Getting Nonprofit Status
GuitarCenter Foundation requires all of its grant recipients to be nonprofit organizations. If your organization is not a nonprofit yet, read this article to learn more about the process.
What is a nonprofit organization?
A Non Profit organization (NPO) is a business entity where making a profit is not a primary mission. Typically, Non Profits are engaged in charitable, educational, religious, or artistic activities of public or private interest. Since Non Profit organizations cannot distribute profit to their directors, officers, or members (those who participate in the management of the Non Profit) any income generated by the Non Profit must ultimately go back into the organization. However, Non Profits can hire and pay staff to carry out operational and administrative functions.
If you choose to incorporate your Non Profit as a 501(c) corporation, you can choose from 26 types – 501(c)(1) to 501(c)(26). Section 501(c)(3) is the most common federal tax exemption for Non Profits, which exempts the Non Profit from taxes on income directly related to the organization’s mission. Therefore, many Non Profits are often referred to as 501(c)(3) corporations. Refer to IRS.gov to learn more about other types of 501(c) incorporation.
How do I start a nonprofit organization?
Many of us have a keen interest in “doing something.” However, reality is that we are busy with other things and that “funding” might be difficult to come by. Don’t let that discourage you from “doing something. Just make sure you have invested time on the front end to determine the level of interest and availability of funds for your cause. Doing so can help you better understand whether a new organization is needed.
Here are five alternatives to starting a new organization:
- Join an existing effort — Study the list of nonprofits already active in the same subject and geographic area and join their efforts as a volunteer, a board member or even as staff.
- Create a special program of an existing effort — Analyze the list of nonprofits already active in the same area, identify the three most compatible with your ideas, and meet with them to explore creating a special project or initiative and negotiate your involvement. You may have ideas that they would welcome, including resources that may be available to finance the new undertaking. Your activity could be a sponsored project with a level of independence, but without the need for separate books, government reporting and boards and committees.
- Start a local chapter of a national or regional organization — Explore the list of national organizations in the subject area of your interest, and see if a local chapter is needed in your geographic area.
- Maintain an informal organization — This is a viable option for groups with annual revenues under $25,000 with no employees. If your effort will be quite local and small, consider forming an unincorporated association or club — have meetings and activities but skip the ongoing reporting requirements. Informal organizations can operate as a nonprofit, however, donations to an informal organization are not tax-deductible.
However, those that choose to remain informal may undertake risk to board members and founders by not incorporating the organization. By incorporating, the organization becomes a legal entity and can only be liable for the assets of the organization. An incident involving an unincorporated organization may put personal assets of board members, volunteers, or others, at risk.
- Find a fiscal sponsor for your organization — If you are considering creation of a group to finance activities or needs of others, plan to work on a limited-time project, or want to test a program idea first, exploring fiscal sponsorship. Fiscal sponsorship, sometimes referred to as fiscal agency, is a way to receive tax-deductible contributions by using the tax-exempt status of another organization as an umbrella.
Fiscal sponsors often provide more than the use of their tax-exempt status. They often co-locate, provide accounting and administrative services, and strategic planning guidance. The sponsored organization will pay a fee to the sponsor for their services, generally around 10 percent of the organization’s revenues.
Fiscal sponsorship is a complex, individualized process. Organizations considering working with a sponsor should first identify several possible sponsors with missions in sync with that of the new organization. Work with each of these organizations to find the best fit in terms of missions, working style, and location. Will the sponsorship be structured to re-grant monies to the new organization? Will the sponsored organization purchase services from its sponsor? At what cost? How will both be assured against tax fraud. It is recommended that both parties consult with legal professionals to ensure their interests are being met in the sponsorship agreement.