Pros and Cons of a Nonprofit Organization

Amid all the press given to small business entrepreneurs, less attention has been paid to their nonprofit counterparts--the so-called "social entrepreneurs" whose corporate identity is focused on promoting a social cause that helps vulnerable populations, such as battered women. However, running a nonprofit organization--and making it successful--offers some unique challenges, beginning with the mountains of red tape and paperwork needed to get started. Consistently winning public or private support that may not always be forthcoming is another ongoing battle, as well as mastering the complex regulatory web that governs nonprofit groups. Devising a long-term strategy is also essential to ensuring the growth of any nonprofit group, no matter how well intentioned.

Advance planning is crucial to a nonprofit's success.

Financial Structure

Nonprofit organizations, as well as their founders, enjoy significant tax advantages. The most coveted designation is the 501(c)3 status, or filing to become a charitable nonprofit organization. According to Carter McNamara, an authority on nonprofits, this is a distinctly different situation from filing under a tax-exempt status, which the Internal Revenue Service requires a corporate, community chest, foundation or fund structure to receive the designation. As McNamara notes in his article, "Starting A Nonprofit Organization," tax-exempt and tax deductible status are not the same thing. Failure to understand this distinction can result in loss of that status, as well as fines and penalties. For that reason, getting help from a tax attorney or accountant is highly recommended.

Organizational Issues

Although the public mindset typically assigns a generic designation to nonprofits, the opposite reality is true, according to McNamara. How a nonprofit is organized will impact its tax status, as well as how the IRS interprets the organization's goals and purpose. For example, the founder could get together with friends as an informal nonprofit, McNamara advises. On the other hand, more elaborate structures may require incorporation as a separate legal entity, which can protect the founder from liability, and ensure that it will survive, "even after you're gone," McNamara writes. In that scenario, legal papers will have to be filed, and a board of directors appointed, as well.

The Need to Take Stock

Payroll companies can be helpful to nonprofits.

Nonprofit organizations require a highly acute degree of record keeping--even more so than a private sector business. Nonprofit status ensures exemption from certain types of income, property and sales taxes--which vary greatly nationwide, and will require consultation with the attorney general of the state involved. If employees are part of the equation, getting a payroll company is strongly recommended, to ensure regular, accurate withholding for various types of taxes, according to McNamara. Maintaining accurate financial records is also crucial, but may trigger different reporting requirements, depending on how the nonprofit is set up.

Building Public Support

One of the nonprofit structure's biggest pluses is its function. Organizations generally come across as more credible than individuals, who may have a harder time raising funds for causes. However, raising enough money to make the nonprofit organization worthwhile is among the most challenging aspects of running one, as analyst and consultant Susan Schreter observed in the Seattle Post-Intelligencer's September 27, 2004 edition. Competition for funding is ferocious, so nonprofit founders must prepare to explain why their ideas and proposals offer better outcomes, Schreter writes, "Entities that can prove the highest levels of social performance outcomes tend to get the most funding support."

Considerations

At its core, the effort needed to get a nonprofit up and running is not a nine-to-five job. Long hours are the norm for management and leadership positions, particularly on the planning and strategy side, which will require constant evaluation. For those reasons, Schreter advises would-be nonprofit leaders to look hard at their calendar, and start-up capital, which will help determine the best approach to take. A clear understanding of what nonprofits do, she adds, goes a long way in deciding how well they function. So-called "social entrepreneurs" push to serve as many people as possible, while a traditional business is driven by the profit motive, Schreter writes. If the latter goal seems preferable, then the nonprofit route may not be the best route.

References

• For Profit Or Not? Pros And Cons For Startups
• Starting A Nonprofit
• Starting A Nonprofit Orgnization

Resources

• Foundation Center's Webinar Series For Nonprofit Startup Organizations
• Nonprofit Practice Guide
• Tax Information For Nonprofits