Cover: Nonprofit Kit For Dummies, 6th Edition by Beverly A. Browning, Stan Hutton and Frances N. Phillips

Title Page

Nonprofit Kit For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Nonprofit Kit For Dummies Cheat Sheet” in the Search box.

Introduction

It may sound corny, but we feel a certain sense of mission when it comes to nonprofits. We’ve started them, directed them, raised funds for them, consulted for them, volunteered for them, given money to them, and written about them. We’ve worked with nonprofits in one way or another for more years than we care to remember.

Why have we continued to work for nonprofit organizations? Yes, we care about others and want to see the world become a better place — our values are important to us. But, to be honest, that’s not the only reason we’ve worked for nonprofit organizations for so many years. We believe the reason is that we can’t think of anything more interesting or more challenging to do.

Starting a new program is exciting. Securing your first grant is thrilling. Working with the multifaceted personalities that come together on a board of directors is fascinating. Learning a new skill because no one else is there to do it is fun. Seeing the faces of satisfied clients, walking along a restored lakeshore, hearing the applause of audiences — all are gratifying.

That’s why we do it.

About This Book

We try to cover the gamut in this book — everything you need to know to start and manage a charitable organization, from applying for your tax exemption to raising money to pay for your programs. We include supplemental information at Dummies.com, including forms to help you create a budget, examples of grant proposals, and links to websites where you can find more help.

We also attempt to give you a bird’s-eye view of the economy’s nonprofit sector. When you look at financial resources, for example, nonprofits are much like the rest of the world: Most of the wealth is held by relatively few nonprofit organizations, a certain number of them are in the middle, and many, many more struggle to make ends meet.

Note: When we refer to nonprofit organizations, unless we say otherwise, we’re talking about organizations that have been recognized as 501(c)(3) nonprofits and are considered public charities by the IRS.

We try to be honest about the difficulties you’ll sometimes face. You probably won’t be able to achieve everything you set out to accomplish, and you’ll always wish you had more resources to do more things. Still, we can’t imagine doing anything else. Maybe you’ll feel the same way after you jump into the nonprofit world.

As you’re reading, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.

To make the content more accessible, we divided it into five parts:

  • Part 1: Getting Familiar with the Nonprofit Framework
  • Part 2: Bringing Your A-Game to Nonprofit Management
  • Part 3: Raising Funds Successfully
  • Part 4: The Part of Tens
  • Part 5: Appendixes

Foolish Assumptions

When writing this book, we made some assumptions about who may be interested in reading it. Here are some of the readers we imagined:

  • You have an idea that will help solve a problem in your community, and you believe that starting a nonprofit organization is the best way to put your idea into action.
  • You serve on a board of directors and wonder what you’re supposed to be doing.
  • You work for a nonprofit and need some ideas about fundraising, managing your organization, or working with your board of directors.
  • You’re simply curious about the nonprofit sector and want to find out more about it.

If you’re one of these people, we’re confident that this book will answer your questions and give you the information you’re seeking.

Icons Used in This Book

We use the following icons throughout the book to flag particularly important or helpful information.

Remember The Remember icon emphasizes important information that you should be ready to put into practice.

Technicalstuff You may not need this technical stuff today (and can skip over it), but — who knows? It may be invaluable tomorrow.

Tip This icon is posted next to little hints and suggestions gleaned from our experience over the years. Put these ideas to good use to save yourself some time, energy, or money.

Warning Warnings are just what you think they may be. We alert you to information that can help you avoid problematic situations.

Beyond the Book

In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the free Cheat Sheet for a list of steps that are necessary for securing nonprofit status from the IRS, a rundown of the roles and responsibilities of people who sit on the board of directors for a nonprofit organization, and ideas for raising money for your nonprofit organization. To get this Cheat Sheet, simply go to www.dummies.com and type Nonprofit Kit For Dummies Cheat Sheet in the Search box.

You can also go to www.wiley.com/go/nonprofitkitfd6e for samples, forms, and lists of helpful websites. We mention many of these files within the chapters; we also include a file of web resources for most chapters. All digital files are labeled with the chapter number and the order in which the element appears in the chapter. For instance, the first digital file in Chapter 2 is labeled File 2-1. For a complete list of digital files, turn to Appendix B, at the back of this book.

Where to Go from Here

One of many handy features about this book is that it’s modular, which means you can start reading anywhere you like! If you’re new to the nonprofit world, we suggest beginning with Chapter 1, where you find fundamental information to get you moving in the right direction. If you’re familiar with nonprofits already but want to better understand your responsibilities as a board member, you can find the answers you need in Chapter 7. If you’re a new board member and want to understand the organization’s finances when spreadsheets are passed out at board meetings, we provide guidance about making a budget and understanding financial statements in Chapter 12. If you need help to publicize and market your programs, we offer some suggestions in Chapter 13.

If you’re like many nonprofit workers or volunteers, you want to know how to find and obtain money for your organization. Part 3 covers this topic, so those chapters are good places to begin.

Whether you’re new to the nonprofit world or a seasoned professional, we think you’ll find helpful and valuable information in this book to get you started or continue your good work.

Part 1

Getting Familiar with the Nonprofit Framework

IN THIS PART …

Peek inside the structure of a nonprofit organization and how nonprofits compare to for-profits.

Get an inside glimpse at what it takes to start a nonprofit organization.

Learn why building your board of directors is the first priority.

See what goes into a mission statement and vision statement and follow some pointers on how to write these two upfront organization-driving documents.

Discover what you need to do to incorporate your new nonprofit. After that task is completed, apply for tax-exempt status from the IRS.

Make sure you maintain your nonprofit status by filing the required IRS reports.

Chapter 1

Journeying into the World of Nonprofit Organizations

IN THIS CHAPTER

Bullet Defining the nonprofit sector

Bullet Getting started with a nonprofit

Bullet Encouraging volunteerism

Bullet Acquiring the resources your nonprofit needs

It’s a typical day in your hometown. Your alarm wakes you from a restful sleep and you switch on your radio to hear the latest news from your local public radio station. You hear that a research institute’s study reports that economic indicators are on the rise and that a health clinic across town is testing a new regimen for arthritis. Plato, your golden retriever/Labrador mix, adopted from the animal shelter when he was 5 months old, bounds onto your bed to let you know it’s time for breakfast and a walk. Plato is followed by Cynthia, your 4-year-old daughter, who wants to help you walk Plato before she’s dropped off at her preschool housed in the community center. You remember that you promised to bring canned goods to the food bank that’s next-door to Cynthia’s school. You haven’t even had coffee yet, but already your morning is filled with news and services provided by nonprofit organizations.

You know that your public radio station is a nonprofit because you hear its pledge drives three or four times a year and you volunteer a few hours each month for the food bank, so clearly it’s a nonprofit. But you may not know that the research institute is probably a nonprofit organization, just like the health clinic where the arthritis research is being tested and the animal shelter where you found Plato. Cynthia’s preschool and the community center where the preschool rents its space are likely nonprofit organizations. Whether you realize it or not, all of us — rich, poor, or somewhere in between — benefit from the work of nonprofit organizations every day.

Nonprofits find revenue from a variety of sources in order to provide services. Because most nonprofits serve a need in the community, tax-deductible donations are an important revenue source. Sometimes nonprofits charge a fee for the service they provide or the work they do. Other nonprofits may sign contracts with your city or county to provide services to residents. Usually, nonprofit organizations scrounge up their income from a combination of all these revenue sources.

The nonprofit sector isn’t a distinct place — it isn’t some plaza or district that you come upon suddenly as you weave your way through the day. It’s more like a thread of a common color that’s laced throughout the economy and people’s lives. No matter where people live or what they do, it’s not easy to reach the end of a day without being affected by the work of a nonprofit organization.

Perhaps your lifelong goal is to find a way to help others in your community, your state, your country, or the world. (If this statement is true of you, thank you, kind citizen.) You think about your options every day, but you haven’t the foggiest notion about the next steps to take to help you reach this admirable goal. You have so many topics to research and tasks to determine how to complete — and so much necessary funding to nail down to help you get started. Think of this chapter as the beginning of the journey. Here we help you understand exactly what a nonprofit organization is and how to start and manage one.

Tip Check out File 1-1 at www.wiley.com/go/nonprofitkitfd6e for a list of web resources related to the topics we cover in this chapter.

What Is a Nonprofit Organization?

People hear the term nonprofit and picture a different type of business where the owner isn’t allowed, by tax law, to make a profit or draw a paycheck. But, in fact, some nonprofit organizations end their fiscal year with a profit, and that’s good because surplus cash (also referred to as reserves) keeps a nonprofit operating in the black versus the red.

Comparing for-profits to nonprofits

Remember The main difference between a for-profit corporation and a nonprofit corporation is what happens to the profit. In a for-profit company like Amazon, Google, United Parcel Service, or your favorite fast-food chain, profits are distributed to the owners (or shareholders). But a nonprofit can’t do that. Any profit remaining after the bills are paid has to be plowed back into the organization’s service programs, spent to strengthen the nonprofit’s infrastructure, or stored in reserve for a rainy day. Profit can’t be distributed to individuals, such as the organization’s board of directors.

What about shareholders — do nonprofits have any shareholders to pay off? Not in terms of a monetary payoff, like a stock dividend. Rather than shareholders, nonprofit organizations have stakeholders — they’re the people who benefit from the nonprofit’s mission and services to their target population (those in need, from animals to humans). These people are often called stakeholders because they’re committed to the success of the nonprofit, such as board members, volunteers, community partners, and the people whom the nonprofit serves directly and indirectly.

Introducing the coveted 501(c)(3) status for nonprofits

When we use the term nonprofit organization in this book, for the most part we’re talking about an organization that has been incorporated (or organized formally) under the laws of its state and that the Internal Revenue Service (IRS) has classified as a 501(c)(3) and determined to be a public charity. If the term 501(c)(3) is new to you, add it to your vocabulary with pride. In no time, “five-oh-one-see-three” will roll off your tongue as if you’re a nonprofit expert.

Technicalstuff Private foundations also have the 501(c)(3) classification, but they aren’t public charities. They operate under different regulations, and we don’t cover them in this book.

Other kinds of nonprofit organizations do exist; they’re formed to benefit their members, to influence legislation, or to fulfill other purposes. They receive exemption from federal income taxes and sometimes relief from property taxes at the local level. (Chapter 2 discusses these organizations in greater detail.)

Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law. They are, with minor exceptions, the only group of tax-exempt organizations that can receive contributions that are tax-deductible for their donors.

The Internal Revenue Code describes the allowable purposes of 501(c)(3) nonprofit organizations, which include serving religious, educational, charitable, scientific, and literary ends.

Tip Check out File 1-2 at www.wiley.com/go/nonprofitkitfd6e for a more-detailed list of the activities that 501(c)(3) nonprofits take on.

Remember Being a nonprofit organization doesn’t mean that an entity is exempt from paying all taxes. Nonprofit organizations pay employment taxes, employee salaries, and wages just like for-profit businesses do. In some states, but not all, nonprofits are exempt from paying sales tax and property tax, so be sure that you’re familiar with your jurisdiction’s laws and nonprofit reporting requirements. Also, check with the appropriate office in your state to see whether you’re required to apply for a state tax exemption or a license to solicit funds.

Knowing Your Mission Before Entering the Nonprofit World

People form nonprofit organizations in order to work toward changing some condition in the world, either for a specific group of people or for society in general. The overall goal or purpose of a nonprofit is known as its mission. Taking the time needed to clearly outline a nonprofit’s mission is time well spent because the mission guides the activities of the organization, helps the nonprofit’s directors decide how to allocate resources wisely, and serves as a measure for evaluating the accomplishments of the group. We think developing a mission statement is so important that we devote an entire chapter (see Chapter 4) to guiding you through this process.

You must also examine your personal mission before launching a nonprofit. You’re creating a legal entity that has responsibilities for reporting to both the state and federal governments. If the organization grows to the point where you must hire employees, you’re responsible for paying regular salaries and providing adequate benefits. And although you can be compensated for your work as a nonprofit staff member, you can’t develop equity in the organization or take away any profits at the end of the year. Chapter 2 has more information to help you make this important decision.

Setting up a nonprofit

Nearly all nonprofit organizations are established as corporations under the laws of a particular state. If you’re located in Iowa and you plan to do most of your work in that state, you follow the laws in Iowa to set up the basic legal structure of a nonprofit corporation. Although you’ll find some differences from state to state, in general, the process requires writing and submitting articles of incorporation to the state and developing bylaws, the rules under which the corporation will operate.

After your nonprofit is established under your state laws, the next step is applying for 501(c)(3) status from the IRS. This step requires completing and submitting IRS Form 1023 or Form 1023-EZ. If you submit Form 1023, you will need to specify in some detail the proposed activities of the new organization, and you’re asked for projected revenue and expenses for the year in which you apply and two years into the future. To be honest, you can’t complete this form in one afternoon. It requires substantial time and thought to develop the necessary material and should be reviewed by an accountant and legal representative before filing. We discuss the incorporation and IRS application process in Chapter 5.

Making plans and being flexible

After you start managing a nonprofit organization, you’ll discover that planning is your best friend. Every task from budgeting to grant-writing requires that you make plans for the future. This continuous planning process for nonprofit leaders (founders and board members) is called strategic planning. And you need to do a substantial amount of strategic planning before you’re ready to send in your IRS application for tax exemption.

Don’t be frightened by this recommendation to plan strategically early on in the nonprofit formation process. The act of strategic planning fundamentally comes down to thinking through what you’re going to do as well as how and when you’re going to do it and writing it down. Your strategic plan becomes the map that guides you toward achieving your nonprofit’s mission, vision, and goals. Strategic planning is something you should pay attention to every day.

Remember You should always begin with a strategic plan, but that doesn’t mean that the original plans shouldn’t be altered when the situation calls for it. Circumstances change; flexibility and adaptability are good traits to nurture if you’re running a nonprofit organization. Chapters 8 and 12 cover strategic planning and budgeting. Chapter 9 addresses how to evaluate your work and know whether your plans are achieving the results you want to see. Chapters 13 and 14 discuss planning for marketing and fundraising.

Embracing and Sharing Your Inspiration

The nonprofit sector is exciting. It encourages individuals with ideas about solving social problems or enhancing arts, culture, the environment, or education to act on those ideas. It creates a viable place within our society and economy for worthy activities that have little chance of commercial success. Nonprofit organizations combine the best of the business world with the best of government social-service programs, bringing together the creativity, zeal, and problem-solving from the business side with the call to public service from the government side.

Speaking from experience, volunteerism is inspiring. Everyone has heard stories of tightly knit communities where neighbors gather to rebuild a home that was lost to a fire or a hurricane. That spirit of pitching in to help is the best part of living in a community in which people share values and ideas.

Communities have become more diverse and are populated with neighbors who come from a wide variety of places and cultures. The nonprofit sector provides institutions and opportunities where everyone can come together to work toward the common good. Volunteerism gives everyone the chance to pitch in to rebuild “the house and make it a home again.”

Applying the term voluntary sector to nonprofit organizations came about for a good reason. The US Census Bureau reported that 77.3 million people volunteered at least once in 2020.

When you’re working in a nonprofit, you’ll likely be supervising volunteers — and they’ll likely supervise you. What we mean is that (with few exceptions) nonprofit boards of directors serve as unpaid volunteers. And if you’re the executive director, your supervisors are the trustees or board members of the organization. At the same time, you likely depend on volunteers to carry out some or all of the activities of the organization. You may serve as a volunteer yourself.

Remember The word supervision sounds harsh, and we don’t mean to suggest that nonprofits are or should be run with an iron hand. The board of directors does have ultimate responsibility, however, for the finances and actions of a nonprofit organization, and, therefore, people serving in that capacity have a real duty to make sure that the organization has sufficient resources to carry out its activities and that it’s doing what it’s supposed to be doing.

We prefer to think of nonprofits as organized group activities. You need to depend on others to reach your goals, and they need to depend on you. We talk about boards of directors in Chapter 7 and working with volunteers in Chapter 10. If your nonprofit employs paid staff or hopes to someday, Chapter 11 provides some guidance in hiring and managing employees.

Finding the Resources to Do the Job

One distinctive feature of the nonprofit sector is its dependency on contributions. We devote many pages of this book — most of Part 3 — to advice about getting contributions from fundraising.

Gifts from individuals of money, goods, services, time, and property make up the largest portion of that voluntary support. This portion, which is also the oldest of the voluntary traditions in the United States, dates back to colonial times. Since the late 19th century, private philanthropic foundations have emerged as another source of support, and more recently — particularly after World War II — the federal government and corporations have become important income sources. Earned income from fees for service, ticket sales, and tuition charges also is an important revenue source for many nonprofits; in fact, in 2013 nearly three-quarters of the revenues for public charities was earned.

Who is giving to nonprofit organizations?

Among private, nongovernmental sources of support, gifts from living individuals — as opposed to bequests from people who have died — have always represented a large portion of total giving, but philanthropic giving by foundations and corporations has been growing. According to the Giving USA Foundation, in 2019 corporations represented the largest portion of total giving and the COVID-19 pandemic is furthering this trend. This resulted in corporations giving the largest share of nonprofit sponsorships and grants. For new nonprofit organizations, the best fundraising strategy is to take a balanced approach that includes multiple forms of contributions.

Supporting your mission with fundraising

Nearly every nonprofit organization depends on generous donors for the cash it needs to pay its bills and provide its services. Even if you have income from ticket sales, admission charges, or contracted services, you’ll find that raising additional money is necessary to keep your organization alive and thriving.

Corporate contributions are the largest source of contributed income to nonprofit organizations. But you can’t just sit and wait by the mailbox for the donations to begin arriving. How will contributors even know that your new nonprofit is up and running, providing services? Two basic rules of fundraising are that potential funders need to be asked for donations and thanked after giving one. Chapter 15 focuses on raising money from individuals, Chapter 16 covers raising money with special events, and Chapter 19 discusses campaign fundraising, which is used when you need to raise extra money for your building or your endowment.

Grants from foundations and corporations make up a smaller percentage of giving to nonprofits, but their support can be invaluable for start-up project costs, equipment, technical support, and sometimes general operating costs. Some organizations get most of their income from foundation grants; others get very little. Chapter 17 introduces you to resources to help you find potential grant sources. Chapter 18 walks you through the process of crafting a grant proposal.

Fundraising works better if people know you exist. That knowledge also helps draw people to your theater or to sign up for your programs. Here’s where marketing and public relations enter the picture. Chapter 13 helps you figure out what your message should be and how to circulate it to the world.

Remember Make no mistake about it: Fundraising is hard work. But if you approach the task with a positive attitude and make your case well, you can find the resources you need.