There are huge needs in society for food, shelter, education, and more; and there are many people who cannot access these fundamental necessities and requirements. In the United States, the 501(c) (3) nonprofit corporation is designed to help address this situation (this designation refers to the relevant section in the tax code).
A 501(c) (3) is a tax-exempt legal structure that can receive charitable donations from individuals, businesses, the government, and philanthropic foundations. Examples of well-known nonprofit corporations include the Boys and Girls Clubs, the YMCA, and the Sierra Club. People who donate money to not-for-profits benefit from their generosity by knowing that they are making a gift to a cause in which they believe. Also, they are able to deduct these contributions from their taxable income.
In the United States, close to 1 million organizations were registered with the IRS as public charities in 2007, compared with 600,000 in 1993. Charitable donations rose from $148 billion to $308 billion in the same period, accounting for about 22 percent of total revenues in 2007. Whereas competition for financial resources has increased, more technical and educational resources are now available to support the management and growth of organizations that choose to incorporate as nonprofits.
Like any business, a not-for-profit will need to generate revenue to cover its expenses. Failure to meet cash requirements will mean a failure to survive. A not-for-profit needs to identify a target market (constituency) and determine how it will deliver its products and services. Some key differences and considerations exist, however, and you should be aware of them before you apply to the IRS for approval:
No individual can own a not-for-profit organization: A nonprofit cannot be bought and sold like other businesses. You would not be able to dissolve the company and sell it for financial gain. Nor could you issue stock to raise money. These organizations are meant to improve society, not create wealth for the founder, shareholders, or employees.
Nonprofits are mission-driven: Before you can operate as a nonprofit, you will need to be crystal clear about your organization’s mission. What problem(s) are you trying to solve? The IRS will not grant tax-exempt status without such a stated mission and considerable additional information. Also, ask yourself if there is another organization that is working toward the same goal. Could you work together rather than creating a new entity and duplicating services and costs? Is there a large enough donor base and grant supply to combine with earned income for sustainability? Also, do you expect the organization to accomplish its mission in the foreseeable future and thus cease to need resources?
Define your unit of change: In a for-profit business, the return on investment is calculated by looking at the corporation’s financial records. Not-for-profit entrepreneurs think about returns a little differently. Not-for-profits do not exist to make money, so the ultimate measure of success will not be financial, although financial goals and measures are part of the equation. Your ROI will be based on how much it will cost you to provide your services, as compared with the level of change that was brought about as a result of this investment.
Determine how you will evaluate your success: As a not-for-profit entrepreneur, you will need to set goals regarding the changes you wish to effect. How many homeless people will you feed? How many students will graduate as a result of your dropout-prevention program? What changes in knowledge, skills, or attitudes will result from the efforts of your organization? The output and outcome goals you establish must tie back into your financial and human-resource inputs. How much does it cost to provide these services? Given the costs, how many “units of change” did your organization achieve? How can you document that your organization brought about these changes?
Analyze your financing strategy: Nonprofit corporations borrow money and earn it. They also have access to a revenue stream that other business structures cannot tap. Nonprofits generate revenue through grants and gifts (donations) from individuals and organizations, but they cannot sell stock to raise equity.
Learn more about non-profit and other kinds of organizations only at the London School of Business and Finance.