a little bit about the challenges of the sector

+ Tips & Strategies for
Starting a Nonprofit
Organization in
California
For Purpose Law Group
A Professional Law Corporation
2120 W. Washington Street, Suite 101
San Diego, CA 92110
(619) 780-3839
info@forpurposelaw.com
www.ForPurposeLaw.com
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+ About the Author May L. Harris, Esq., M.A. 2 Ms. Harris is currently in her fifteenth year of legal practice, and has over a decade of executive, development, and leadership experience within the nonprofit sector and within socially innovative businesses. Graduating from the University of San Diego School of Law in 2000, and earning her Master of Arts degree in Nonprofit Leadership and Management in 2010, Ms. Harris provides an unique insight to the firm's clients, approaching issues not only from a legal or regulatory perspective, but also from a practical, management oriented view. For nonprofit clients, this full spectrum approach assures that they receive practical, real world advice they can apply immediately with staff, board members, share-­‐holders or donors to establish, protect, and grow their for purpose organizations. For emerging social enterprises, this m eans you have access to m ore than just another "business attorney." Ms. Harris spends many hours volunteering her services, and serving those in need. Believing that philanthropy and service is a life-­‐long endeavor to be modeled, she has served in Guatemala and Jamaica with her children on m edical service trips, and she volunteers with her daughter in SPRITES, a m other-­‐daughter philanthropic organization. She also sits on the Board of USA Rugby Trust. Ms. Harris is a member of the San Diego County Bar Association, the San Diego Chamber of Commerce, the California Bar Association, and a member of both the Taxation Section and the Tax Exempt Organizations Standing Committee. 1
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+ How wonderful that no one
need wait a single moment
to improve the world.
~ Anne Frank
a little bit about the challenges of the sector You have the passion and the purpose to make a difference in the world… to solve a glaring problem in your community, or to improve the well-­‐being of the world. So you begin by thinking you need to start a nonprofit organization. Congratulations! Your intent is wonderful… unfortunately, you have a convoluted and somewhat confusing road to travel to get your nonprofit organization established. Starting and operating a start-­‐up or “new” nonprofit can be incredibly challenging. Not only is the nonprofit sector a highly competitive and highly regulated one, but a newly formed nonprofit is joining a list over 1.5 million nonprofit organizations already registered with the Internal Revenue Service (IRS). Perhaps more eye opening is the statistic that the likelihood of establishing a successful nonprofit in the long-­‐term can be quite low. In his book, “The Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities & Build Financial Strength,” author Ron Mattocks postulates that only one-­‐third of nonprofits survive beyond five years and as many as one-­‐
third of registered nonprofits operate in the zone of insolvency. Add to these practical difficulties the incredibly complicated legal and regulatory filing requirements demanded of the sector by state and federal governments. For example, the IRS recently revoked the exempt status of over 275,000 previously exempt organizations simply for their failure to file annual reports for three consecutive years – and new organizations are added to the list every day. In addition to the annual filings required by the Internal Revenue Service (IRS), there are also annual filings required by the California Franchise Tax Board, the California Secretary of State and the California Attorney General. As most founders and directors of nonprofit organizations are volunteers with a great deal of passion for their purpose, many cannot navigate the many filings, requirements and disclosures currently demanded of nonprofit managers. It speaks to the desire of people to contribute to their communities that despite these challenges, new nonprofits can be vibrant, sustainable, and make a significant impact in an array of locations -­‐ within schools, communities, museums, homeless shelters, food banks, and so much more… indeed, as Margaret Mead so famously said, “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it's the only thing that ever has.” 3 + Tips & Strategies Before starting a 501(c)(3) organization, consider … • Crafting and defining your Mission and Vision: A 501(c)(3) organization must be organized exclusively for one or more qualifying exempt purposes (e.g., charitable, educational, scientific, literary, and/or religious). Consider whether the mission you’ve crafted is consistent with what is an exempt purpose within the meaning of the Internal Revenue Code. For example, simply “helping people” may not necessarily be charitable for purposes of tax-­‐exemption. • Identifying who you will serve: A 501(c)(3) organization must serve a charitable class of individuals or groups, rather than either private interests or the personal interests of its founder(s). Identify the class of people you seek to serve, and ensure they meet charitable criteria. • Determining how you will operate: A 501(c)(3) organization must be primarily operated for one or more qualifying exempt purposes as set by the Internal Revenue Code. Thus, the core activities should be in furtherance of the organization's exempt purposes. A primary activity of providing services in direct competition with traditional “for profits” entities, for example, may or may not be consistent with this requirement. • Finding out if you are alone: A new nonprofit should not merely duplicate what is already out there. Understanding your place in the market not only helps the organization to differentiate itself from others, but may also generate ideas about collaborations that better further the mission. One strategy for success may very well be approaching an organization already in operation whose mission is parallel to your own, and combining your efforts. • Assessing if you have a path to sustainability: While funding is almost never a sure thing, even for a well established nonprofit organization, you should take reasonable steps (as if it was your own money) to assure charitable funds are not wasted for lack of consideration about sustainability. Ask yourself, “How certain am I about receiving financial support in the future?” 4 + Tips & Strategies, continued… Before starting a 501(c)(3) organization, consider … • What are your Current and Future Resources? A nonprofit built on a shaky foundation can later learn that everything built on top of it is in jeopardy. Critical building blocks include human resources to govern the organization (board of directors), run the charitable programs (staff and/or volunteers), ensure legal and regulatory compliance, and to fundraise. These building blocks many times include various organizational consultants, accountants, and lawyers. • Drafting a simple business plan: It doesn’t have to be any longer than a page, but you should craft a “work-­‐in-­‐progress” business plan that includes a relevant SWOT analysis (i.e., evaluation of strengths, weaknesses, opportunities & threats), a preliminary marketing plan, and a three-­‐year prospective budget (you’ll also need this for the exemption application). • Educating yourself on the legal landscape: Important laws that are applicable to nonprofit organizations include those related to the board (duties and responsibilities, areas of potential liability, filing requirements, conduct and activity restrictions) staffing (human resources & employment) and operations (charitable solicitations, certain applicable taxes, substantiation and disclosure requirements, intellectual property, contractual obligations and leasing). • Understanding your options: Alternatives to formation may include working with an existing organization (e.g., volunteering), fiscal sponsorship, or a donor-­‐advised fund. This may be particularly attractive if you're weak in the essential, but often downplayed, areas of administration and legal compliance. • Deciding upon a legal structure: Again, you do have options. The legal form of the organization can vary. For example, the nonprofit may be incorporated or unincorporated under state law and it may or may not have a voting membership structure. Such decisions carry different benefits and challenges. 5 + Common Issues for Startups governance compensation The organization’s governing Executive Compensation – documents (e.g., articles of Executive compensation is a highly incorporation, bylaws, policies) are scrutinized topic in the nonprofit the organization’s “how-­‐to” sector and the IRS uses certain rules manuals on how best to m anage for determining the reasonableness and operate the organization. of compensation and when to impose penalties for excessive pay. Just as you wouldn’t rely on a Toyota m anual to operate and run a Lamborghini, you shouldn’t rely Organizations should take advantage of certain precautionary upon templates or other measures made available by the IRS organization’s governance documents to run and operate your such as the rebuttable presumption organization. It is often a m istake of reasonableness to better ensure to copy these documents, in whole the compensation is reasonable and protect charitable assets. or in part, unless reviewed by an attorney. 6 Regular attention to strengthening the board (e.g., new board member orientation, ongoing education and training) is an often-­‐
neglected key component to better governance and a healthy organization raising funds Charitable Solicitations – A commonly overlooked requirement is applicable charitable registrations as an organization expands its fundraising efforts. Consider where you plan to engage in charitable solicitations and check whether you must register to solicit donations in those states. Further, m any nonprofits utilize gaming activities like raffles, bingo, or other casino type “games of chance” to raise funds. If you do – BEWARE! There are a great m any obstacles to overcome when planning fundraising activities like this in order to make them legal and to ensure your volunteers are unwittingly committing a crime. + Our Unique Approach Your purpose is different from a traditional corporation. Your legal counsel should be different, too. Nonprofit organizations come in many different forms (association, corporation, joint venture LLC) and can be often be exempt from income taxation under various provisions of the internal revenue code. Whether you are a public charity under section 501(c)(3) or a social club under 501(c)(7), you need legal counsel that understands your unique situation. Formations For Purpose Law has a great deal of experience forming various types of nonprofit organizations, including California Nonprofit Public Benefit Corporations, Nonprofit Mutual Benefit Corporations, and unincorporated nonprofit associations. For simple formations, we offer an easy flat-­‐fee engagement with no hidden costs or surprises. Outside General Counsel The For Purpose Law Group has expertise representing nonprofit and exempt organizations in most transactional matters, including human resources, contract preparation and review, trademark protection and corporate compliance. Traditional Hourly Representation The For Purpose Law Group also offers traditional legal representation on an hourly basis, with an upfront deposit. This fee structure is appropriate for more complex legal matters, including legal opinion letters, dissolutions, or preparation for litigation. 7 + We’d love to answer your questions. Just drop us a line. info@forpurposelaw.com (619) 780-­‐3839 + For Purpose Law Group, a PLC 2120 W. Washington Street, Suite 101 San Diego, CA 92110 www.ForPurposeLaw.com