Frequently Asked Questions

What is a nonprofit?

A nonprofit organization, also known in some places as non-governmental organizations (NGO), is a corporation that exists to address a specific need in society. Once a corporation becomes a nonprofit, it is no longer owned by any one person. Instead, it is considered to be "owned" by the citizens of the United States. Nonprofits cannot grant "personal benefit" to any of its staff, volunteers, or board members. Any "profit" a nonprofit organizations makes is not dissemenated among anyone, but instead used for the future budget of the organization. Each year, nonprofits report on their activities to prove they are meeting their tax-exempt purpose.

What is a tax-exempt purpose?

A tax-exempt purpose is the reason the organiaztion exists, and what need it is trying to address. The philosophy behind a nonprofit organization is simple. Tax-exempt organizations provide vital community services that, if not provided by the community, would be the responsibility of the government to address. Therefore, a nonprofit providing one of these services is viewed as a sort of proxy for the government. The government "funds" the organization by not taxing it for the work it is doing to address the community need. This also allows more freedom of choice for citizens to directly choose where their money goes, rather than paying to the government with representatives who decide for them. The reason you can deduct taxes when you donate to a nonprofit is because you are, in the strictest sense, paying taxes when you do so. Many of these things are also intertwined with rights provided to the community that the government must create avenues to allow.

Some examples of a tax-exempt purpose, and a corresponding "need," are:

Chuch/Place of Worship: To provide a place to practice religion with others of shared faith
- This meets the need for access to religion
Community Center: To provide a place where people can go for recreation, services, etc
- This meets the need for people to assemble with others
Animal Shelter: To provide loving homes to animals in need
- This meets the need of keeping domesticated animal populations under control
Housing Agency: To provide assistance for people facing homeless or housing insecurity
- This meets the need of shelter, which allows people to freely and safely execute their rights

You may notice I tied most of these back to some sort of right enshrines in the constitution. Tax-exempt purposes can, philosophically, be considered things that make it easier for citizens to execute their rights. As you can see, the "needs" can also take many different forms.

I have an idea for a nonprofit. Should I start one?

Probably not. Very few ideas are truly novel, and the work required to create a new organization and get to the point where you can safely provide that service is much more than most people think. Nonprofits are, at their core, businesses with extra requirements and take a lot of time and effort to put together. Before starting a nonprofit, you should explore other nonprofits nearby and see if they are doing what you suggest, or if they have tried it before and failed. Then, you need to figure out what the service you want to provide will cost, and figure out how to start with that amount of money. The chances are that you'll realize it is not as realistic as you thought wth your current resources.

What do I need to start a nonprofit?

Nonprofits are formed as corporations, no different from any business. After the formation of the corporation, you must request an EIN from the IRS, and then submit a Form 1024 (or 1024-EZ). This form is your reasoning for requesting designation as a 501(c)(3) organization. Other forms of nonprofit use different documents, but you are probably forming a 501(c)(3) organization.

Those are the administrative tasks you need to complete, but you need more than that to create a nonprofit. Before you complete any forms or incorporate any organization, make sure you have these things in order.

First, you must have a tax-exempt purpose. If you cannot specifically identify your tax exempt purpose, then you are probably not looking at a nonprofit. The tax-exempt purpose must be the primary function of the organization.

Then, you need board members. To form a corporation, you need at least three board members. One of those members can be you. Making sure you have board members who are able and willing to complete the work is vital. Do not just put people down so you can incorporate.

Finally, you need money, generally speaking. Some organizations are doing work that requires no money, or is based on donations. For instance, organizing a "Free Little Library" can be easily accomplished with donated books, and does not have much overhead. However, organizations that are interested in providing more complex or numerous services will need to amke sure they have the money to support it.

Many people will self-fund their organization. There is nothing wrong with that, though it is always good to make sure there are more people willing to support it. The best option is to identify an early supporter who can bankroll your first year. Do not wait until after you have established the organization to start looking for a donor. You shouldn't be filing anything if you do not have a source of income or a lump sum available.

I have an idea for a program for my organization, what do I do?

The first step in this situation is research. We all have ideas, and they may seem great, but we need to back them up with data. First, you want to see if it's been done before. What kind of organziation, what goals, and what results did it have? Then, you want to see if any organizations around you have similar programs, and what exists in the community. Then, of course, we check the cost of the program. We see if we have the funds, or can raise them, then put it into place.

I hear that nonprofits are tax exempt. Can I use one to avoid paying taxes?

No, you cannot. 501(c)(3) charitable organizations are tax exempt, but it is not as simple as that. Every tax-exempt organization has a tax-exempt purpose. A organization's tax exempt purpose is the, usually broad, explanation of why they are tax exempt. Any expenses that do not go toward that tax-exempt purpose are taxable, and threaten the tax-exempt status of the organization. Technically, there is a buffer for "non-tax exempt" expenses, but they still need to fit within the organization's reasonable expenses.

Any money donated to a 501(c)(3) organization can be deducted from your annual tax burden, but legally that money is no longer yours and belongs to the citizens of the United States. Attempts to manipulate this system are considered tax fraud and carry extra repercussions due to the manner of the manipulation.

Are churches tax-exempt? Can I start a new church?

All churches are tax-exempt as long as they are registered as churches. In addition, churches are automatically tax-exempt and do not need to go through the same process as other organizations. That being said - yes, anyone can start a church. The IRS does not have "requirements" to be considered a church, but does have guidelines. "Church" is not the phrase the IRS uses, as this applies to any place of worship. You can find information about starting a church on the IRS website. Churches are not my speciality, but feel free to reach out with more questions.

I want to keep my family's money safe, will a family foundation help me?

When giving money to any nonprofit - including family foundations - you are willingly giving up your money. It no longer is yours. It belongs to the nonprofit and, by proxy, the people of the United States. Many families with means will use family foundations to both lower their tax burdens and support the community, but no organization can be used for personal benefit. If you put family money into a foundation, you cannot get that money back or use it for you own spending. Generally, family foundations are used to reduce a tax burden, and at minimum must provide at least educational scholarships totaling 5% or more of the total value each year. These scholarships need to be publicly available and providing them to your own family would be considered personal benefit, unless you can prove that the process was fair and unbiased. Many family foundations also provide grants to other organizations.

I think a nonprofit is misusing its funding. What do I do?

If you believe a nonprofit organization is behaving improperly, you can report them to the IRS. You can choose to do this anonymously, or you can complete a Whistleblower Claim for a potential award.

A board member wants us to start selling things to raise money. Is that allowed?

No, selling of items for income is not allowed, and threatens the organizations tax exempt status. To circumvent this, organizations often create secondary, non-exempt corporations to sell items, and then donate the proceeds to the organization. These usually have the same leadership and function like one organization, but they are legally and financially distinct entities.

However, your organization may give items away for during a fundraising activitiy. This can be accompanied by a "suggested donation" amount, though you are unable to force a specific amount of donation in exchange for an item and are legally required to give the item even if someone does not provide any money. While it may seem like organizations are selling items as fundraisers, this is likely what they are actually doing.

A local political candidate has policy positions that will benefit my organization. Can the organization support them?

Political activity is a fine line to tow. All 501(c)(3) organizations can spend up to 5% of their expenditures on "political activity" but that political activity must be directly related to their tax exempt status. For instance, if a candidate or sitting official is proposing removing funding from the organization, the organization can advocate for that funding to not be removed. This is allowable because the funding is used for their tax exempt purpose. Losing the funding is a direct impact on their ability to achieve their tax exempt purpose. However, they cannot endorse or advocate for a specific candidate, only policies. Any formal stance by an organization must be focused on supporting or combatting policies - which may translate into combatting or supporting certain candidates. Depending on how close the policy is to the organization's tax exempt purpose, the organization may be able to be more engaged in the political process, though not exceeding the 5% of expenses threshold. They also cannot make any donations to political campaigns. Organizations can hire lobbyists for specific policies.

Individuals in an organization are free to support any politician in whatever way they want, as long as they do not promote their support as the organization's support.

What do I need board members for? What do they do?

The board of the nonprofit is ultimately responsible for the success of the organization. Any corporation, no matter the type, requires at least three (3) board members. These members are legally responsible for the organizations success.Their role is to mkae sure the organization follows all legal and stautory requirements.

Depending on the size and scope of your organziation, board members may play a more or less direct role. For newer, smaller organizations, most of the work is done directly by the board. For larger, long standing organizations, the board focuses on strategic planning and partnerships. For any organization, fundraising is the board's top priority. Board members may choose to hire staff to do the work in their stead, but they are still ultimately responsible for the success of the organization.

I need more board members to start my nonprofit. My friend has offered to sign on as a board member just to help me incorporate, but wont do anything else. Can I do that?

While there is no legal or statutory restriction to doing this, it is highly discouraged. Board members should never be just placeholders. The success of a nonprofit can be predicted by how engaged its board is with the work. Your organization will not be successful if you cannot find people willing to support it as a board member and do the work. If the person is not willing to stand with you and help, they will only bring your organization down.

My board members want to vote on getting paid for their work. Is this allowed?

By definition, board members are volunteers and cannot be paid for the board-related work they conduct. If a board member owns a business that provides a relevant service, their business may be able to contract with the organization. If the selection process is fair and impartial, and the proposal from their business is the best option, it could be appropriate. However, hiring a company you own a stake in is easily viewed as a personal benefit, and may cause more issues than it is worth. If the organization chooses to do this, the board member in question cannot be involved in any part of the process, on either side. To avoid any potential conflict of interest, this is highly discouraged.

Board members may also be compensated for certain activities outside the scope of the organization's work. For instance, a board member may be paid to be a speaker at an event, representing the organization. However, the pay must be reported on the organizations 990 forms.

In addition, the treasurer of a board may be compensated for tax related work for the organization, but not other financial functions.

If someone wants to get paid for being on your board, they are likely not good candidates for your board.

What happens if a nonprofit shuts down?

The sad truth is that most nonprofits do shut down. Usually they are small, moneyless, and do nothing, but they still close. However, when larger organizations with assets decide to dissolve the organization, one of two things can happen. THe assets can be absorbed by another organization with a similar purpose, of the assets are claimed by the government. Generally, the government will sell any true assets, but will retain the cash value. If the organization ever reforms, they will be eligible fto get that money back.

I have already made so many mistakes! How do I fix this?

Just keep palm and send me an email, we will see what we can do.