Questions to ask before starting a 501(c)3 nonprofit organization
“I’m not saying that small organizations don’t have an impact. Many of them do. And I’m not saying you shouldn’t run with your great world-changing idea and your desire to do good. You should. Just don’t start a nonprofit.” Dahna Goldstein, Social Entrepreneur and Nonprofit Advisor
Nonprofits can’t solve every problem. In fact, establishing a 501(c)3 can draw resources away from a comparable organization that has the capacity and experience to create an immediate difference with that dollar, volunteer, or board member. In addition, the time and money used to comply with state and federal nonprofit laws (e.g., fundraising filings, annual corporate filings, board management, industry best practices, etc.) could detract from hands-on, grassroots work that drives social change.
Before filing for 501(c)3 status with the IRS, explore if any other approach would better promote sustainability, revenue generation, or impact. Consider the following alternatives to starting a new nonprofit agency:
What organization structure would be the best fit?
Fiscal Sponsorship: A fiscal sponsor is an existing agency that serves as the legal and administrative home for a partner organization or program. In exchange for a fee, the sponsor provides operational, financial, and fiduciary oversight while granting access to tax-exempt status. This can be a great option for a project that needs to accept tax-exempt donations.
Business: If you want to start a nonprofit to create a meaningful career, think again. Nonprofits belong to the community, not the founder. As such, a nonprofit founder’s control over the organization’s finances, staffing, and strategic planning are limited. No guarantee for long-term involvement or compensation for your time comes along with starting a nonprofit.
Operating as a sole proprietorship, limited liability company (LLC), or corporation allows for ownership by an individual or family, more personal control, new revenue opportunities, operation without afd board of directors (depending on the type of business), and does not need to meet the IRS definition of serving the public. However, for-profit businesses are not eligible for tax-exemption
Benefit Corporation or Certified B Corporation: Companies committed to social and environmental good can obtain status as a benefit corporation, meaning that “they are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.” Organizations can obtain Benefit Corporation status as a legal structure through incorporation in their state or earn the title Certified B Corporation through a third-party evaluation by the B Lab.
Volunteer: Does another agency already provide the services or programs that you want to you establish in your area? If so, don’t start a new organization! Inquire about serving on the board, joining a committee, volunteering for a program, or creating a new volunteer role. If another organization serves the same target population but does not offer the specific program that you want to start, talk to the Executive Director about opportunities for collaboration.
Words of Advice
If, and only if, none of the options above will provide the necessary infrastructure, talk to your stakeholders about starting a nonprofit. Thinking of an independent 501(c)3 status as the last option for addressing an identified need will help your organization to be built on an appropriate, solid foundation for long-term impact.