Completing the Necessary Paperwork to File for Tax Exemption

Filing paperwork can be a difficult task, and most people do not look forward to this stage of the process. However, this can be an opportunity to ensure ahead of time that an organization’s numbers are making sense and if the financials are in order. This is the most complicated yet important part of filing for tax-exempt status.

The first step in filing is to apply for an Employer Identification Number, or EIN, from the IRS. Form SS-4 is available online through the Internal Revenue Service’s website, and can be filled out in minutes. This number, which is like the social security number for an organization, is usually received in relatively short order, and its receipt allows the company to continue the application process.

Because they are the most in touch with the financial workings of the organization, a nonprofit’s CFO, or Chief Financial Officer, is most often the person who does the filing for tax-exempt status. There is a great deal of work required, however, so it is sometimes shared by the president or other organization members.

After the tax-exempt paperwork has been filed, an organization is free to work toward its mission with only annual filings to concern itself with in the future.

Main Components of the NPO Business Plan

A not-for-profit business plan is generally the same as that for a for-profit enterprise. The main components include:

1. Title page – This page lists the official name of the NPO as well as the board members (or directors in some states) with titles and a date.
2. Executive Summary – an outline of what the subsequent pages will contain. The key points are arranged with appropriate facts.
3. Corporation Description – a summary of how the NPO came to be and what the founder hopes to accomplish with it. This section also includes an analysis of which parts of the business model make the mission or board likely to succeed.
4. Market Analysis and Data – This section demonstrates the need for the organization as supported by real numbers and an analysis of the local constituency. Surveys and demographic data are appropriate here.
5. Services – a description of what exactly the NPO will offer the members of the community.
6. Operations – a description of how the NPO will go about providing said services.
7. Marketing Plan – a description of what types of media the NPO will use to get people interested in it, and what position the organization will take within the NPO “marketplace.” If a board member or committee of members is responsible for marketing, this section lists who is involved as well as their credentials.
8. Board of Trustees and Members – an outline of how board operations will be handled, who will be part of the board, and how elections will be overseen.
9. Management and Personal – This section describes a business plan that outlines each person’s responsibilities within the company. Any special or specific policies should be mentioned here.
10. Required Funds – an explanation of what funds are necessary to the NPO and how procured funds will be spent.
11. Financial Statements and Projections – the NPO’s five-year plan, along with the supporting reasoning, should be stated here. Historical documents are also appropriate in this section.
12. Appendix – This section includes tables, data, exhibits and charts. NPO bylaws and other rules for order to be adopted by the board should be included here.

Having a clear and concise business plan is foundational to successful everyday operations. Gathering the information necessary to a complete plan that is illustrative of how a nonprofit will operate can help a founder to have a complete picture of the organization and to be able to anticipate any future trouble.

The Nonprofit Business Plan- A Framework for Success

All nonprofits, whether submitting their plans to a bank (or other organization) or not, should draw up and maintain a professional, accurate business plan. Like any other business model, nonprofits can fail without proper planning and preparation. However, with the correct tools, resources, and materials, the likelihood that a nonprofit will be successful increases exponentially.

The Basic Business Plan

There are many published guides that help in the process of putting a business plan together. All manuals stress the importance of including in a business plan what the NPO intends to do, how it will go about doing it, and how the organization will remain solvent throughout the years.

Attendance at Regular Meetings

Most states require that board meetings are held at least once a year. All members will have to attend meetings. Again, the meetings can be as strict or as loose as you like, but everyone is required to deal with the issues at hand and give their opinion or vote. In some states, members can sign off on the minutes of a meeting by email, in lieu of actually being there.

Electronically, telephonically, or physically, members must be present at board meetings in one way or another. This is especially important for boards that require a certain number of votes to carry a motion. The best board members understand the importance of participation in meetings.

Representing the Public Interest

Many nonprofits choose board members from the community it serves. Having members who are in touch with the mission of the organization can be a valuable tool for effective business operations; they will likely have a clear idea of the needs of the end-users of the specific educational or research effort.

Board members who are well-acquainted with the community may also have clear leads on local sources of funding, useful contacts, and legitimate areas of demand in the area. In choosing experienced and in-touch members, the organization will gain a certain amount of legitimacy, as well as a valuable resource of information.

Potential Conflicts of Interest

Founders and board members alike cannot legally profit from their NPO. They may be reimbursed for expenses, but they cannot receive any special favors, they cannot directly profit from the sale or endorsement of any instruction or advertisement, and though the members’ companies can do business with the NPO, the members in question are not allowed to vote on any decisions involving their company. Conflicts of interest are a decidedly grey area, and knowing the ins and outs of legal operations means having a clear idea of how to avoid these potential conflicts of interest.

Board members may be deemed unsuitable because they have a clear conflict of interest with the work or results of a particular nonprofit organization. Such conflicts can result in a tax-exempt status application to the IRS being denied. If a person stands to make money off his or her involvement with a nonprofit, then their participation on the board is very likely illegal. Other conflicts of interest could be membership in an organization or regular employment at a company that inherently conflicts with the mission of an NPO as a charitable organization.

Though a high school science teacher who wants to assist an NPO agency as part of classroom curriculum is considered a public good, a board member who owns a business that will profit off of the publicly unavailable research of the NPO is considered a breach of trust and conflict of interest.

Potential board members who have a conflict of interest may still be signed on to the board as members, but they will likely have to sign some additional statements saying that they will keep such affairs separate. For this situation, the legal and practical advice of a tax attorney is indispensable. Professionals will be able to explain what relationships are legal and what sort of language is necessary to make documents regarding conflict of interest binding and legal.

Finding the Board

Locating board members who are well-suited to a particular NPO can be a significant hurdle in the process of establishing the company. Networking is the best way to undertake the challenge of finding the best people for the job.

Professional associations are a great place for a founder to meet with people and tell them about the specific organization. Community and city council meetings are good places to find those who are involved with other projects or even related ones. These civic-minded individuals are perhaps the best prepared to understand what the needs of the community are. Corporations also sometimes come into being as a result of an online collaboration. If the community that a prospective NPO will serve is widely scattered, having board members from across the country could be a useful tool for the NPO.

Discussing what an NPO does is the best way to spread word of mouth about the organization and learn who is inspired by the mission. In talking about a nonprofit, any founder who is looking for potential board members creates opportunities for prospective members to not only learn about the organization, but to express interest, as well. Networking through formal or informal organizations can be the best way for a founder to find the right people to become board members.

Enthusiastic Potential Members

Though almost everyone would like to donate time to volunteerism, other commitments often prevent them from doing so. The likelihood of someone wanting to assist a nonprofit depends greatly upon what is required of him or her in comparison to what sort of personal benefit he or she may derive by association. Finding willing individuals can be a considerable challenge, but a clear and inspiring mission can often motivate people to volunteer their time. Those who have a stake in the success of an NPO’s mission are those most likely to make time because it is personally important to them.

Qualified Individuals

In searching for qualified people to become members of the board, it is a good idea for the founder of an NPO to search for those who are professionals in their areas of study, research, or work. Those who are already invested in a particular area of interest are the most likely to benefit by association, and may have the most reason to join the organizational structure. Even the newest and smallest NPOs are based on a worthwhile foundation, and many professionals are looking to donate their time and energy to a worthy cause. Attracting the talents of professionals in the area of focus of a particular NPO can mean the difference between that organization’s success and failure. Finding these individuals can be a daunting, but necessary task.

Finding an Effective and Commited Board of Directors

Corporation or foundations must have a board of directors or advisory council. As a legal entity, the corporate body must have at least two (3 or more in most states) board members who share responsibility for making decisions about how the business will be run. Sometimes this decision-making is accomplished by voting, and sometimes by consensus.

Generally, people who share a passion for the mission of the NPO will make the best board members. It is important to find board members who are qualified, trustworthy, and easy to work with. In fact, many start-ups begin with a group of friends or associates as the board members.

The Council on Foundations (2006) recommends assessing the size and composition of an NPO board based upon a few guiding factors while, of course, keeping current state law firmly in mind. These factors include:

• Type of foundation and the nature of the board’s work
• Mission and purpose
• Asset size
• Donor’s original intent
• Board structure
• Lifecycle of the NPO
• Requirements for fund-raising
• Diversity requirements

Drafting Appopriate and Binding Bylaws

Bylaws are yet another tricky aspect of establishing a legal nonprofit business. There are guides both online[i] and in books that outline good templates and that can serve as useful guidelines. Bylaws include corporate objectives as well as more general things that a corporation will and will not do. Though these bylaws may be supplemented over time, a basic version will be sent along with the initial 501(c)(3) IRS application for tax exemption.

Some common inclusions in bylaws might include rules for when documents will be filed, the number of board members, a regular meeting schedule, rules for compensation, as well as general policies and guidelines. Ethics guidelines, too, are a very common type of provision in bylaws, especially in larger organizations. When the final draft of bylaws has finally been accepted by the members of an NPO, they may even contain specific stipulations on travel, executive compensation, or the required disclosure of conflicts of interest before a board member joins the company.

One of the most important aspects of drafting bylaws is that the rules and regulations for how decisions will be made are included therein. Meetings can be as formal or informal as the board decides, though it is a good idea to keep meetings formal to the point that order can be maintained in the event of a future dispute. Bylaws often require that annual reporting meetings and planning sessions, and can allow for electronic or telephone meetings, as well.

For the members a new nonprofit, it is important to remember that all bylaws are binding, and that all members must abide by them. It is often the case that when officers first take office, they are required to swear to abide by these bylaws.

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[i] Writing Bylaws for an NPO, online. http://www.ivu.org/vuna/members/bylaws.html

Calculating the Level of Involvement

This is a good point for the founder of a nonprofit organization to make some decisions about how involved he or she will be. Some areas of concern are:

• The amount of money the founder would like to invest in a start-up
• How much time the founder is willing to put into a company
• How often the founder is willing to meet with the board
• Who is expected to ultimately make decisions
• The division of labor for the multiple aspects of running the NPO

Board members will not be paid for the work they do on behalf of the NPO, so the founder who finds him or herself taking on a great deal of responsibility may have these responsibilities indefinitely. The division of labor during the planning stage often continues far into ordinary operations, so for a member taking on major responsibilities, it is important to remember that he or she will likely continue to be responsible throughout his or her tenure with the company. If too much responsibility is required of potential members, they may be reluctant to sign on. Making choices about time, money, and decision-making processes preemptively will create a framework upon which other members can successfully build.

Drafting and Filing Articles of Incorporation

Incorporating a nonprofit can be a tricky process without sufficient preparation and research. Learning what is necessary to becoming a nonprofit before the process begins saves considerable time in the long-run. Typically charter articles, mission statements, and financial summaries are necessary for filing articles of incorporation.

Charter articles on the state level are filed with the secretary of state’s office. Each state has its own rules regarding how to go about this, but generally, they follow the same rules as for-profit corporations.[i] NPOs must also lay out the general mission of their organization and specify that funds will be transferred back into the organization. A declaration of initial board members as well as their functions and duties will also likely be required.

A fee for incorporation is required in almost all states, and depending upon the area in which the NPO is incorporated, can cost several hundred dollars. State laws differ vastly from one another. In fact, it is this wide range of rules about incorporation that make many for-profit companies (credit card companies, etc.) locate in specific states.

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[i] Articles of Incorporation for NPOs, online. http://www.nonprofit-info.org/if/idealist/en/FAQ/QuestionViewer/default?category-eid=5-5&eid=65-52&sid=84761347-257-Qiy

Setting Specific Limits for the NPO

As part of the incorporation process, it is important to clearly lay out what the NPO hopes to accomplish and the means by which it will attain these goals. In the initial stages, keeping these goals relatively simple will lay the foundation for success, as having too many projects and aims will not only add to the paperwork and hassle, but may also dilute effectiveness. Many nonprofits with a complex groundwork hold numerous events or classes to which only a few people come. Smart businesspeople will hold fewer events or classes, but attract more people to each, thus saving on equipment and administrative costs.

Working in the nonprofit sector means doing more with less, so focusing on a narrow field of interest can be the simple foundation which allows for educated changes in operations later on. Concentration on a specific line of inquiry allows a nonprofit to explore specifics and become successful through a clear understanding of its field.

Gauge the Beneficiary Audience

Knowing who will benefit from the existence of a nonprofit is essential in setting up an appropriate organization for community needs. One of the most important steps in looking at the beneficiary group is determining exactly how many people are likely to be served by the future organization.

Part of a nonprofit organization’s five-year plan is an accurate estimate of how many people are likely to take advantage of the NPO’s program. A proper estimate depends upon advertising, word-of-mouth, and reputation. Nonprofits that partner with local schools or organizations typically have a higher level of participation than their counterparts that are not in strategic alliances. The five-year plan estimate should account for all eventualities, including the tapering off of high initial participation, anticipated growth, or steady membership.

For a new not-for-profit, gauging the interest in the initial marketing campaign, knowing who its audience is made up of, and how to make alliances to increase visibility can drastically increase participation. Attracting a large audience is a sure sign that an NPO is serving the public with equal access. It also means a greater chance of success for the organization itself.

The Mission Statement

The NPO structure requires a mission statement. This statement functions as the organization’s reason for existence, and should state the charitable mission at the center of the enterprise. The mission statement immediately conveys to others what an organization does.

The mission statement also serves as a sort of boundary which sets parameters for the organization. It controls the scope of what an NPO will try to accomplish, and through this clear definition of goals, helps to keep focus on realistic goals and overarching objectives.

By clearly outlining what sort of goals the NPO hopes to achieve, the mission statement is a kind of measuring stick for gauging the success of the organization. Even if the specifics of how a nonprofit goes about accomplishing its mission change, the mission statement serves as a reminder of the overarching mission of the organization.

Implementing an Initial Nonprofit Business Plan

After the initial decision to establish an educational NPO has been made, many more steps lie ahead. The work of start-up not only involves preparatory planning and paperwork, but also involves finding others who will join the organizational structure to help with operations. Some NPOs are begun as partnerships, but most start out with a founder and a few board members. In order to fully institute an organization that will be of real use and value to the community, it is essential to understand the necessary steps to setting up a thriving organization.

Determining the Limited Mission of the NPO

Nonprofit organizations are dedicated to helping others, and the founders of these businesses often have a broad idea of philanthropy. It is necessary for anyone involved in the nonprofit sector to narrow this scope of compassion. A focused mission and specific constituency means a more successful. As in the for-profit business world, filling a specific niche and avoiding overly broad operations makes for a thriving business model.

Funding Options

Many cities have programs and grants of their own that are designed to help worthy organizations within the city limits. Registering a nonprofit at the local level may prove eligibility for such perks. A city clerk or professional advisor may be helpful in pointing an NPO toward appropriate opportunities. The local Municipal Office of Business and Development is another likely place to get information on assistance programs found within the city.

Grants can often provide the necessary resources for a business’ operations, and though it is possible to receive grants before the process of incorporation is begun, documentation that shows that an application is in process must be provided before consideration. Sometimes the IRS will speed up the review process if there is a federal grant at stake for the purposes of start-up funding. Oftentimes, however, it is more straightforward to apply for grants after a company has been incorporated.

Though funding can be a major problem for small organizations, many resources exist to sustain the economic health of an NPO. For educational nonprofit organizations, education must remain the primary focus in order for an organization to retain its tax-exempt status. Making sure that operational expenses will be covered ensures that the mission of an NPO can be fulfilled. This stage is a good time for a prospective non-profit founder to evaluate his or her commitment, ability, and available resources. Deciding ahead of time if a founder is suited to the process of establishing a start-up nonprofit can save untold time and energy.

Childcare and Vocational Education

Childcare can also be a qualified NPO sector, and may be considered exempt if it fulfils an educational mission created and maintained by qualified teachers. In specific cases, the enrolment must also be limited to low-income children or some other socially disadvantaged segment of the community, which allows the parents of the children to seek employment that would normally be out of reach.

Vocational education is certainly part of providing for the public good and is an excellent option for those who would like to pass along their knowledge in a more informal setting. Vocational education NPOs must either make a partnership with previously established vocational schools, or actually start a physical school. This can include the presentation of a formal plan of instruction, the hiring of certified instructors, and the enrolling of a body of students. However, vocational training does not need to be so structured. Though a vocational NPO may not be an accredited institution that can confer degrees, it can still offer certificates of completion to those who finish a course of study. Maintaining an internet site that explains just what those certifications mean could assist graduates in a potential job search and give others an outline of what a particular NPO has to offer. Even programs such as those that link up a student with a mentor are considered a type of hands-on vocational education. Vocational education can be of a number of varieties.

It is essential to gauge the interest of the community in founding an NPO. Childcare, vocational education, performance art, and general research are just some of the categories available to potential nonprofits. In carefully choosing a program well-suited to a community, and not suited to selfish interest, an NPO founder is more likely to build a successful not-for-profit business. If a founder or a member of a particular institution disproportionately benefits from the NPO, the IRS is likely to reject the organization’s exempt status,[i] so by tailoring the programs of an NPO to the public and exploring the options available, it is likely that it will not only be accepted as an NPO by the IRS, but also likely that it will flourish.

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[i] "Organizations that provide vocational training may be exempt as educational organizations, provided that any commercial operations are not larger than needed for the training program. In other words, commercial activity must be incidental to the educational activity.” -- IRS publications, online.

Curriculum and Education Promotion

For nonprofit organizations that have more research-based missions, the results of research can be presented as curriculum, the most typical example of this being the work NASA does at schools nationwide. As long as the research is made publicly available, however, it need not be disseminated so widely.[i]

The arts, too is a significant area of education. Promoting the arts, especially in areas or ways that are not normally accessible to the community, can be a type of eligible education. A museum, for instance, can be a type of nonprofit, which are often begun with a legacy grant and run in the chief benefactor’s name. “The arts” is a wide category that includes fine art, folk art, or any culturally artistic expressions. An NPO cannot, however, be a collective of artisans who have banded together to sell art work. Cooperatives are not exempt under 501(c)(3).

Performance arts are also acceptable nonprofit organizations. Theatre and choir groups that give performances that are reasonably accessible to the public are also considered charitable education. Of course, just like any other NPO, all revenues must be put back into the organization. Once the necessary payments have been made (actor salaries, light bill, performance space) are paid, profits can be put into the next production.

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[i] "Organizations that devote most of their effort to research and the development of a new body of knowledge may be educational. The results of the study and research must be available to the public even though it may not be extensively disseminated." – IRS Web site: http://www.irs.gov/irm/part7/ch10s04.html

Charitable Education

There are many ways that an NPO can go about fulfilling an educational mission. Instruction through conventional classes is the most common method, but requires a location at which the classes can take place. There are many ways that people gather information, however, and the IRS recognizes that as long as an NPO fulfills its educational mission by teaching a useful skill, a nonprofit business does not necessarily need to run a school house[i][ii].

Research opportunities are considered viable not-for-profit work as long as the results of the NPO’s work are freely available, and as long as there is a public good resulting from the work. Any patents secured by an NPO must be made freely available to the public and the work must be performed in the United States.[iii]

Charitable education is defined by the IRS as “the instruction or training of the individual for the purpose of improving or developing his (or her) capabilities” and “the instruction of the public on subjects useful to the individual and beneficial to the community.”[iv] Publishing educational materials falls under this category. These materials may be published online or as books that are sold as part of a fund-raising effort. As long as materials are disseminated in such a manner as to contribute to the public good, they are a part of an NPO’s work in charitable education. These materials, however, must be demonstrably different from commercial publications of the same sort, and any work that is contracted out to create such materials must be paid on a per-item basis. Because all profits from the sales of such literature must go into the nonprofit organization, no royalties are payable to authors.[v]

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[i] "Education of the public may be carried on outside the classroom. The regulations provide examples including: public discussions, forums, panels, lectures, museums, zoos, and planetariums. Reg. 1.501(c)(3)–1(d)(3)(ii). " – ibid.

[ii] “This may also fall under the larger Public Education clause," Reg. 1.501(c)(3)–1(d)(3)(i) provide that the term educational includes the instruction of the public on subjects useful to the individual and beneficial to the community." – ibid.

[iii] “Public good research is further defined as, "Reg. 1.501(c)(3)–1(d)(1)(iii) provides that scientific research will be regarded as in the public interest:

1. If the results of such research (including any patents, copyrights, processes, or formulae resulting from such research) are made available to the public on a non-discriminatory basis;

2. If such research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof;

3. If such research is directed toward benefiting the public.” -- ibid.

[iv] IRS publications, online. http://www.irs.gov/irm/part7/ch10s04.html

[v] "…A nonprofit organization that makes funds available to authors and editors for preparing teaching materials and writing text books, and under the terms of the contract with the publisher receives royalties from the sales of published materials and then shares them with those individuals, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–104, 1966–1 C.B. 135.” IRS Web site: http://www.irs.gov/irm/part7/ch10s06.html

Untangling the Public Good from the Good of Nonprofit

A nonprofit organization must exist for the public good, without restriction of access of any sort. A new nonprofit organization and its work must be freely available to all who wish to seek it. The IRS regulations list that the “operational test” for the public nature of a nonprofit:

“Reg. 1.501(c)(3)–1(d)(l)(ii) provide that to meet the operational test, an organization must be engaged in activities furthering "public" purposes rather than private interests. It must not be operated for the benefit of designated individuals or the persons who created it.”

Because the members of a nonprofit constitute “the public,” these members, too, can take advantage of what the organization has to offer. The members must not have a financial interest in the operation of the business, and should be aware that using any insider information or taking any special favors is considered illegal. As such, an NPO must be very careful about not only who can join, but also about how the members of the organization benefit. Members cannot receive any special reimbursement, especially if the compensation is part of funds that have been turned back into the organization.[i]

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[i] IRS Web site: http://www.irs.gov/irm/part7/ch10s05.html#d0e85950

The Public Good

The 501(c)(3) designation is that of a charitable organization which serves the public good through education or scientific research.

The IRS includes in its definition of educational nonprofits (IRS-4220 2003):

· Schools such as a primary or secondary school, a college, or a professional or trade school

• Organizations that conduct public discussion groups, forums, panels, lectures, or similar programs
• Organizations that present a course of instruction by means of correspondence or through the use of television or radio
• Museums, zoos, planetariums, symphony orchestras, or similar organizations
• Nonprofit day-care centers
• Youth sports organizations

Except in the case of organizations that are specifically chartered to prevent cruelty to animals, the beneficiaries of an NPO must be human. The people most likely to be served by a particular nonprofit are those within the area surrounding the organization, but could include people throughout the U.S. or even certain foreign countries that demonstrate a need for aid.

NPOs offer many benefits, but it is important that they exist to serve everyone, not only an elite group of people. If the group of people the NPO is geared to is considerably small, the IRS may not consider it worthy or approval. If membership or access to an NPO is in any way exclusive, the organization will most likely not be approved for NPO status.[i]

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[i] "An otherwise qualifying organization will be disqualified for exemption if it excessively benefits private interests, either through inurement of its net earnings to certain 'insiders' or by primarily benefiting the interests of persons who, though not "insiders," do not comprise a charitable class." -- ibid.

Political Considerations

An NPO business model may not be for someone who is motivated by a political agenda. IRS codes do not allow nonprofits to contribute to or support any particular legislation. Educational nonprofits are not allowed to back a specific political ideology in their curriculum, though they are allowed to direct general areas of investigation and education. As an organization, no nonprofit is allowed to participate in the political process.

Nonprofits that attack other NPOs or engage in non-scientific research typically have a great deal of difficulty qualifying for NPO status. While simply investigating a extreme view isn’t reason enough to disqualify an NPO, offering unsupported opinions in the guise of public lecture is not covered under the auspices of the NPO business model.[i] As long as an organization is not supporting specific legislation and its research or education is based in science which fairly approaches its investigations, it should be considered a legally qualifying NPO.[ii]

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[i] "Rev. Rul. 68–263, 1968–1 C.B. 256, holds that the publication of material which discredits particular institutions and individuals on the basis of unsupported opinions and incomplete information about their affiliations is not educational.” IRS publications, online. http://www.irs.gov/irm/part7/ch10s05.html#d0e85950

[ii] In Rev. Rul. 66–256, 1966–2 C.B. 210, however, an organization that conducted public forums, lectures, and debates on controversial social, political, and international questions was held to be educational. Although the speakers were frequently controversial, the organization adopted an unbiased position. Organizations doing research or educating the public on controversial public issues must stick to the reasoned approach and avoid unsupported opinion. They must also avoid the advocacy of specific legislation as a substantial part of their activity." Ibid.

Don't Cheat the System

The IRS is aware that a number of nonprofits try to skirt the laws that govern 501(c )(3) exempt organizations and the compensation of founders. By their own analysis, "…those in control may not, by reason of their position, acquire any of the charitable organization’s funds. If funds are diverted from exempt purposes to private purposes, exemption is in jeopardy." This means that founders cannot receive funds or other payments. "Those in control of an organization may not withdraw its earnings under the guise of salary payments.” These types of kickbacks may take the form of inadequately secured loans, property received at a price that is less than fair market value, fringe benefits, or even personal grants. Founders on nonprofits do no receive a salary, and it is vital that they are careful in how and when they receive reimbursement.[i]

Founders of NPOs must keep the law in mind at all times to avoid illegal compensation, conflicts of interest that could jeopardize petitions to the IRS, or other illegal activities. With an honest and accurate assessment, a new entrepreneur can genuinely evaluate the level of involvement to which he or she is willing to commit.

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[i] The IRS defines Incidental Private Benefit: "To be incidental, the private benefit must be a necessary concomitant of the activity which benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be achieved without necessarily benefiting certain private individuals." Also, "Further, private interests must be benefited only to the extent necessary to accomplish exempt purposes. It is a facts and circumstances test in that public benefit from the organization’s activities must outweigh any individual benefit." – IRS Publications, online. http://www.irs.gov/irm/part7/ch10s04.html

Extreme Dedication

The effort that is required when starting an NPO is significant. From networking to paperwork, ceaseless personal energy defines a successful NPO founder.

Just some of the necessary measures that an NPO founder must take include putting together an advisory council or governing board, recruiting workers, organizing volunteers and employees, and even undertaking human resource and outreach operations.

Securing capital and funding can be one of the greatest draws of energy in the establishment of a new NPO. New founders must often invest a certain amount of money in a potential project, even though they do not draw a salary. Another consideration is the money spent on filing fees and consultations with professionals and insurance. Making an NPO work may require expanding the organization very early on to include paid professionals such as employees or freelancers. There are ways to spend less on such fees, such as getting grants that may cover start-up costs, but a worker will have to sit down and apply for these grants before such monies are in place. Though it is presently the case that grant funds can be used to bankroll bookkeeping and further fund-raising, the initial seed money must be secured outright, and often through the very time-consuming process of fund-raising.

Considerable Time Commitments

Establishing and running a nonprofit requires a serious time commitment. Paperwork, planning, and implementation take considerable energy and working within the confines of a small business NPO model can make this requirement all the more conspicuous.

For a potential NPO founder, an earnest examination of how much time he or she is willing to commit is one of the most fundamental steps in establishing an NPO. Talking to family and friends can also help a potential entrepreneur to decide if the intense time commitment will fit a personalized schedule. Many NPOs are started as limited partnerships. With the help of a well-chosen partner, the workload of starting an NPO is considerably lightened. Once the business is established and a board is chosen, the founder is no longer responsible for taking care of every aspect of the business. However, even a smoothly running NPO requires a serious time commitment.

One other aspect of time commitment to consider is how long it takes to put in place all of the elements of an NPO. Though states often finalize NPO status approval within a month, three years is a typical wait time from the beginning of the application process to the final approval of the IRS.

The time commitment that an NPO demands is considerable. On a personal level as well as a bureaucratic one, beginning a nonprofit organization is not for those who desire a rapid-start business model.

Keeping Your NPO Tax Information Above Board

Another potential form of taxation might include income generated by investment incomes and property held by the NPO. Like any business tax, this tax must be paid quarterly on investment income of more than $500 per year. A professional accountant will be able to give advice on the quarterly filing on any such income.

In addition to the IRS forms required for an NPO, every year or fiscal quarter statements and reports must be prepared for organization associates and board members. Depending upon the size and mission of the NPO, this task can be quite involved. Even financial information that shows an organization in a negative light will likely, depending upon individual state laws, have to be made public.

Finally, when it is time for an NPO to dissolve, all physical property and assets must be given away to another recognized NPO. The founder and the investors will not recover compensation for any money or property that was originally put in to the venture. This rule exists to prevent NPOs from becoming money-laundering schemes and is applicable in all 50 states.

The tax-exempt status of an NPO can be a considerable benefit, but knowing the intricacies of tax law is essential to running a successful and lawful nonprofit. Being prepared for the negatives as well as the positives of running a not-for-profit can help to sufficiently prepare a would-be NPO founder.

Filing Forms and Keeping Your Tax Exempt Status

Ensuring that a nonprofit is established legally requires significant time and effort spent filling out legal filings and forms, organizing statements and budgets, and pouring through charts and graphs. Generally, the necessary paperwork falls into two or more of the following categories:

• IRS forms and filings – depending upon the organization federal tax forms are filed as often as quarterly
• State filings – state level filing occurs most often once per year
• County –even though an organization is tax exempt, some areas require that exemption forms are filed yearly
• City – some cities or towns have a yearly filing in addition to a city sales tax. Depending upon the specific area, an NPO may be exempt from both.

Even with an accepted 501(c)(3) status, NPOs are often responsible for some amount of tax liability. The Unrelated Business Income Tax typically applies to related business enterprises that have been deemed “successful.” Since all proceeds must remain in the business, if an NPO cannot find a use for any extra capital by the end of a fiscal year or quarter, it may become taxable income. Nonprofits with realistic expectations of likely business profits and donations can incorporate these figures into a budget and avoid taxes through efficient use of received capital.

Disadvantages of a Nonprofit Business Model

Nonprofits have a comprehensive set of benefits that accompany them, and as such, can be an attractive option for a would-be founder. However, the nonprofit business sector has a number of negatives, as well, and it is essential that they be considered along with any possible advantages.

Tax-Exempt Status

The tax-exempt status of an NPO can be one of the best aspects of this business sector, but the IRS must approve the status of a nonprofit before it becomes tax-exempt. Even for a nonprofit that has already been incorporated and approved at the state level, IRS sanction is essential.

Dealing with the Internal Revenue Service is a process that most look forward to with trepidation. Therefore, it is a good idea for any prospective NPO founder to ensure that any tax questions, concerns, or problems, including those for past taxes, are settled before entering into the process of founding an NPO. Tax laws in the United States are exceptionally complex, and securing the services of a tax attorney at this stage can save considerable time, money, and stress.