As 2020 marches on with little relief in sight from crises affecting our region, more and more attorneys, accountants, and financial advisors are fielding questions from well-intended clients who are exploring starting their own nonprofits to help people in need.
Whether a client's passion is health care access, support for the arts, social justice, or any one of hundreds of other worthy causes, it's critical to provide counsel regarding the pros and cons of forming a brand-new nonprofit.
Here are suggested topics to include in your client discussions:
1. For-profit or nonprofit? Help your clients decide whether they want to start a charity or whether their vision would be better structured as a for-profit business. Most charities keep the lights on by securing donations. Companies operate by selling goods or services. Either way, you've got to pay employees and manage a budget. This seems like common sense and something that any astute client would understand, but sometimes even these basic principles are easy to overlook when enthusiasm for a cause takes over.
2. The state and the Feds. Explain to clients that if they decide to start a new charity, just like a business, it still requires setting up a legal entity. Unlike a for-profit company, to qualify as a tax-exempt nonprofit, the client will need to apply to the Internal Revenue Service for an exemption under Section 501(c)(3). This exemption allows the organization to be free from paying income tax. It also allows people to donate to the organization and be eligible for a tax deduction on their tax returns. Again, these rules seem like Charity 101 material, but never assume your client is in the know.
3. Sell, sell, sell. Most people who start a charity are passionate about a cause and probably already have programs in place. However, the trick is to get out there and share the news about the cause to raise money. Your client needs to be aware that starting a new charity involves "sales," just like a for-profit enterprise, except they most likely will be asking for donations to support their good work instead of selling goods or services like a for-profit business. Certainly, nonprofits can generate earned income, but most organizations also should be designed to receive public support in the form of grants and contributions to avoid specific tax rules, such as those prohibiting excess "unrelated business taxable income."
4. Verify the unmet need. Finally, and perhaps most importantly, encourage your client to research whether any existing organizations are already serving the mission your client intends to fulfill. Indeed, during challenging economic times such as these, best practices suggest that two or more nonprofits combining their efforts is an excellent way to create efficiencies and ensure more effective service delivery to people in need.