Nonprofit Start-Up: Reality Check
Not too long ago, I had a discussion with a friend about celebrity foundations. Neither of us could really figure out why celebrities started their own foundations rather than just supporting existing organizations and causes. Of course celebrities have access to cash and lawyers and the financial black hole that can be nonprofit start-up is a drop in the financial bucket for someone with millions.
Part of my mission is to provide a realistic picture of what it takes to get your tax exempt status. Each one is different and presents unique challenges, but here are some common perceptions I have encountered about start-ups.
PERCEPTION: “If we get a 501(c)(3) we can apply for all sorts of grants and foundation money. There’s tons of them out there, right?”
REALITY CHECK: The odds are stacked against start-up nonprofits when it comes to competitive funding. If you’re creating a 501(c)(3) to be eligible to apply for grants, know that three years of audited financial statements are usually one of the requirements just to apply (with no guarantee you’re going to get anything). Having your financial statements reviewed by a qualified CPA is a very expensive prospect. One nonprofit I know has spent $2,500 over the last three years paying for CPA reviews (not full blown audits, just reviews). That doesn’t sound particularly expensive but when your annual revenue is only about $10,000 that amount represents roughly a quarter of the organization’s finances. Not to mention, that same amount of money could have provided 100 hours of direct service to clients. There are a lot of costs associated with seeking grant funding – not all of them monetary.
PERCEPTION: “If it is for charity, it should be easier and less expensive than starting a small business.”
REALITY CHECK: Start-up costs and time for a nonprofit far outstrip the cost of starting a small business. For just a couple of hundred dollars, an entrepreneur can legally setup a small business and is ready to go, usually within about a month. In addition to incorporating, a charity needs to apply for tax exempt status to be able to solicit donations and apply for grant funding. By the time the Determination Letter is in hand, expect to have invested roughly $2,500 over the course of twelve to eighteen months.
PERCEPTION: “I’ve run a business, a nonprofit can’t be much different.”
REALITY CHECK: If you’ve never been involved with a nonprofit board or organization, you may find the structure restrictive. Nonprofits are not operated by one person. The board plays an important role in guiding the mission and providing fiscal oversight. Many things that a small business owner can do on her own (such as taking on financial obligations like contracts) must be reviewed by the Board of Directors. This can be frustrating if you’re used to moving faster.
Did you have any of these perceptions about starting a nonprofit? Did you have any others that impacted your start-up process?