Sometimes collaborations do not go smoothly. This post summarizes some of the pitfalls and lessons learned when a nonprofit tried to acquire a struggling nonprofit for all the right reasons, but the effort ended up being more trouble than it was worth.
Case study of successes, disappointments and lessons learned from a successful merger of two human service organizations.
The well-meaning have been advising exempt organizations to operate like a business for years. If the organization is a Section 501(c)(3) organization, operating too much like a business can cost it its tax-exempt status due to the Commerciality Doctrine. Practically, the issue of commerciality usually arises when a tax-exempt organization engages in any endeavor for which a clear for-profit counterpart exists in the marketplace. Typical examples include publishing, consulting and sales of arts and crafts. Today, the Commerciality Doctrine is a threat to the increasingly popular movement toward social enterprises. Those that choose to organize as Section 501(c)(3) organizations should only do so after a thorough review of the Commerciality Doctrine.
The Bad News About the Arizona Corporation Commission Changes Recent reductions in the Arizona Corporation Commission’s budget are impacting nonprofit corporations doing business in Arizona
Asks Forgiveness, Not Permission. I receive calls from nonprofit CEOs who are struggling with their boards. I am also asked by boards to intervene when there is a an issue with the CEO. What I have learned is that great CEOs do not overly confer with the Board. Instead, great CEOs understand that it is their job to implement the Board’s strategy within the scope of the strategy, policies, and budget the Board has set. Too much checking-in can have the unintended consequence of inviting the board to micro-manage. Conversely, scribbling too far outside the lines of the board approved strategy, policies, and budget can get a CEO fired.
Private foundations are subject to a more strict regulatory regime than public charities. There are penalties for “self-dealing” transactions, failure to distribute sufficient income for charitable purposes, holding concentrated interests in business enterprises, making risky investments, and for making certain types of expenditures.
As the recession deepens, we get more and more creative ideas from people wanting to conduct complex raffles. In Arizona, the most popular questions this year involve raffles of real estate. While raffles can be great revenue generators for charitable organizations, many charities do not realize that in most states, including Arizona, raffles are illegal gambling. Cautionary tales abound. Most states have specific exceptions for charitable raffles but require the charity and the raffle to meet specific criteria to qualify.
Boards are entitled to delegate tasks to committees, officers, staff, or in certain cases, professionals, but only if they perform sufficient oversight. Oversight is commonly exercised through policies and procedures so long as the board ensures that the policies and procedures are actually followed. Common oversight mechanisms include review of financial statements and the annual Form 990 as well as the implementation of various governance policies.
Forming a nonprofit corporation is not the same as being tax-exempt. To obtain 501(c)(3) status, newly formed entities must apply to the IRS for a formal determination of exemption. Entities seeking 501(c)(3) status apply by filing Form 1023. (Entities seeking exemption under other sections of 501(c) file Form 1024.)
Newly formed organizations applying for exemption face a chicken and egg dilemma. Form 1023 requests considerable detail regarding the charity’s planned programs and activities. The attitude of the IRS is that requiring applicants to articulate detailed plans is a small price to pay for the significant tax benefits associated with 501(c)(3) status.
Once a non-profit founder has surveyed the non-profit landscape and found a legitimate need, recruited an initial board, created business and fundraising plans, and scraped together some start-up funding, he or she is ready to proceed. In Arizona, it usually makes the most sense to form the entity as an Arizona non-profit corporation. The steps required to form a nonprofit in Arizona are covered.
Most states require you to register your organization if you solicit donations from their residents. Many states also require registration if your organization collects substantial or ongoing donations from their residents, even if you aren’t specifically targeting donors in that state. Download our comprehensive list of each state’s requirements.
Download our free guide to learn about the many elements needed to run a successful nonprofit organization, as well as how to avoid common pitfalls and mistakes.