Part I: Starting a Nonprofit in Arizona – Laying the Groundwork

I receive several calls a week from people who want to start a new non-profit. Looking back on my legal career, I realize that many of the tax-exempt organizations I helped to create early on never got off the ground. Today, I consider it part of my responsibility to the potential new client and to the sector to educate would be founders on the realities of the marketplace. What follows is a walk through the typical discussion that I have with potential founders.

1.   Does the Idea Have an Exempt Purpose? Not every good idea is something that will qualify for tax-exempt status. Examples include: making investments in start-up companies; providing benefits limited to a relatively small and defined class; and ideas for businesses that are indistinguishable from for-profits except that they commit to contribute profits to charity, just to name a few.

2.   Running a Charity is a Competitive Business. Starting a nonprofit is a lot like starting a business. Rather than looking to access investors in the capital markets, charity start-ups are looking to access donors in the philanthropic markets. Would be founders need to know that there are already 1.4 million charities in the United States and competition for philanthropic dollars is fierce and grants are the smallest and most competitive piece of the philanthropic funding pie.

3.   Survey the Landscape. Today’s funders strongly discourage duplication of services. To get a realistic idea of your chances of attracting funding, research other non-profit organizations that are similar to the organization you propose. If there are others filling the niche and filling it well, do you have a plan to deliver the service in a new, innovative way? If you can’t differentiate your organization, it is going to be very difficult to attract philanthropic support.

4.   Do Your Homework. To obtain 501(c)(3) status, non-profits have to present the IRS with a detailed business plan. A business plan is not a mission statement. It is a statement that answers what you plan to do, when, where, how, by whom, for how much and with what funding. The IRS will also want to see a qualified and mostly independent board of directors. This can present a frustrating chicken and egg problem for many would be founders. If you can’t answer these questions in detail, consider whether you are really ready to start a non-profit.

5.   Consider Alternatives. The cost in both time and resources to create and maintain a new non-profit can be daunting. Alternatives to creating a new entity include:
• partnering with an existing organization as a volunteer or fundraiser;
• creating a donor advised fund;
• finding an established charity with a related purpose to act as a “fiscal sponsor” of the project; or
• starting a chapter of an established national organization.

After discussing the above, if the potential founder is still ready to proceed, the next step is to review the actual mechanics of creating the organization and applying for tax-exempt status. This is the topic of Parts II and III.

6 Responses to Part I: Starting a Nonprofit in Arizona – Laying the Groundwork

  1. Thank you Ellis for creating a balanced view of starting a nonprofit. You've given some important food for thought to those considering such a move.

  2. Nice article, Ellis. Much needed. Regarding #2 – starting a nonprofit isn't "like" starting a business. It IS starting a business and the same need for market research is critical. Also, I agree with you that grants are the most limited and most competitive piece of the funding pie. As a fundraising professional for the past 14 years, I too hear from would-be founders who ask me for advice and many (if not most) assume that grants are the best place for startup funding. As you mention, that's not likely to be the case.

    I look forward to part 2!
    Best wishes and keep up the good work.
    Dee

  3. Good list! People rush in just because they want to do some good. That is laudable but starting a nonprofit needs just as much "realism" as starting a business, maybe more.

  4. Ellis, loved this article. Wish I had read it, and had this information three years ago. Loved the idea of ” starting a chapter of an established national organization.” Duh! never thought of that. Can’t wait to read part II.

    I am hear to tell starting a non profit takes over your life, hope it gets better.

  5. Great piece, Ellis!

    I would add: Do you really want to found an organization that will ultimately not be yours, as an owner? You’ll be giving control of the organization’s future over to a board of directors. This is hard for a lot of founders, and I’ve met many people who didn’t understand that this is what they were going to be doing in starting a nonprofit.

    Most founders will still say yes, but it’s a question they ought to be thinking about.