, fight militias, and assist with other tasks deemed necessary. In modern day, we would consider these worthy citizens as volunteers. By participating with these organizations, Americans began to learn that it was a powerful and effective school of democracy. They learned that they could be self-governing to argue and persuade, they learned to raise money and manage finances and they also learned to form alliances and coalitions. All of this gave way to modern day non-profit organizations. Many organizations continued to flourish over the centuries with a similar focus - - helping the community. 90% of non-profits have come into existence in the United States since 1950. According to the National Center of Charitable Statistics, there are currently 1,514,821 tax-exempt organizations in the United States. The largest United States profited is the Bill and Melinda Gates organization with an endowment of $34 billion dollars. Their organization gives grants for healthcare and education across the world (www.ehow.com). The scope and scale of non-profits is enormous. They may range from simple grassroots organizations with few employee volunteers with no multi-billion dollar endowments to healthcare complexes with hundreds of thousands of employees. No matter how big or small, they all have in common the key characteristics of a non-profit and must abide by those characteristics in order to maintain their tax status. Even though, non-profits are for the greater good of the community in which they serve, they often find themselves as the center of controversy with their tax status being scrutinize.
D. Controversy and scrutiny date back well into the 1900s, with intervention from the courts on large donations to charitable organizations. There were concerns about the power of non-profits and the concentration of wealth. New York courts in-validated a million dollar donation to Cornell inciting that if Cornell accepted the donation, it would render the university’s endowment larger than the legislature had an authorization to hold. Controversies such as this and many more lead the pathway to the development of organizations to assist with the structure of non-profits. In the early 1920’s, the creation of The Community Chest and the Charities Federation helped to address problems of current spending and giving. Over time, many enthusiastic business leaders not only donated money but the donated their time to sustain charitable organizations with their innovative ideas and their companies sought ways to improve the community. “Welfare Capitalism” allowed corporations to donate generously to community based organizations but also establish pension plans, institute educational plans and supported social and athletic activities for their employees and their families. Many corporations not only sold products but sought to improve lives of their employees and the community they served.
It is evident that overtime, charitable organizations have “morphed” into defined non-profit organizations embracing the key characteristics of a non-profit: 1) purpose, 2) ownership, 3) control and 4) accountability with an emphasis on the importance of a positive pubic reputation and image.
E. The long, hard road of non-profit organizations has been traveled and met with a lot of controversy along the way. In modern day, scrutiny of non-profit still exists to ensure the purpose of the organization is still intact and any profitable funds are spent accordingly and intended - - giving back to the community they serve in the way of education, products and/or services. Non-profits organizers feel good about giving back to their community and that’s a good thing. Maybe we all should give back, even if we are not a non-profit organization. What a wonderful world it would be. “How to” Establish a Nonprofit Corporation in a step-by-step manner
The first step to establishing a nonprofit organization is to determine what type of organization you are going to create. To accomplish this you must figure out the name of your charity, what you are going to donate to; It is to support some issue or matter of private interest or public concern such as the arts, charities, education, politics, religion, research, or some endeavor for non-commercial purposes. A nonprofit organization should cater to the needs of the community in which it is housed.
Next, you must formulate a mission statement. Begin by really clarifying what the purpose of a nonprofit is. The mission is all about meeting a need in the community. It is the most important reference point for board members when doing their jobs. When starting your nonprofit, write an initial, basic mission statement. The statement can be in a wide variety of formats and lengths. It can range from a few sentences to a few pages. At this point, the mission statement needs to be generally descriptive. As a non-profit organization, you exist to accomplish your mission, which should be crafted based upon your purpose, services and values. The mission statement is a concise expression that covers who the organization is, what it does, for whom and where. It should also be compelling, as it will be used in all published materials, funding requests and public relations. The mission statement should portray how your organization is distinct from others.
No organization is complete without a team of individuals all striving to achieve a common goal. The next step to establishing a nonprofit organization is to form a board of directors. You will need a small number of board members to help you start a new nonprofit which can be referred to as your “first board.” If you plan to incorporate in your state, recruit at least enough board members to meet state requirements for a corporate board. Each state has regulations that determine the minimum size of the board, typically three, five or seven, but the optimum number of people who sit on the board should be determined by the needs of the organization. If you do not plan to incorporate, consider an informal advisory board to help guide you. As the organization grows, you might end up doubling or tripling the size of your board. For your first board, select members who agree with the mission of your new nonprofit. They should be available and devoted to providing the time and energy to help you start the organization. Your board members should also have useful expertise in an area that can be utilized by your organization. Based on what your organization would like to accomplish, you should decide what special skills and qualities you would require of the individuals on your board. Do not select board members based on social status or passion alone.
Although you can do much of the work yourself to incorporate, you should always consider getting professional help. If you plan to incorporate, you should hire a lawyer. Applying for tax-exempt and/or tax-deductible status is more complicated, and your team would benefit from the advice of an experienced lawyer who understands nonprofit matters. Even if you do most of the work yourself, at least have a lawyer review the materials before submission. You might be able to find very low-cost legal fees from a Legal Aid chapter in you area, or from pro bono services of law firms in your area.
Seek a bank that understands the needs of a new, small nonprofit. Set up a bank account and begin to build a relationship with your bank. Every organization needs a separate bank account for business matters to avoid financial conflicts among team members.
It is likely that you will also need an accountant. You may struggle through much of the legal filings and forms, however, if you do not have at least a basic understanding of both bookkeeping and accounting, you may find yourself in a great deal of trouble. In an ideal situation, you can recruit a volunteer who has financial management skills, and make them your Board Treasurer. Some communities have local volunteer organizations that can recommend someone. Otherwise, look through the Yellow Pages or utilize online resource to find accountant organizations.
At this point, you have done way too much planning to allow something to go wrong without a back up plan. Most experts think that nonprofits need "Directors and Officers" (D & O) liability insurance. It can be costly*, but many D & O claims are filed by employees of nonprofit organizations. Such claims can include wrongful termination, failure to properly promote, sexual harassment, and discrimination in regard to pay and/or duties. You may also need liability insurance, property insurance, and when you hire staff: worker’s compensation, health and life insurance benefits. The purpose of insurance is to protect your company from malicious claims.
Draft articles of incorporation and get it approved by board members before submitting the official documents. These specify a legal description of your organization and power to the board. You will need to draft these only in you plan to file for incorporation with your state.
The bylaws should also be drafted and approved by board members. Bylaws are simply the "rules" of how the organization operates. Although bylaws are not required to file for 501(c)(3) status, they will help you in governing your organization. Bylaws should be drafted with the help of an attorney and approved by the board early in the organization's development. Depending on whom you use to assist in the process, some firms require that the Bylaws be sent to the IRS. Make sure that you check with the laws of the state to ensure that your bylaws are in compliance.
Once the board approves the drafted articles of incorporation, you should officially file for incorporation with your state. Articles of Incorporation are official statements of creation of an organization filed with the appropriate state agency. They are important to protect both board and staff from legal liabilities incurred by the organization, making the corporation the holder of debts and liabilities, not the individuals and officers who work for the organization. Registration for incorporation includes submitting drafted and approved articles and you may be asked to submit bylaws as well. The specific requirements governing how to incorporate are determined by each state. You can obtain the information you need from your state Attorney General’s office or your state Secretary’s office. Be proactive by finding out what various reports the state wants from nonprofits. Before you spend your money, at least consult with an attorney who is experienced in the area of nonprofit law so that you do not make one of the many major mistakes that people make when they try to incorporate by themselves.
One of the hardest parts of creating a nonprofit organization is developing a budget. A budget is the financial expression of the plan of operation designed to achieve the objectives of an organization. In order to develop a budget you must figure out how much liquid cash you have to spend and assessing how much you will need, if any, to complete the required tasks. You should consider fiscal sponsorship to jump-start a nonprofit.
If your board does not include someone with a financial or accounting background, it is best to work with an accountant or bookkeeper familiar with non-profit organizations. Nonprofits are accountable to the public, contributors, and government granting bodies. It is vital to establish a system of controls when establishing the organization’s accounting practices. Responsible financial management requires the establishment of an accounting system that meets both current and anticipated needs. If your board does consist of an accountant, make certain that you brief them on the documents that you will need for them to provide such as the various financial statements.
The next step is extremely important. Regardless of whether you have employees or not, nonprofits are required by law to obtain a federal Employer Identification Number (EIN). This number is used to identify the organizations when tax documents are filed. It is like an organization’s social security number. If you received your number prior to incorporation, you will need to apply for a new number under the corporate name. Your board should also approve this filing before submission. The required documents can be retrieve from the IRS. Ask for form SS_4 when applying for your EIN.
To apply for recognition of tax-exempt, public charity status, obtain Form 1023 and Publication 557 from the local IRS office or the IRS web site. According to the IRS, to be “tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization.” This means that it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. The filing fee depends upon the size of the organization’s budget. The application is an important legal document, so it is advisable to seek the assistance of an experienced attorney or certified public accountant when preparing it.
Once you get IRS exemption, file for any state tax exemptions. In accordance with state, county, and municipal law, you may apply for exemption from income, sales, and property taxes. Contact your state Department of Revenue, your county or municipal Department of Revenue, local Departments of Revenue, and county or municipal clerk’s offices for information on how to do this in your jurisdictions. For example, in the USA, you will file Form 1023 to the Internal Revenue Service. You may also need your bylaws, Articles of Incorporation, employer identification number and strategic plan. Ask the IRS to return a determination of your tax status and provide you a “determination letter.” It could possible take up to six months to receive this letter. During this waiting period, you can conduct operations including solicitations from funders. When you get your letter of determination, have your accountant or bookkeeper keep this form in a safe place. You may need it to show funders that you are tax-exempt.
If your organization’s plans include fundraising, be aware that many states and few local jurisdictions regulate organizations that solicit funds within that state, county, or city. Usually compliance involves obtaining a permit or license and then filing an annual report and financial statement. Contact the state Attorney General’s office, the state Department of Commerce, state and local Departments of Revenue and county or municipal clerk’s offices to get more information.
The federal government provides further subsidies for nonprofits with reduced postage rates on bulk mailings. While first-class postage rates for nonprofits remain the same as those for the for-profit sector, second- and third-class rates are substantially less when nonprofits mail to a large number of addresses. For more information on eligibility, contact the U.S. Postal Service and ask for Publication 417, Nonprofit Standard Mail Eligibility
Finally, you may start to conduct strategic planning. All board members can be involved in this process and should share their ideas. Compose a set of goals that you can complete in the span of one year. Then start planning and preparing for future endeavors. Use your mission statement as a guideline to accomplish your goals and to govern your board of directors. Be creative and have fun. This is what you are passionate about and should be particularly easy compared to all of the legal documents and financial planning that you have to complete before really getting started.
When you’re in the process of starting a nonprofit corporation, there a lot of researching and filing that is required. I feel the first thing you should do is research, to make sure that there is a need for your organization in area you wish to create. You must come up with a business plan to start the nonprofit. Then you should compose a mission and vision statement. These statements provide the direction and functional strategy for the entity. While in this process you should hire a board of directors, who believes in your organization. They should have experience in the market you’re trying to serve. This is also important to your nonprofit organization, that you draft and file your organization articles of incorporation with the office of the Secretary of State. Some states don’t require that your organization file with the Secretary of State. When filing your articles make sure that you hired an attorney. You need the attorney to review your documents to ensure that you ‘re following the right steps. Compose your organization by laws. These laws will be enforced by your board of directors. You must seek funding such as grants and fiscal sponsorship. This nonprofit must establish a bank account and methodology of re apply for tax-exempt status with IRS. Apply for a federal Employer Identification Number. This is necessary if you plan hiring full-time employees. As you continue to conduct your research, you should continue to come up with plans for the organization. Planning is very important part because you’re preparing for activities, events, and obstacles you may come across. In your plans, it should include how the company will generate revenue, what qualifying non profit activity it will engage in, and the corporate structure of the organization. If you plan ahead, you will be prepare for anything that comes in your organization way. A good business plan helps the business stays focused; it can also show how to raise funds through donations or loans. This is very important part for your non profit corporation that your organization files for incorporation. If you don’t file incorporation for your organization, your organization can lose their assets, pay a fine, and receive federal prison time from the IRS. When filing incorporation, your organization needs to choose a name. Some states required the non profit corporation include the name “Corporation” or “Incorporation”. They could use the abbreviation of the names such as “Corp” or “INC”. Your non profit corporation should file the appropriate documents with the appropriate agency. The non profit corporation should also obtain licenses and permits that are necessary to conduct business. There are many business structures to operate your non profit corporation. Some of the for profit structures include C Corporation, limited liability, and sole proprietorship. Some other business structures are hybrid and non profit mission-related enterprises. If you’re using a for profit structure it is easy to raise startup money. For profit structure you’re raising money to fulfill the organization. In the hybrid structure, you will find that corporations have charitable foundations and non profit institutions that establish related businesses earn money to support the organization. The non profit mission related enterprises is that you have to earned income from the sale of products or services. Any income earned through selling is used to further the organization’s mission. Using these business structures, your non profit corporation can benefit from it. With using these business structures, be aware of the risks that come with the structures. As you continue on the process of starting a non profit corporation, you will notice the advantages of the different business structures. The advantages of having a for profit structure is that your nonprofit can tap in large pool capital investment. You will have successful companies or corporation donating large amount of money to your nonprofit. The advantage of the hybrid structure is creating a subsidiary that protect the nonprofit status of charitable organization. The parent of the nonprofit is protected from the liabilities of it’s for profit subsidiary. The advantage of having mission-related enterprises is not being over taxed. The nonprofit continues to raise money through grants and donations. The mission related has a marketing advantage which supports the nonprofit. There are some disadvantages of having these business structures to support the nonprofit corporation. The disadvantage of having for profit structure is social line is not built into to the business, it must be added through corporate social responsibility programs or corporate philanthropy. Another disadvantage of for profit structure is not receiving a tax breaks as non profit would. It must focused on the shareholder value and making a profit. The disadvantage of the hybrid structure is having a hard time diversifying its income especially if the for profit structure is the major source of funding. If you have more overhead, the assets of the nonprofit are locked in and can not be sold. The disadvantage of mission-related enterprises is tradeoffs between the two parties and acquisition of capital is limited to traditional nonprofit structures. Starting a nonprofit corporation is not easy, there will be important decisions that will have to be made from you and your board of directors. Choosing your board of directors is very important to your decision making. You want your board of directors to make sure that the organization fulfills its purpose. The board of directors is the support team of the organization. They’re required to work, perform, and make decisions as a team. Communicating with your board of directors is a key characteristic of having efficient organization. If the board of directors is not communicating it can cause problems, which can cause to the team to get off track of serving the organization mission. Another important decision is how the IRS is going to classify your organization. Each charitable organization is classified either as public charity or as a private foundation. A public charity seeks contributions from many sources that include the general public, government agencies, corporations, private foundations, and public charities. A private foundation has a single source of funding and engages in making grants to other charitable organizations and to individuals. Having a nonprofit corporation comes with many benefits that will your organization to be effective. A benefit of having nonprofit corporation is no taxes. As a nonprofit organization, your organization is eligible for state and federal exemptions from corporate income taxes plus certain other taxes. Federal and state taxes can run high depending on which state you lived in. Ability to receive public and private donations is beneficial to a nonprofit corporation. As a 501(c) (3) nonprofit corporation you will be able to receive grants and donations. Tax-exempt government foundations such as the United Way or Ford foundation are required to give funds only to 501(c) (3) organizations. Individual donors to your nonprofit corporation can claim personal federal income tax deductions for their donations, and bequests will be exempt from federal estate taxes. Protection from Personal Liability is beneficial to your nonprofit corporation. Shielding members of your organization from personal liability is the key among the benefits of nonprofit incorporation. Board members, officers, and employees of your organization will be protected from liability for corporate debts or liabilities such as unpaid organizational debts or lawsuits against the organization. Creditors can only go after your corporate assets, not the personal assets of the people who manage, work for, or volunteer for your organization. Some of the other benefits of having nonprofit corporation are organizational perpetuity. The corporation is a legal entity separate individuals who manage it or organize it. This separate legal existence affords the protection from liability, but it also means that the organization becomes immortal. The employees that work for the nonprofit corporation can benefit from it. Being a corporation opens the doors for employees’ benefits such as group life insurance, health insurance, and a pension plan. Miscellaneous benefits include exemptions from county real and personal property taxes, lower postal rates on third class bulk mailing, and cheaper advertising rates. There are some disadvantages of having a nonprofit corporation. A disadvantage of having a nonprofit corporation is a number of fees that have to be paid before a nonprofit incorporation status can be established. Other preliminary costs include having to use a lawyer to prepare the corporation’s papers. Some lawyer’s fees can be very expensive and some lawyers can be affordable. The board of directors that you hired for your nonprofit corporation can not receive any compensation. Your board of directors must know that they’re not going to be receiving compensation for their work; they are working on their own will. Another disadvantage of having a nonprofit corporation is time. There is a lot of time that is spent on regulatory requirements include submitting annual reports to the state and federal agencies. The time you take out to file tax exempt papers can take up a lot of your time. If the nonprofit corporation folds, it assets must be distributed to other nonprofit organizations.