Starting a non-profit is great. You get to help the world or your community by provides services or programs. The difference between a non-profit and a for-profit company is just as the name suggests, the non-profit organization is not in the business of making a profit while the for-profit organization is in the business of making a profit. There are at least six things to consider when starting a non-profit.
1. What is your Mission?
Everyone and everything has a mission. Wal-mart has a mission to be the best and number one retailer in the world while having the lowest prices. Although, people missions are normally called goals, we strife to be the best that we can be at what we do best. So come up with a mission for your non-profit. You will need it to fill out the IRS Form 1023 (Application for Recognition of Exemption). Once you have paid the required fees and filed the request, the IRS will send you a 501(3)C determination informing you whether or not your organization is a 501(3)c non-profit. If the IRS determines that your non-profit is a 501(3) organization than any donations you receive can be tax-deductible if the contributor is able to use the itemized instead of the deduction.
2. What services will you provide?
In a for-profit business, you have revenue and expenses. If revenue is more than the expenses, then you have income. If expenses are more than income, then you have a loss. In the non-profit organization, you have three type of expenses. The three types of expenses are Program Services, Management and General Expenses, and Fundraising expenses.
A. Program Services
The Program Services expenses are related to the services you provide to achieve your mission. For example, non-profit hospitals are supposed to be in the business of providing medical treatment and services to the community. Any revenue and expenses earned or spent to provide the medical services at the non-profit hospital would fall under program services.
B. Management and General Expenses
Management and General Expenses are expenses that are expenses not related to the non-profit’s mission in addition to executive pay. In our non-profit hospital example, this could be the gift shop or the fast food restaurant operated by the hospital.
C. Fundraising Expenses
Just as the name implies, fundraising expenses are those expenses related to raising the funds needed to operate your non-profit organization such as charity balls, dinners, and auctions.
3. Will the non-profit have employees or volunteers?
How will you achieve your mission? Will your non-profit organization have employees? If so, how many? Will your organization rely mainly on volunteers to provide the services? What training will you provide?
4. Will your non-profit use grants or public contributions?
I talked about expenses above. Now it’s time to talk about revenue to operate your non-profit and provide services. Will you apply for grants to provide the services? If not, will you solicit contributions from the general public. Will you use a combination of both grant money and public contributions? Some states require that you register with them before solicting funds for your non-profit.
5. Does your non-profit operate on a fiscal year or calendar year
Now we get to the IRS reporting requirements. Just as a for-profit business must file tax returns, the non-profit must file a Form 990 with the IRS. Most non-profits operate on a calendar year-end closing date. Schools and university operate a June 30th closing date. The form 990 is due 5 months and 15 days after your year-end. In addition to the IRS filing requirements, some states require additional filings as well.
6. Will the non-profit have unrelated income and expenses?
In our non-profit hospital gift shop example that I used above, the revenue from the gift shop is outside the scope of the mission of providing medical services. If your non-profit has unrelated business income, a form 990-T (Exempt Organization Business Income Tax Return) will be required in addition to the Form 990.
One of the most unusual things about a non-profit is that the 990 is open for public inspection including the executive pay. If someone walks up and asks to see the 990, your organization must make it available. A few years ago, the IRS expanded the Form 990 to make it more open and transparent. Whether or not it has, the information reported on the 990 is invaluable to those individuals and organizations needing the information to determine whether they want to contribute to a non-profit organization.
I hope these six questions to consider when starting a non-profit organization is helpful and useful. Leave any questions or comments below.
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