Look Before You Leap (Into a 501(c)(3), That Is)

One of the most valuable services we offer at Propel Nonprofits is free technical assistance (TA) to nonprofits and those thinking about starting one. While we don’t have an official TA hotline number, if we did (and if you could put heart symbols in phone numbers) it would be something like 1-800-WE♥NPs! We offer this service because “we love nonprofits” and “be helpful” are woven into our core values.

As Propel’s fiscal sponsorship director, I have fielded many of the calls from people thinking about starting a nonprofit. Over the past few years, I’ve noticed a couple of key issues that anyone with a mission-driven idea should avoid when applying for a 501(c)(3).

Not knowing the basics

Many of the calls I get are from organizations that have existed for a few years, didn’t realize they had annual requirements to fulfill, and are now facing repercussions. Every 501(c)(3) organization has federal and state obligations, which vary based on each organization’s structure and individual state requirements. These usually include registration with the Secretary of State and State Attorney General, holding a minimum of one board meeting per year, and signing annual conflict of interest forms.

Nonprofits also need to file a Form 990, the annual nonprofit tax return, which is required even if you raised $0! This is where new organizations can fall into a trap: they don’t submit a Form 990 because they didn’t receive any funding, and organizations that do not file for three consecutive years automatically lose their tax-exempt status. You can always get your status reinstated, but it is costly and time-consuming. If your annual revenues are over a certain threshold, you may also be required to do an annual audit (in Minnesota, for example, audits are required if your annual revenues are over $750,000).

Propel Nonprofits has a great resource on the minimum annual requirements for nonprofits. If you are starting a new nonprofit, keep it handy and set calendar reminders because, while these are annual requirements, some due dates are based on calendar year and others on your fiscal year.

Jumping in too fast

A second cause for possible problems comes when organizations jump into establishing a formalized nonprofit before testing the waters to discover a) if they have the capacity and expertise to run the nonprofit and b) whether philanthropy is ready to support the idea. (As a fan of fiscal sponsorship, I’d be remiss not to mention how it can help avoid this problem!) The Minnesota Council of Nonprofits outlines 5 Stages to Forming a Nonprofit, and more often than not, I get calls from organizations that skipped stages 1 and 2 (vision and planning) and go right to stage 3 (federal filing). For example, I had one executive director email and say they started a nonprofit (stage 3), but don’t have time to run the organization, find volunteers, or seek funding – how could I help them? Had they spent time on the vision and planning stages, they would likely have realized they weren’t yet ready to start a nonprofit.

Taking time to set a clear vision and create a plan doesn’t mean your work has to come to a grinding halt while you sit in a library and pour over research. It does mean having conversations with founders of other recently created organizations, talking to funders to see if there is an appetite for supporting your idea, testing out the waters by partnering with an existing nonprofit, or using a fiscal sponsor while you refine your business plan. Partnering with a seasoned nonprofit as a program or sponsored project would help with both “not knowing the basics” and “jumping in too fast” as your nonprofit partner can provide guidance while you develop your organization (or decide not to).

While having a firm understanding of the necessary requirements and testing the waters doesn’t mean you won’t encounter a few waves as you start a nonprofit, a strong foundation can help give you the needed headspace to deal with other challenges as they arise. If you’ve got an idea you’re thinking through, don’t hesitate to reach out – we’d love to talk more!