Understanding Nonprofits
In our world, there’s no shortage of ways to contribute positively. This can take many forms, from a group of neighbors coming together for community disaster planning to existing organizations working on voter registration or even a community coffee shop training youth for employment. Among these avenues for social good, forming a nonprofit is a popular choice for those looking to have a structured impact on a cause they care deeply about.
So, what exactly is a nonprofit? Simply put, a nonprofit is an organization established to serve the public or a specific community interest. Unlike for-profit entities, nonprofits don’t have owners or shareholders and are not established to generate profit for their organizers. In Washington State, for example, creating a nonprofit requires filing with the Office of the Secretary of State.
It’s a common misconception to equate nonprofit status with tax exemption. However, while nonprofit status is determined at the state level, obtaining tax exemption is a federal matter. A nonprofit may choose to apply for federal tax-exempt status, which, among other benefits, allows donations to be tax-deductible and exempts the organization from certain taxes.
Nonprofits can vary greatly in form and function, each with its unique focus and operating structure. However, there are some key distinctions between nonprofits and for-profit entities, including ownership, profit distribution, volunteer involvement, and governance. These differences highlight the nonprofit sector’s unique role in our communities, driven by mission rather than profit.
Reflection Before Starting
Before forming a nonprofit, it’s crucial to pause and consider whether this is the right path for your goals. Like startups, many new nonprofits face the challenge of sustainability. The reasons for these challenges vary, but they underscore the importance of careful planning and community support. While creating a nonprofit can be an effective way to serve your community, there are also other, less demanding ways to contribute that you might consider.
Nonprofits play a vital role in our communities, fostering mutual support, protecting rights, and enhancing quality of life. If you’re drawn to starting a nonprofit, know that it begins with a small group of dedicated individuals committed to making a difference. Whether your organization remains small or grows to become a cornerstone of the community, your efforts are valuable and appreciated.
Considering Alternatives
For those looking to make a difference without forming a new nonprofit, there are several alternative approaches to consider. These alternatives can offer a way to engage in community work with less need for governance and administrative overhead. Options include:
- Fiscal sponsorship, which allows you to operate under the umbrella of an existing tax-exempt organization.
- Collaborating with an existing nonprofit working in the space is another avenue that can provide support and structure for your charitable efforts without the need to establish a new nonprofit entity.
- Working with a community foundation to establish and operate through a donor-advised fund.
The Importance of Formality
Realistically, these alternatives don’t work for every scenario. If you decide that forming a nonprofit is the right choice for you, it’s important to understand the implications of formalizing your organization. This includes managing finances responsibly and protecting yourself and others from personal liability. Formalization brings structure and credibility to your organization, protects you and your fellow board members from liability, and enables you to fulfill your mission effectively while adhering to legal and ethical standards.
Making Early Decisions
Deciding to form a nonprofit involves several key considerations, from defining your mission to determining the composition of your board and whether your organization will have members. These decisions lay the foundation for your nonprofit and guide its direction and governance. Additionally, deciding on whether to seek tax-exempt status as a 501(c)(3) organization is a significant step that can influence your organization’s funding and operations.
Each chapter in this journey reflects a commitment to making a positive impact in your community. As you navigate the complexities of forming and running a nonprofit, remember the core motivation that brought you here: a desire to serve and make a difference.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C., licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.