Is there a social cause you’re passionate about? Do you want to help the homeless population in your community find affordable housing? Are you passionate about caring for abandoned animals?
If you’re trying to find the best way to pursue your passion and do good, you might be considering starting a nonprofit organization. But why start a nonprofit if you can just volunteer or donate?
There are a variety of reasons to consider nonprofit status as you pursue helping your cause. For example, in 2017 alone, Americans donated over $410 billion to charities.Â
Even a sliver of those donations could help you make a big impact. So, what do you need to know about starting a nonprofit organization?
Read on to learn about not for profit status and how you can get started.Â
Understanding Nonprofit Status
First, what does it mean to be a nonprofit? Does that mean you can’t get paid?
You know that nonprofits are charities, usually looking to help solve a world social problem. But officially, they aren’t called charities, instead are nonprofits.
Becoming a nonprofit is actually an IRS status and has to do with taxes. There are a few different classifications to consider.Â
501(c)(3)
A 501(C)(3) is a charitable organization like you are familiar with. They do charitable work, solving societal problems.Â
This status means you will not pay federal income tax, you become exempt. If a nonprofit becomes a 501(C)(3), it also means they will be able to be exempt from paying their state and local taxes too as those often mirror the federal qualifications.
Another benefit of this status is the ability for donors to donate and get tax deductions. It incentivizes donors because they can get tax deductions from donating. Many donors won’t make donations to charities if they can’t get the tax deduction.Â
The IRS says to maintain a 501(C)(3) status the nonprofit must remain true to its mission. So, if you start with the intent of feeding the homeless, then want to add helping underprivileged children go to college, you need to notify the IRS of your change in focus.Â
It’s important to get legal advice and do your research. Getting this status can be complicated with many hoops to jump through.Â
Don’t assume the IRS will be okay with you wanting the status and focus on the charity without actually having done all the appropriate documentation.
Not for Profit Vs. For-Profit
Again, let’s go back to the question of why your organization exists.Â
A business is started to provide goods and services for profit. People pay a business and they make profits which they can use to operate, pay employees, and keep profits for themselves. This is called a for-profit model.
In a charitable nonprofit, the organization can make a profit. It can appropriately cover its expenses and employee costs, then all of the remaining profits can go back to the cause associated with the charity. Hence, the not for profit status.Â
It should be noted that nonprofits must still remove taxes from employee wages, they are not exempt, only the nonprofit becomes exempt from corporate taxes.Â
Advantages of Having Nonprofit Status
While it can be challenging to get a nonprofit status because of the documentation required, it is worth it. And while you might prefer to focus on your cause, do the good work, going through the steps to get the nonprofit is important for the success of your charitable organization.
Let’s consider some of the advantages of becoming a nonprofit.Â
Tax-Exempt
One of the biggest advantages already touched on is becoming exempt from paying federal taxes. As a charitable corporation, you can avoid paying those corporate taxes.Â
Many large for-profit companies will negotiate with cities and states to get a lower corporate tax rate. As a small organization, you don’t have that negotiating power.Â
The charitable status allows you to avoid the corporate tax altogether.Â
It’s essential to work with an accounting service that understands the unique features of a charitable organization so you protect your tax-exempt status.Â
Public and Private Grants
When you have a formal charitable organization status, you will become eligible for more public and private grants. There are many philanthropic organizations that won’t give their grants to a group that doesn’t have nonprofit status.Â
Formal Organization
While certainly you are passionate about your cause or you wouldn’t be delving into this nonprofit world, you need to separate yourself from it legally.
You want your organization to have its own status separate from you as an individual.Â
When you become a formal organization, it puts the mission of your charity out in the forefront instead of this being about your interests.Â
Create a board of directors who share your passion and bring something to the table that will benefit the charity. They might have social influence, contacts, or even resources they can offer the charity that helps it to achieve success.Â
The old adage many hands make lighter work applies here because you use what they bring to help support the focus of the charity.Â
Liability Limits
Again, while the ball may have started rolling as your passion project, you need to protect yourself. When you become an organized and official charity, you limit your personal liability.Â
This is huge to protect and separate yourself from a potential legal dispute for the charity. Nobody imagines someone suing a charity until something unexpected goes wrong. You must protect yourself from liability.Â
Creditors and courts would only have access to the profits under the charity window, instead of your personal assets with formal charitable status.Â
If times get tough, it also protects you from being liable for the debts of the organization too.
Why Start a Nonprofit?
Doing charitable work is noble. If you feel passionate about your cause and want to pursue it as a charity that terrific.Â
But why start a nonprofit? It not only helps your cause legally and financially but it protects you too.Â
If you would like help getting started with the finance-related questions and organization for your charity, contact us today.
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You’ve done a thorough job of the how-to and pros and cons of starting a nonprofit. With over 1.5 million registered nonprofits in the US however, I believe it’s also important to consider if an exiting nonprofit is already addressing the issue in your community, could you profit the help you want as a program of an existing nonprofit or perhaps by starting a foundation or endowment to support another nonprofit’s work that is already addressing the need.