If an organization is selling goods or services to generate income, even if it is conducting the activity within a larger group of activities related to its exempt purpose, the activity is a trade or business. It is important that you file the correct return and pay taxes on this income.

Sales of merchandise, publications, and other media can generate UBI if the items sold are not substantially related to the organization’s exempt purposes. If the items do have a substantial relationship, then the sales do not generate UBI, but their relationship to the exempt purpose must be clearly identifiable.

For example, the sale of educational videos or publication subscriptions by an animal welfare group would be substantially related if the content of those videos or publications promotes the organization’s exempt purpose. If the same animal welfare group sold pet accessories and apparel, the sale of these items would generate unrelated business income.

Exceptions and Exclusions

• Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
• Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
• Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.

If you have questions or concerns about whether your planned activity may generate UBI and thus subject you to taxation and/or jeopardize your tax exempt status, you may want to seek consultation with a nonprofit expert.

For many small startup nonprofits, learning the ins and outs of nonprofit operations, especially as an organization exempt under IRC 501(c)(3), can be overwhelming. However, it may be best to first begin to acquire knowledge of what activities have the potential of jeopardizing the exempt status that you have worked so diligently to achieve. Four primary types of activities exist that may result in revocation of an organizatio’s tax exempt status: Private Inurement, Lobbying, Political Campaign Intervention, and Unrelated Business Income.

Private benefit/inurement

The prohibition of inurement to insiders is absolute. Any amount of inurement is grounds for loss of tax-exempt status. In addition, the insider involved may be subject to excise tax.
In contrast, if the activities of an organization privately benefit someone who is not an insider, that benefit must be substantial in order to jeopardize the organization’s tax-exempt status.

Lobbying

Lobbying is activity designed to influence legislation. A 501(c)(3) is attempting to influence legislation if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation.

Political campaign activity

501(c)(3)s are prohibited from engaging in any “political campaign activity”—that is, directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate. The prohibition of political campaign activity is absolute.

Activities generating excessive unrelated business income (UBI)

UBI is income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.

If you have any concerns as to whether or not your ongoing or planned activities may place your organization’s tax privileges in jeopardy, I’m here to help.

I believe steadfastly that nonprofit Boards should be fully contributing. However, in addition to contributing cash to their organizations, members of the Board of Directors should also assist in the generall fundraising efforts. When determining whether or not to fund your organization, in many cases funders will consider three questions:

1. What percentage of the board is contributing to the organziation? (the answer should be 100 percent)

2. How much, in total, does the organziation receive in board contributions? (the answer should be a substantial portion of individual contributions, perhaps 20 percent)

3. How active is the board in soliciting funds? (the answer should be very active)

While not all trustees feel comfortable in asking for money, they still can be involved in the general fundraising endeavors. For those not at ease with direct solicitation there are other activities. These may include working on a special fundraising event, updating mailing lists, undertaking analysis of donor records, writing personalized fundraising letters, researching funding sources, or hosting fundraising luncheons. There are plenty of tasks for everyone.

The most important reason why your board should be active in fundraising is because people give to people, and especially peers give to peers. To the extent that board members are active within the community, are givers themselves, and are not afraid to ask for money, the organization will be more successful in the fundraising effort. Futher, the fiscal health of the organization may depend on the extent that the board feels the income gap is their responsibility. Thus, board involvement in revenue procurement is one way that the funding community takes the measure of the organization’s vitality and health.

Although there are over 60,000 foundations and countless corporations and individuals ready and willing to contribute to every cause, there is today tremendous competition for winning grants. The growth of the nonprofit sector is a major cause of this intense grant competition. Now, more than ever, it is important grantseekers to be educated in the fundamentals of grant writing and research. With foundation grant funding, specifically, it is imperative that you are aware of the correct foundations that you should be submitting your proposal to.

There are 4 types of foundations: private, corporate, operating, and community. The correct foundation from which to request funding depends on your organization’s specific situation and needs.

Private Foundations

Private foundations are most often set up by wealthy individuals or families. These foundations are typically set up to benefit a particular cause or causes. The Bylaws stipulate the types of causes it will support and the types of agencies it will fund. In general, foundations do not provide multi-year funding. Amounts of funding vary depending on the assets of the foundation. It is important that your organization submit proposals only to those private foundations whose guidelines your programs are well aligned with.

Corporate Foundations

This type of foundation must have the approval of its corporate board and shareholders. Corporate foundations will typically fund programs within their geographical service area that will be of benefit to their employees or their community.

Operating Foundations

Operating foundations are organized to operate research, social welfare, or other charitable programs deemed worthwhile by the donor or governing body. These foundations do not usually fund other organizations’ programs and thus state “applications not accepted” in their guidelines.

Community Foundations

Community Foundations are set up within geographic locations and generally will only make grant awards within a specifically targeted geographic area. Awards are typically small and not for multi-year awards. A community foundation accepts contributions from various sources and combines them in order to have sufficient assets to run the foundation, invest for growth, and award grants.

The bottom line is if you’re considering seeking foundation grant funding for your organization, you’ll need to be quite diligent and informed in your research. Not only will you need to choose the correct foundations, but also be aware of application forms, deadlines, award ranges, etc. Luckily, we’re here to help.

While your Board of Directors should consist of a highly competent and skilled cross-section of the community you serve, most organizations, especially small startup nonprofits, will encounter the need to hire a consultant from time to time to assist either board members or staff members with their respective duties. Even if board members could do the specified job well, the politics of some situations or the lack of time to focus on the task may suggest the need for a consultant. To avoid conflicts of interest, employ an outside expert as a consultant rather than an individual who has been elected to serve on the board of directors.

Many attorneys, accountants, and other professionals specialize in the nonprofit sector. These individuals possess specialized skills, experience, and networking contacts gained from working with other nonprofit organizations. More importantly, these individuals will be objective, outside observers without any personal interests in the organization. This enables them to provide unbiased feedback and a new perspective on the issue at hand.

Common tasks for which to seek the assistance of an outside consultant include:

• Program Development Assistance
• Assistance with State and Federal Compliance
• Board Development and Training
• Organizational Governance
• Fund Development
• Cash Management
• Program Evaluation
• Executive Leadership
• Mission-based Marketing
• Volunteer Coordination
• Strategic Planning Recommendations

I’m often asked by those new to the nonprofit sector what type of charity accounting and bookkeeping is necessary for churches and charities. My typical response is that is critical that nonprofit directors and executives develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic abilities in financial management begin in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure reliability in the accounting and bookkeeping process. Nonprofit administrators should learn how to generate financial statements and to analyze those statements to really understand the financial state of the nonprofit organization.

Diligent financial management of nonprofit organizations involves the use of financial statements as a management tool; the elements of an accounting system and identification of its best use; basic methods of internal controls and preparation for a third party audit; the budget cycle and annual filings. These aspects are indispensable to an organization’s finance and audit committee of the Board of Directors, and are essential in the oversight of the organization’s financial soundness.

Because each nonprofit organization faces different fiscal issues and has different fundraising ideas to bring to pecuniary functions, each organization will choose a different set of regular financial reports to prepare and analyze. At different times an organization will need different reports to provide information to support its decision making. The required reports will depend on several things, including the extent to which the organization is financially stable, the degree and extent to which the financial outlook changes during the period, the availability of resources to meet financial obligations, the availability of staff or other professionals to prepare reports, etc.

Common Monthly reports include:

• Statement of Position (Balance Sheet)

• Statement of Activities (consolidated) showing budget to actual information

• Departmental Income and Expense Statement showing budget to actual information

• Narrative report including tax and financial highlights, important grants received, recommendations for short term loans, or other means of managing cash flow

Common Quarterly reports include:

• Fundraising Reports; actuals vs. projections for donations; status report on all foundation proposals.

• Cash flow projections for the next six months

• Payroll tax reports

• Fee for service report showing number of fee-paying clients and revenue against projections.

Common Annual Reports include:

• Annual Federal forms, including 990 and Schedule A; State Reports

• Draft financial statements for year: Statement of Activities; Statement of Position; Income Statement for each program.

• Audited financial statements for the entire organization, including Statement of Position, Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses

• Management letter from the auditor

It has come to my attention, once again, that numerous small businesses are receiving correspondence from Corporate Compliance in their state. Operating under the guise of a government agency, a private business is distributing very official looking documents to the registered agents of small corporations claiming a need to file annual meeting minutes in order to remain in compliance with corporation statutes.

Attention folks: Such filing of annual meeting minutes is not an official requirement, and Corporate Compliance is not a governmental agency! They are simply hoping that they can trick as many small business owners as possible into believing that they need to do this filing, which of course requires the remittance of a hefty filing fee that is to be made payable to their company. Please be diligent in reading the small print in any mailing that you are not positive is from an official government agency. On the aforementioned mailings there should be a tiny disclaimer somewhere that mentions that they do not represent any government agency.

Now I’ve heard of this scam before but it had slipped my mind until a client recently phoned to inquire about its legitimacy. After doing some quick research on the web I’ve found from many other sources that these notices come under the ruse of a variety of agencies, including:

• (Enter Your state Here) Corporation Compliance
• Corporation Compliance Recorder
• Minutes and Compliance Affairs
• Compliance Annual Minutes Board

So please, I implore you, if you receive any such mailings requesting annual filings be sure to check for an official state seal, that the notice clearly states it is from the Secretary of State or Division of Corporations in your state. While there are annual filings required of corporations, these filings do not typically require submission of minutes and carry a minimal filing fee. If you have any question as to what annual filings are required for your corporation to remain in compliance don’t hesitate to check with an expert.

A volunteer is an essential asset to a nonprofit organization, and volunteer management requires an understanding volunteer needs and an application of strategies that address volunteer needs. Many nonprofit professionals rely upon well known motivation theorist when managing the needs of their volunteers. Specifically, I rely on Maslow’s hierarchy of needs to address the following needs.

Safety and Security Needs

Volunteer safety is a basic need that the organization has a legal and moral obligation to meet. Security as a volunteer is comprehensive. First, proper orientation and training will give your volunteers the confidence to feel secure in completing their assignments. Second, feedback from their supervisors will enhance this security. Additional security can be provided through flexible policies, grievance procedures, other benefits and/or insurance when necessary.

Social Needs

Many volunteers do so as a positive outlet for socialization. Belonging and love can be communicated to volunteers through social events, educational offerings, meeting, fundraising events, banquets, etc. Taking a personal interest in your volunteers, remembering their name and special things about them communicates that they are valued within the organization. Meeting these needs is most important in retaining a volunteer’s commitment to the organization.

Esteem Needs

Feelings of esteem and self-actualization are important, and can be enhanced through a variety of techniques. First, achievement can be in the form of promotions, or creation of a volunteer career ladder. Opportunities for achievement can also be provided through special projects that a volunteer coordinates or is responsible for. Remember that respect for volunteers and their work by all staff is a powerful tool for enhancing their feelings of esteem. Finally, special recognition of a volunteer’s efforts in a formal public venue, such as volunteer recognition events, newsletters or plaques can enhance esteem needs.

Everyone within the organization plays a part in retaining volunteers, and the Director of Volunteers must cultivate this attitude within the organization. Personal consideration of each volunteer’s needs and strategies will lead to a secure bond between your volunteers and the organization.

Once you have established the parameters for your organization’s volunteer program, you are ready to undertake the task of volunteer recruitment. Upon beginning to recruit volunteers, you must keep in mind the need for diversity within your program. To adequately reflect the needs of a diverse population, your volunteers should be a diverse group as well. It is important to reflect the community and the client base.

Another aspect of diversity for your consideration is the fact that volunteers have diverse needs that the organization will need to address. Most importantly, the organization will need to recognize the diverse time commitments that varying individuals will be able to make. Thus, volunteer opportunities need to have diverse time components.

Whether your organization is undertaking generic recruitment, a widespread call for all volunteers; or targeted recruitment, a request for individuals with a specific skill such as accounting, there are three techniques most commonly employed.

Individual Contacts- This is most effective on a one-to-one basis through a network of existing volunteers, professionals, or other key people within your community.

Organizational Contacts- This method involves the use of other organizations, such as volunteer centers, schools, service clubs, judicial systems, and online volunteer portals.

Media Contacts- The use of the media to recruit serves two purposes, to recruit volunteers and to create publicity for the organization and its role within the community.

Remember that once a potential volunteer has been recruited the real work begins. The recruitment process for the volunteer program should involve the following:

• An application form
• An interview
• Screening procedures
• Procedures for acceptance and rejection of potential volunteers
• A Volunteer Contract
• An orientation program
• An assignment procedure
• Development of a personnel file that includes all of the above

The next step will be retention of these valuable organizational resources…

In America, volunteers and volunteer organizations are a way of life. Volunteers give their time, talents, and treasures in many ways. Parents frequently volunteer to help at their child’s school, with extracurricular activities, or church groups. Children learn about volunteering from their parents, their teachers, and their peers as many public, private, and parochial schools require service of the students to foster civic responsibility. Young adults become involved in organizations to support their beliefs, such as ecology, literacy, or poverty reduction.

Whether yours is a startup nonprofit who is operating solely with the use of volunteers or an established entity with a paid staff who are complimented by volunteers, it is important that you view your volunteers as a valuable resource- a resource that requires maintenance and management. Volunteers as a resource can save the organization money and increase cost-effectiveness, while they expand the organization’s capabilities, improve the quality of service, and improve community relations. However, these advantages require a significant investment and commitment by the organization in time, money, and staffing.

In order to create a successful volunteer program, an organization must practice diligent volunteer management through the establishment of policies and procedures for the program. When creating your organization’s volunteer management program, remember to address the following policies:

• Recruiting volunteers
• Interviewing and screening for placing volunteers
• Orientation and training of volunteers
• Supervising and evaluating volunteers
• Retaining and recognizing volunteers
• Maintaining the records of the program
• Writing program reports
• Evaluating the program
• Advocating and educating the staff on the important roles of volunteers

While this may seem like a lot to undertake, it all comes down to what I think are the two most essential elements: recruitment and retention. More on that to come…