This article is part of our Nonprofit Business Startup Guide—a curated list of articles to help you plan, start, and grow your nonprofit business!
Starting a nonprofit means you want to make a difference. You’re not starting your NPO to hawk silly mobile apps or book infomercial time, you’re trying to make the world a better place. And that’s great!
But, since a nonprofit is meant to serve the public good, the government takes regulation of nonprofits a lot more seriously. You’ll get benefits like free mail and tax breaks, but in return, you’ll need to keep your books in order, stay compliant, and follow your nonprofit charter.
Messing up could mean losing your nonprofit status, which can be both stressful and catastrophic.
Since the most common type of nonprofit is a 501(c)3, we’ll be looking extensively at those.
501(c)3s are public charities and certain private foundations that receive a majority of their income from endowments, donations, and investments. If your nonprofit is classified as a 501(c)4 or any other type, some of these rules may not apply to you. Contact an experienced attorney to learn the subtle differences.
Without further ado, here are a few things you should know about running a successful nonprofit.
Tax Rules and Regulations
As a nonprofit you’ll enjoy a number of tax benefits. 501(c)3s can offer tax-deductible donations to their donors and, if run correctly, are tax-exempt in the eyes of the IRS. They even get to send mail for free!
Of course, with these benefits comes added scrutiny. The first thing you’ll want to know is that even though your nonprofit is tax-exempt you still need to file a 990 form to the IRS every year. If you neglect to do this for three straight years, it will result in the IRS taking your tax-exempt status away. That’s a serious consequence. Take care to speak with an accountant and file your 990 every year.
As for business expenses, you can write most of them off if you’re running a 501(c)3. Nonprofits are exempt from sales and property taxes. However, like any for-profit business, you must pay employee taxes, such as Social Security and Medicare.
If your 501(c)3 nonprofit wants to stay tax-exempt, you should not do the following:
- Contribute to political campaigns
- Heavy lobbying and political activities
- Allow employees, officers, and/or directors to privately or financially benefit from the nonprofit (this doesn’t include reasonable salaries, however)
- Use money for purposes other than for the needs of the nonprofit
In addition to keeping your tax obligations squared away, your nonprofit will need to stay on top of a few other compliance responsibilities. Here’s a list of the most important nonprofit compliance requirements, with a quick description of each.
- Conflict of interest policy: Your nonprofit must sign a document, verifying that none of your officers or directors are privately benefiting from the organization.
- Annual board meetings: When you first formed your nonprofit, you had to create governing documents like Articles of Incorporation and Nonprofit Bylaws. These documents should’ve listed how often your board of directors meet every year to make high-level decisions like budgets and policies. At the very least, they must meet once a year.
- Nonprofit minutes: In those meetings we mentioned above, you should make sure you’re keeping minutes for every meeting. This habit helps you stay on top of record-keeping requirements and allows you to show how your board arrived at important decisions that affect your growing nonprofit.
In most states, you won’t need to file all these documents. Just keep them with your records in case you need to prove that decisions were voted on or in case the IRS or other regulatory agency is checking up on your organization.
Employees and Volunteers
Nonprofits often rely heavily on a staff of volunteers who are willing to commit their free time for the organization’s cause and mission. But there are certain positions you’ll need to hire full-time employees for to ensure that your nonprofit runs successfully.
Think about roles that may need more than volunteer assistance. Does your NPO need an accountant? A lawyer on retainer? Delivery drivers? No two nonprofits are alike, so take some time and consider what’s best for yours.
Though volunteers don’t receive compensation for their time (just that warm, fuzzy feeling), employees are allowed by law to receive a reasonable compensation. The keyword is “reasonable,” and the IRS will compare your salaries to similar nonprofits in similar circumstances to make sure.
Though a 501(c)3 doesn’t exist to generate profit, it still needs capital to function and accomplish its mission. At the end of the day, every business—even ones that don’t look for revenue windfalls—need to pay the rent and stay cash flow positive.
Here are some standard methods nonprofits use to generate capital for their mission:
Nonprofits often depend on donations to survive, so it’s important that you not only raise money for your NPO, but that you raise it in accordance with the laws in your area.
There are plenty of different ways to secure capital for your nonprofit—from bake sales to fundraisers to traditional mailers—so make sure you’re clear on the rules before you get started.
An event, like a benefit dinner, is a great way to receive large donations.It’s much more likely that someone will donate a large amount of money if they’re getting something in return (like food and entertainment). And the best part? 501(c)3 donations are tax deductible!
If you’re sending out mailers, you’ll want to include your tax ID number, 501c status, state of operations, and your actual address. Keep in mind that federally recognized nonprofits get free mail from the US Post Office.
An important point: You’ll need to send receipts to your donors so that they have a record of their gift. It’s a smart idea to send these receipts just once a year. For starters, you’ll save on paperwork and hassle. But if you send these early in the year (like January or February), that’s when a lot of donors are filling out their own taxes. Not only is that convenient for them, but it can help incentivize them to donate more the next year for additional deductions.
2. Grant writing
Certain government departments, foundations, and trusts offer grants to nonprofits. To request funds, you must apply by writing a proposal or submission. It’s usually a smart idea to employ a professional grant writer to help you with the applications.
3. Fees for services
If you’re offering a service for a fee, you need to make sure that the service is related to your mission. Let’s say, for example, you’re running an animal shelter. You may want to offer rabies shots for a fee. Since this service is directly related to your mission as a nonprofit, the money you generate is tax deductible.
Dissolution, if it comes to that
Whether your nonprofit has reached its mission or encountered irreconcilable differences within the organization, there are rules you need to abide by when dissolving it.
The remaining money you have in your nonprofit cannot be disbursed amongst the board of directors. Instead, it must be given to another nonprofit. Think of it as charities doing charity. On the flip side, if your nonprofit has accrued debts or liabilities, no one—not even the board of directors—is personally responsible for them.
Keep in mind that these are just basic guidelines. It’s always best to speak to a lawyer if you have any questions about the tips above, or the guidelines in your state. And, of course, good luck! There’s nothing as rewarding as helping other people out. Keep your paperwork and taxes in order and you can be doing it for a very long time.
Where to next?
If you’re already running a nonprofit, have you had a chance to look at Google Apps for nonprofits? It’s free and is a good starting point for anyone looking to learn more, or for a bit of extra help.
Do you have a question about starting or running a nonprofit business? Any advice to share from your own experiences? Let us know in the comments below.