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Starting A Nonprofit: Common Mistakes For Starting A 501(C)(3)

Each year, thousands of individuals set out to start a nonprofit organization. These people are undoubtedly passionate about their cause and truly want to make a difference in their communities. Unfortunately, many individuals when starting a nonprofit organization fail to fully develop a well-structured plan for the mission and vision of the organization.

Nearly all start-up nonprofit organizations wish to be tax-exempt as well, so the terms are often confusing to the general public. Many charitable organizations, for example, are nonprofit organizations and are recognized by the federal government as being tax-exempt under 501(c)(3). However, becoming a nonprofit and becoming tax-exempt are different processes, done at different times, and by different government agencies. In addition, there are a total of twenty-seven exemptions that exist under the federal tax code for different purposes, and some organizations might find one of them more appropriate than others.

Keep in mind that starting a nonprofit can be very complex and requires a unique set of knowledge, skills, and abilities to be successful. Just having a passion about a cause is simply not enough. By avoiding these common mistakes, a nonprofit can succeed.

Common Mistakes Nonprofit Start-Ups Make Include:

Lack Of Planning And Research

Research and planning are essential to starting a nonprofit organization. Most nonprofit start-ups don’t realize that operating within the nonprofit sector requires a lot of work and dedication from all parties involved. In addition, you need to ask yourself some key questions to ensure that the mission and vision qualify and if the needs of your cause can be addressed by the programs or services the nonprofit will provide.

Not Registering Properly

Registering a nonprofit is required in all states. Some individuals are under the impression that because they are a nonprofit organization, they are not required to file. That is a misconception; you will need to file to become legal as nonprofit organization in your state and in most states you will also need to file a state tax exemption, and charitable solicitation registration to be able to legally solicit donations from individuals and businesses in the state.

In addition to filing at the state level, you will also be required to file with the IRS if you would like the nonprofit to be tax exempt and tax deductable under the IRC 501(c)(3). Just because you are a nonprofit at state level, you are not exempt from paying federal taxes unless you file the correct documents.

A Nonprofit Must Fall Into One Of These Categories:

•Religious

•Charitable

•Scientific

•Testing for public safety

•Literary

•Educational

•Fostering amateur sports

•Prevention of cruelty to children or animals

Is It A Public Charity Or Private Foundation?

If your mission falls under one of the allowable purposes of the 501(c)(3), then you will need to determine the classification of your organization. Organizations typically will fall into either the category of public charity or private foundation.

Public Charities

Public charities are typically the most common type of 501(c)(3). Public charities may accept donations, which will be tax-deductable. Individual donors can donate up to fifty percent of their income and corporations can donate up to ten percent of the revenue before being taxed on donations.

These types of charities are governed by a majority unrelated board of directors. The IRS will heavily follow these types of organizations to ensure that they are following their strict criteria. In addition, the IRS will require that public charities obtain the majority of their funds through fundraisers and donations from the public. Some examples of Public charities include educational, religious, charitable, and animal welfare organizations.

Private Foundations

Private foundations will fall into two categories: either non-operating or operating 501(c)(3) foundation depending on if there are active programs offered, like a public charity. Typically with both types of foundations the board of directors, individual, or family will fund the organization.

Family foundations are the most common type of private foundation and these types of organizations can donate a maximum of thirty percent of their income without having to pay federal taxes. The majority of private foundations are grant giving organizations that will support other charities with similar missions and visions, at times they will also award individuals with funding.

Next Steps

Once you determine which category of the 501(c)(3) your organization falls under, you will need to complete a 1023 application with the IRS and pay the required fees. Prior to submitting the 1023 application you will need to ensure that your Articles of Incorporation or Charter has been filed at the state level and that the nonprofit has adopted Bylaws and a Conflict of Interest policy.

Once approved a nonprofit must be familiar with all processes and procedures, and be prepared for detailed reporting on an annual basis.

In addition to such forms, you may have added filings that need to be submitted. A charity registration is required to be submitted in a majority of states. This form allows your business to hold fundraising events also to solicit for funds in your own state. Additionally, some states require that a state tax-exemption form is filed. Lastly, some states possess the choice of submitting a sales-tax exemption form.

Not Having An Effective Team On The Board Of Directors

In any business, your leadership is crucial to being successful and the same goes with a nonprofit organization. Your board of directors should be as passionate about the cause and population you are serving. In addition, the members on the board should be individuals who have influence, connections to funding, integrity, and expertise in a specific skill that is essential to the nonprofit organization and its mission. 

It’s not uncommon for the initial board of a nonprofit organization to be made up of the founder’s friends and advisers. But that can set a precedent for filling future vacancies with other friends and advisers, creating a board to become stagnant instead of diverse. As with a for-profit organization, board members of diverse backgrounds and skills provide what every organization needs to do and be its best with a variety of valuable perspectives.

Communication Is Key

It is important that the board of directors communicate and participate in board meetings. The IRS requires that a nonprofit board meet at least once per year at a minimum to discuss the programs and budget of the organization. Make sure to maintain copies of the corporate minutes of all board meetings (and committee meetings for committees that are authorized to act on behalf of the board, such as an executive committee).

It’s highly recommended that the board of directors meet more than once per year to discuss any issues or changes with the organization. By having frequent meetings it helps to keep everyone involved in the nonprofit.

It’s crucial that board of directors never lose sight of why they’re there, to guide the executive director or chief executive and provide oversight and strategic direction. Boards should set or review organizational priorities regularly, and come to a consensus on actions and a timeline for each. The board should also implement formal processes for evaluating organizational performance, ensuring that resources are well spent.

Not Having The Financial Support Or Knowledge

A common misconception made by many individuals when starting a nonprofit organization is that getting donations and funding will be as easy as 1, 2, 3, just because you are a charitable organization. Remember that you are just one out of 1.5 million 501(c)(3) nonprofit organization seeking funding in the United States.

So I’m sure you’re asking yourself, “How will my nonprofit organization survive and be sustainable?” Begin with creating a solid fundraising or funding plan that will guide the organization in the right direction. Allocate some resources to fundraising events or activities in your community. Don’t be scared to ask for donations from local businesses, friends, family members, co-workers, and anyone who will listen about the nonprofit. Prepare yourself for rejection, but if you don’t ask most likely people and businesses won’t give.

Lacking A Proper Donor Communication Strategy

Another major mistake start-up or existing nonprofit’s make is failing to establish a strong communication strategy to engage with donors and supporters. Without it, connecting and getting your message across becomes difficult. Communication strategy is vital to make your donors feel valued and influence their decision to support your cause. Make sure to utilize email, text messages, social media, and your nonprofit’s website for maximum exposure.

Once you have a donor’s attention, engage the donor and build the relationship. Focus on getting them to attend your events. Ask for suggestions and participation in volunteer work. Make them feel like a part of your team. Building strong relationships with both donors and volunteers are crucial to the nonprofit’s success. Don’t assume that donors and volunteers know everything about the nonprofits mission. Make good use of every opportunity you get to give them the full story about the challenges your organization addresses and how they can be part of making a change.

Create opportunities to meet with your donors in person. Invite them to come to your nonprofit’s events so they can see firsthand what your organization is doing. Always acknowledge donations quickly after they’ve been received. While you can use an automated system to send out thank you notes to most donors who contribute small amounts, write a personal letter to larger donors and include an invitation to an event or let them know what their donation means to the organization. Make sure your executive director signs the letter.

Conclusions

Remember, effective communication is at the root of every nonprofit’s operations and efforts. Without it, there’s no good way to get a message across to your donors and volunteers day to day. Therefore, before deciding to become a nonprofit organization or tax-exempt organization, or both, it’s a good idea to sit down and study all possibilities with an expert. Together you can decide on the type of exemption that best meets your organizations needs.

If you are not sure whether your organization is a nonprofit startup or meets the requirements to become a tax-exempt organization with the IRS, please contact the offices of CharityNet USA to speak to one of our nonprofit experts at 407-857-9002 or info@bizcentralusa.com.  We can help guide you and your organization in the right direction.

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