Michael Kraft
A story I tell often goes back to my grad student days. I had a research assistant job, which might be research, it could devolve into grunt work, or it could involve escorting a VIP around campus. One such VIP was the late Frances Hesselbein, who had recently retired as the CEO of Girl Scouts USA to head up a leadership institute affiliated with the university.
In our time in the car, I let Ms. Hesselbein know (smart MBA student that I was) that I had unpacked some of the financials around the sales of Girl Scout cookies. The numbers were phenomenal. I found a polite way, I thought, to ask a version of “how much money do you need, anyway?” She understood the question behind the question immediately and answered, looking severely over her reading glasses, “well, Michael, we’re not for profit but we’re certainly not for loss!”
This encapsulates the no margin/no mission nature of running nonprofit organizations. Not all of your programs will earn a surplus but, overall, the organization has to do better than break even over time. A surplus is the cost of being in operation tomorrow. Even though there aren’t owners, and the “profit” doesn’t accrue to investors, you need to be profitable.
Nonprofits face tough systemic financial realities. There is overhead to starting one, running one, and even to closing one. That’s why many experts will tell people who have a passion for a cause to first see if an existing organization could provide an umbrella under which they could operate. Incorporating your own nonprofit takes time, effort and at least some money. There’s an $800 minimum franchise fee in California for incorporated organizations, even if they are dormant.
I recently answered a question for a client about what the annualized cost is to keep their nonprofit organization alive in dormancy. My research provided a range of $900 – $4400, depending on just how dormant is dormant and how much of the bureaucratic maintenance work is performed by professionals vs. volunteers.
There are required annual tax filings, both state and federal, regardless of active status. Every other year, you have to update the Statement of Information, an odd vestige of a thing required by the California Secretary of State. Active or inactive, a 501c3 must have a board and at least an annual board meeting. Board members have fiduciary responsibilities and, in extreme cases, could face personal liability.
Closing any legal entity represents a classic pain in the neck. For 501c3 nonprofits, in addition to a lot of paperwork, you need to transfer any assets to another 501c3 organization, typically one that has some similar mission.
Now, I’m not telling you, “absolutely, do not start your own nonprofit.” But be sure to do the work to understand what you’re getting into, knowing that you’ll need other folks to get into it with you. Know that someone will have to do the administrative work, which rarely is the focus of a passion project. Accept that there are real costs beyond providing services.
The path I recommend? Find that aligned organization, join them, and start the actual work you wish to do, seeking both philosophical and mission alignment, as well as a reasonable overhead fee. The umbrella organization gets to do the legal filings, performs lots of the bookkeeping, supplies the board, etc. The Northern California Association of Nonprofits (NorCAN) can help guide you.
Laura Olson, who is active with NorCAN, added this advice.
1. If you start a nonprofit without understanding the landscape of nonprofits that exist, you are potentially starting one that will be fundraising in competition with an established nonprofit with a similar mission. That causes fragmentation of support and can result in some pretty bad feelings.
2. To find existing nonprofits in Humboldt County, you can search (by city) on the IRS Website’s Charity Search: https://apps.irs.gov/app/eos/. People often believe if they start a nonprofit that means money will start coming in because they can fundraise and apply for grants. But there are over 1,000 nonprofits in our County that are also trying to support their cause by fundraising and applying for grants. That doesn’t mean it’s impossible, but it’s often much more difficult than it sounds.
Formal umbrella or partner, if it goes well, you can decide to continue to work under the organization, or to apply for separate nonprofit status in a reasonably coherent and timely way. Oh, and that application process? My experience says to figure on 6 – 12 months to get through it.
This is the non-sexy, bureaucratic slog that goes with launching and running a 501c organization. People considering founding a nonprofit should know about it. And, all of this caveat emptor information notwithstanding, the slog should all be in support of your good work.
Michael Kraft writes the Good Work series on behalf of NorCAN. To nominate a deserving organization, email michael@kraftconsultants.com.
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