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Before You Start a Nonprofit Organization

Cliff Ennico on

"I am looking to set up a nonprofit organization with some friends to help raise funds for an obscure but devastating disease.

"I've been looking over the IRS forms for getting a tax exemption under Section 501(c)(3) of the Internal Revenue Code and they look pretty daunting. My friends and I all have full-time jobs and are not sure we will be able to comply with all of the IRS requirements.

"Is there any easier way for us to 'do good' without having to quit our day jobs?"

In my law practice, I receive at least one inquiry a week from people looking to start nonprofit organizations. I wish more of them looked like this email.

A lot of people are under the impression that in order to do good, you have to be a nonprofit, as if making a profit were somehow illegal or immoral. I have to remind my nonprofit clients periodically that the first obligation of any newly formed nonprofit organization is ... to make a profit!

Being a nonprofit does not mean you don't make money. It means your profits are not distributed to the owners of the organization (nonprofits have no owners as such) as dividends or a return of capital. Profits earned by a nonprofit must, by law, be used to further the organization's tax-exempt goals, whatever they may be.

 

For a primer on how to set up a nonprofit organization, see my two-part YouTube video on the subject (search "Cliff Ennico nonprofit" in YouTube).

Before you set up a nonprofit organization, here are five tough questions you need to ask yourself and your fellow founders:

Who Will Run the Organization? Lots of people will tell you they will help you run the nonprofit once it's set up, but don't believe them. Many, if not most, will disappear into the woodwork once the organization is up and running and you ask them to devote X hours of their time each week to help out. Most nonprofit organizations are run by one, two or (at the most) three people who do 95% of the work. If you have not identified those people, be assured you will end up doing everything.

Will We Have the Time for This? Make no mistake: Nonprofit organizations are time vampires. They will demand every spare waking hour of your life. If you are working full-time jobs, then consider hiring someone to act as the executive director of the organization and devote himself or herself full time to running the organization. Keep in mind that this person (unless retired and looking for something to do to stave off dementia) will want to be paid; you will have to withhold taxes on his or her paycheck; etc., etc.

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