11 Jan Myths About Starting a Nonprofit or Charity
By Phil DiComo
There is a certain joy in making a difference in this world, helping others in our community, or, simply, doing a good deed. That leads many of us to the idea that it would be great to start a nonprofit organization. So, let’s explore some of the myths of starting a charitable organization that may help you to think through this crazy (or not so) idea before spending a considerable amount of time, money and effort.
Myth No. 1 – “I just file a nonprofit corporation with the state or an on-line fast legal filing company, and I am good to go.”
Wrong. Actually, there are so many reasons why this myth is wrong. The first is you shouldn’t be forming an entity of any kind without a business plan and a strategic path forward, but let’s put that aside for a moment and just focus on the practical considerations.
There are two key components or steps when forming a charitable organization; first the actual entity type and where and how it is organized, and second, the organization’s ability to be tax exempt under the Internal Revenue Code. The first matter is a state law matter and the second is a federal law matter. Typically, nonprofits are set up as not-for-profit corporations under state law (there are other possibilities, but we’ll put those aside for now since the majority of operational nonprofits are corporations under state law). This process typically means filing Articles of Incorporation with the state. While it’s true you can go to www.sunbiz.org in Florida and file not-for-profit Articles of Incorporation using a state provided form, the big reason you don’t want to waste your time and money doing this is that you’ll wind up butting heads with the IRS and have to amend and restate your articles later (that’s a legal term for throw it away and start over). The same is true for when you create the Bylaws for your new organization which is destined to save the world. While state law formation process and federal IRS process are separate and distinct, they are actually linked because the IRS requires certain “magic language” to reside in both your Articles and your Bylaws. If you skip this requirement when you create these documents, it will slow down the entire process of creating your nonprofit and result in a greater cost. So, best to do it right the first time rather than pay to have it fixed later.
Once you have the state nonprofit corporation formed, along with the correctly worded Articles of Incorporation, Bylaws, a written organizational consent providing for the initial directors (in Florida you’re required to have a minimum of three directors) and officers, then you can go to the second step in the creation process, which is determining what type of tax-exempt status to apply for with the IRS, and begin that process.
Unfortunately, clients come to me all the time to help them with the application to the IRS and the first thing I tell them is, let’s throw away everything you did to get ready for this point and start again, because your organizational documents will be rejected by the IRS as drafted.
Not to worry, you can still save the world with your new nonprofit. Just get some good advice before you proceed.