Thinking of Starting a Nonprofit? Here’s What You Should Know

July 23, 2014

Connect Member

Personal financial trainer helping women business owners gain control of their finances.

Have you ever had a flash of inspiration and thought of a new and better solution to a problem than anyone has ever thought of before? Most people let these moments go with the passing thought that someone should invent this thing or perform that action and the world would be a better place. Others see an opportunity and launch themselves into an entrepreneurial venture. Still others see their idea as the answer to a social need and start a nonprofit.

Once there was a bright line between the business world and the nonprofit sector. But today, with more business owners building social responsibility into their business models, the decision to start a nonprofit is no longer as obvious as it once was. 

The best nonprofits operate like well-run businesses. You need a deep passion for your cause and an entrepreneurial spirit. You also need a business plan, measurable results and good management skills. While there is much to be gained from starting a nonprofit, there are also some limitations and drawbacks that need to be carefully considered.
1. The Competition
Is your mission already being addressed by another nonprofit? If so, can you work with or for them? It is far easier to work with an established organization than to start one from scratch. The non-profit space is crowded and the pool of available funds is relatively small. Your venture will most likely have to compete for grant and donor dollars against more established organizations with past accomplishments to their name.
2. Tax Implications
Nonprofits are tax exempt and can offer tax deduction incentives to donors. This means that they pay no income tax on money raised or earned and that their donors can deduct donations from their own taxes. These are incredibly powerful tools. However the usefulness of these tools depends entirely on the nonprofit's ability to raise and earn money. For-profit businesses do have to pay taxes on net profits, but they are able to use those profits to easily explore new markets and products without the regulations and restrictions nonprofits face.
3. Sources of Income
Many nonprofits operate entirely on funds raised through both public and private donations and grants. Some large funding organizations like the National Endowment for the Arts and Humanities, The United Way and the Ford Foundation are required to only give funds to 501(c)(3)s. Some nonprofits are a hybrid organization with a fully non-profit branch (operating on raised funds), with another branch operating as a mission-focused enterprise, which can earn income. However, this can add another layer of complexity to the business model. Remember: it is possible to convert a for-profit business into a nonprofit if it fulfills all of the requirements, but it is not possible to convert a nonprofit into a for-profit business.
4. Giving Up Control
A nonprofit is never just you. In order for a nonprofit to gain tax-exempt status it must have a board of directors. You can and should have a hand in the selection of the board members to make sure that their intentions and interests are in alignment with your vision. But once the board is in place, it is the board — and not you alone — that will make the big decisions. It is not unheard of for the board of directors and a founder to disagree on the direction a nonprofit should take. Even if you are an officer on the board, you have given up the control that you would have maintained as a private business owner.
5. Flexibility and agility
Depending on how the mission statement and bylaws are written, it can be difficult for a nonprofit to pivot and change directions in response to changes in the environment, the economy or the social situation that your mission addresses. A nonprofit can only use the funds it raises for the specific mission for which it was formed.  A private business, on the other hand, can more easily respond to market feedback by shifting the focus of offerings or services to meet new and unforeseen needs as they arise.
6. Paperwork
While there is some amount of paperwork and accounting involved in any business venture, for nonprofits there is considerably more. The government doesn't just hand out a tax-exempt status to any old organization without thorough examination and oversight. It takes a lot of paperwork to start a nonprofit and more ongoing paperwork to maintain compliance with regulations.
7. Asset distribution
When a business goes out of business, the assets are liquidated and the net proceeds are distributed to the owners/shareholders. When a nonprofit goes out of business, any remaining assets must be given to another nonprofit. There is no way for a founder or donor to ever reclaim donated assets.
8. Perpetuity
Your nonprofit can outlive you. Because of this possibility, nonprofits remain a great vehicle for affecting long-term change. If your mission addresses a problem that stretches out into future generations, and you want to keep on making a difference long after you are gone, then this may be the best vehicle for you. Conversely, few small for-profit businesses outlive their founders. The ones that do generally become large businesses that go public and end up being owned by their shareholders and run by a board of directors.

Jen Turrell is a member of the DailyWorth Connect program. Read more about the program here.

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