Sometimes
I get asked for advice on non-profits, which makes sense since I have
one. But there's a lot of misconceptions out there. Like recently,
someone was asking me about a non-profit he had just started.
Apparently he had filed to incorporate on some online quickie legal prep
work site. I asked him about his FEIN, but since he was under the
impression that such cost, he had not got one. He did have a website. I
looked at the website.
It had a for profit site, which by
selling things, would - he said - generate money for the non-profit.
That's not necessarily illegal, by the way, but it takes a lot of
paperwork and care to keep conflicts of interest from arising, separate
incorporations at times, and no free rides on the taxes off of sales of
goods on the for profit side.
Of more concern, the website had a
section for donations, but for the description spoke of the funds going
to aid their 1,200 member facebook group outreach. If you're wondering
how a free facebook group needs financial aid of a tax free nature,
yeah, I wondered too. So did my wife.
Which is why her immediate
response was, "It's a scam." She's a not a member of the Church of
Jesus Christ of Latter-day Saints. Me, I am, so I am aware of the very
real possibility of a member's heart being larger than his experience in
various enterprises. Mostly the sincerity and integrity of such a
person can get them through the perils and pitfalls of any number of
situations, even when they lack any necessary experience or knowledge.
Yet this was not one of those situations. Business never is.
I've been trying to explain to that very young brother that a
product/service is needed before one can go about soliciting funds from
the public. He suggested that it be "spreading the gospel". A laudable
goal, but given that the Church does this for free, and we're commanded
to, not something that really needs all the fuss of a non-profit
corporation. In response to my showing why that was impractical, he
suggested as a service "helping with family histories". Again, I had to
be the wet blanket. Lately, I've seen he and the others at this group
speaking of "music" as the outreach service I've said they need. I've
shared the concern that if the music provided is free, what would anyone
need these guys for?
Here's the thing. A non-profit, first and
foremost, is NON-profit. Few - and I mean vanishingly few - are going
to make a living at it. Folks lose track of that by seeing so many that
are successful, the Susan G. Komen Foundation, the United Way, the Red
Cross. I could list a dozen more. And of those who are bringing in
enough money to pay salaries to directors and hire employees, there are
thousands.
But there are hundreds and hundreds of thousands of
non-profits! I would confidently state that the ratio of success to
failure in the non-profit world is comparable to the business world.
Mostly because a non-profit business still is a business. In other
words, 99% are going to fail in the first year. Other foundations will
be very limited foundations that rely merely disbursing some given
amount of money from a will or bequest.
So people start with a
big heart, and figure that hanging out an internet shingle is all it
takes. Plus that Legal Beagle help site, or whatever it was. But let's
back up. What's it really take?
First, a business plan. You're
going to be operating a business. You need a business plan. If you
don't know what's involved in a business plan, google that and do that
first. If you can't handle that, you can't handle anything else.
Really. And if you can't be bothered to do that, then no one should
bother with you. Because you clearly are not serious.
Second,
how about a good and/or service? Admittedly that really comes first,
then the business plan! Something more specific than "outreach".
Something not being done to death already. Remember, like any business,
you're going to be competing with other non-profits. You really think
anyone is going to pay you for family history work when the LDS Church
will do it for free? Or deal with you for music when it's so freely
available everywhere?
You need a good and/or service that you
feel there is a need for, and that you are better qualified to provide
than others are. For we here at the Liahona Mission, that was Sober
Living Homes. True, others do it. But we compete by charging less
program fees and offering more aid. And - at least for now - we are
only dealing with providing services in one county. We are uniquely
qualified to do that given that we have a volunteer (your humble author)
to do the day to day work, which would ordinarily cost a non-profit
$2,000 per month in wage and attendant costs.
Third, having made a
business plan for your good/service, it's time to go over all the
paperwork in advance of doing it. Yes, there's the incorporation
papers, which you can file down at a State office on your own, just for
the filing fees, and without the $150 to $500 that most Legal Sites will
charge you to "process" it. The filing fees the State will charge are
between $50 and $150. So saving upwards of $500 in processing fees is a
good thing. But besides the incorporation papers, you'll see that you
need three people. You and two others. And by laws.
So now you know to get the other two people you trust lined up before filing. And to have the by laws ready.
Have you read samples of by laws? Do you know how to write them to
comply with IRS regulations? Not legally required, by the way, but
handy for when you apply - later - for your 501(c)3 exemption. As in
"you won't get the exemption unless your by laws conform". Do you know
how to write the by laws so that not only are they democratic and fair,
but also clever enough to keep your two other board members from voting
you out? Yeah, that's a thing that can - and has - happened. But with
"founder exceptionalism" (google it!) you can avoid that.
Were
you aware that the IRS will give you the Federal Employer Identification
Number for free, and over the phone, while you wait? Yes. With no
need to have Legal R Us charge you for it. You see, the IRS wants you
to have that number, it helps them keep track of you. It's like a
Social Security number for businesses. You can't do anything without
it.
Were you aware that the paperwork for your 501(c)3 tax
exemption runs upwards of 30 pages? And takes a several hundred dollar
fee to the IRS, and usually a paid CPA to fill it out properly? You're
looking at near $1,000 on that one, total, so you can see why you should
be serious with actual business plans and others working with you and
lots of preliminary research! They're going to want things like
business plans and quarterly income projections, and either an
accounting of the past three years, or since you're just starting, the
next three years! And thorough details on your day to day operations.
Fourth, having done all this research, now you can start to fill out
paperwork. With your by laws and directors all set, file your
incorporation papers, get that FEIN, open a business account with the
bank (make sure you have two officers needing to sign for any
withdrawals!) and then...you're still not ready.
Because for
fifth, you must register with whatever state agency in your state
overseas charities. There's sure to be one. In Illinois, it's the
Illinois Charitable Trust Bureau. The bank, if they're on the ball,
will want to see the paperwork on that before getting your account
activated, though sometimes they'll do it just with the incorporation
papers and FEIN. Without that registration, you are then probably
illegally soliciting money from the public. That's not a good thing.
Note carefully - a private individual can solicit money from the public
with just his cardboard sign. But a corporation, however legal, must be
registered with the state that oversees such things. And if you're not
registered in a given state, you're really supposed to fill out the
forms for doing business in that state as a "foreign corporation".
Also, and part of the "fifth", did you read up on "fiduciary
responsibilities"? Have you had each director fill out an application,
an I9, a Conflict of Interest sheet, a Mediation and Arbitration
agreement and such? That'll be helpful. If appearances of propriety
are of value to you. And I assure you that they'll be of value to the
IRS, the charitable oversight board and any major donors. Not to
mention Homeland Security. Yes, a non-profit really is a business. It
must conduct itself in a legal and above board fashion.
Sixth,
it will be a year and a half - on average - before getting your tax
exemption, assuming you could afford to apply at once. Only after that
can you apply for local property tax and sales tax exemptions. Which
the locality is not required to give you. This total process can be so
long and expensive that for the Liahona Mission, we haven't spent our
capital on that, choosing instead to get the properties and facilities
up and running.
Now, all this assumes that you actually chose a
decent good/service to provide. But let me tell you what often happens,
and I don't like this at all. A person with a big heart will have some
kind of idea. So he wants to pay the minimal fees to do the above, get
all legally incorporated, and then go online to collect money. With a
website or blog or in the old days, a "newsletter" or "brochure" or
"pamphlet". It is, in other words, a paper corporation, no brick and
mortar to it. It's him, his pals and his computer.
He then
expects others to donate to him. Why? Because then he'll take that
money and give it to others, keeping a bit for his time and trouble. Or
maybe taking nothing, but with the sales site, that seems doubtful.
The state then is supplying the legal stuff. You, the donor, are
supplying the funds. Others who don't know how to download music - all
two of them - are supplying the needs. I guess in the above example the
internet is supplying the free music. What's he supplying again? An
"idea"? Something about "doing good"?
Yeah. I asked that.
It's an important question. In some cases, not the above example, the
founder may be bringing some real expertise to the table. Like maybe
he's a cancer researcher who needs funds for a cure. If so, great. Or
maybe he's some deep pockets original donor with all the capital, and
just needs some one to hire to cure cancer. That's also great. In each
case, he's bringing expertise or money to the table.
But beware those
who while well intentioned are simply wishing to be the baton waving
middle man, directing the efforts of the big money guy and big brain
research guy. A baton waver is exactly as useful then as your
congregation's hymn director. Which is to say, kind of/sort of helpful,
but hardly essential. And if you were paying your hymn director, not
worth it at all! No one pays a guy to wave a baton. Because no one one
needs a baton waved to sing a hymn. Or to tell a rich guy who wants to
cure cancer that giving to a bright doctor who knows how is helpful.
Or to download free tunes online for those who want free tunes
downloaded online.

Years back, when I was thinking of this
non-profit, I could have done the paper foundation, and tried to raise
funds to buy the shelter and tried to raise funds to purchase the
repairs and tried to raise funds for hiring the caretaker. What I'd be
needed for then, if everyone else was doing the paying, the buying and
the caretaking, I've no clue. Yes, a talent for raising money can be a
bona fide "skill", but more often, those with the heart aren't all that
great on the fund raising. And even if they are, some actual work
should be done at some point. One who genuinely has a fund raising
talent should work for the one who has a talent for actually doing
something!
Fund raising, advertising, marketing, paperwork, it
can all be such a flurry that it is forgot that something should be
being done that all those things are for! They sure aren't ends in
themselves! They're means only! Important means, but means all the
same! The guy I'm trying to save from himself is busy going on about
having a "newsletter". About what, I've no clue. He's no real product
and not even a business plan yet!
In the case of our non-profit,
we decided to be a brick and mortar one first. We swore that we'd be up
and running and have something to donate "to", first. And we have.
All the above steps, purchased properties, renovated homes, labor lined
up, it's all in place, and operating right now. It was operating before
our first website. Then, and only then, with four guys sitting in the
Sober Living home being helped did we then for the first time start
worrying about paypal and donations and blogs and facebook.
Years after we started.
Not that we didn't have any help before, donations in service, in goods
and such. But cash-wise, a non-profit in most cases is funded by those
most directly involved, those who most directly care. The Directors
themselves. Their family and friends. Yeah, mostly themselves. And
really, why would it be any other way? You have an idea. If you
believe in it, you put your own blood, sweat, tears - and your cold hard
cash - where your big heart is! You're expecting others to, so lead
the way. Show the level of your own belief in it first! Remember 1
Corinthians 14:8 - "For if the trumpet give an uncertain sound, who
shall prepare himself to the battle?"
Who indeed? If the
person asking cares not to pour himself into it, then people will not
pour so much as a penny of their's into it! Look, many foundations are
started by the mega-rich who can afford for it to all spring into
existence at once. But for everyone else, it really takes long and hard
years where you're doing nothing but work on the venture to get it
going. You're doing it out of pocket, it's just that your pocket is
much smaller than the pocket of Bill Gates.
I could not even
begin to get across what it was like getting the first condemned house
bought and repaired. 10 hour days, only Top Ramen to eat, every cent
going into those repairs and fees and paperwork. Living in the
condemned house I was fixing because if I rented a place, that would be
$400 less a month in repairs. But 9 years ago I was homeless myself.
Now, a recovered alcoholic, I'm caretaking for that house, repairing
another house, and aiding four people who'd otherwise be homeless. But
it's not a free ride - it's work, and lots of it. Having no boss
doesn't mean you aren't working, it means you discover what a mean boss
you are!
A non-profit of the sort I started and that I and my
wife have built up, by the way, is not even needed for most things. If
one simply wishes to "spread the gospel" or "help with family history"
or "share Christian themed music", then really, why bother incorporating
at all? Doing those things is free, you can obviously volunteer within
the context of the Church of Jesus Christ of Latter-day Saints, or any
other church at all, or even just do that alone! Not everything needs a
corporate structure! There's never any law against just rolling up
your sleeves and pitching in!
Non-profits are for those who
wish a lot more than just doing good themselves. It's a means of
administering a large amount of funds over time for pubic purposes.
Maybe funds that just came into being as a result of a person's death,
or a rich person wishing to start being a philanthropist. Or it could
be a means of making sure that a collection of such funds for a
sustained effort over time purely for the public good will not be taxed
away during the collection and disbursement. It allows many other
people to join in, and to receive some tax breaks, for aiding in that
endeavor. It is not, with only some despised exceptions, a means of
generating any kind of real income for the individuals involved. In
fact, many non-profits - such as the Liahona Mission - bar salaries or
wages for their Directors and rely only on volunteer effort.
Not that there aren't some non-profits where it's legitimate to use some
paid employees for some facets of the work, and not that our non-profit
won't hire contractors for specific one shot tasks, but that should
always be looked at carefully. And particularly in the realm of "admin"
costs, those should never be greater than 10% of the expenditures. And
we believe it should be zero percent. Ours are. If it's not
volunteered, it's not happening. And as it's our non-profit, we do the
paperwork ourselves. Learning how meant not having to pay a clerical
staff.
For those reasons, non-profits, are usually something
that only the well-off can afford, as nothing I say can emphasize enough
now "non-profit" most non-profits are! True, if you really capture the
public's imagination, then one day - years after you're dead, most
likely - your non-profit may be large and international and dealing with
billions of dollars. Even in your lifetime, if you benefit from some
net-fad like the Ice Bucket Challenge that could happen. I say this
with the same straight face that I would use for telling a man in his
twenties that, "Yes, your rib recipe is great, and one day the
restaurant you're dreaming of could be a world-wide chain like
McDonalds." In both cases I'm speaking the truth, but it's really rare.
Really, really rare!
Mostly, were you to have one successful
restaurant, locally, and it stay in business for your life time, you
should count that as a wild success! And it would be! Likewise, many
non-profits will last the life time of their founder, and not so much
past that. Rich people with rich friends may grow such foundations into
rich foundations, but modest folks with modest friends should be
content with modest foundations.
So I guess before any of those
half a dozen things to do listed above, an assessment of whether you
even need to be a non-profit is helpful. If you aren't buying a
structure, if you're truly just going to be a baton waving middle man,
I'd say not bother. It's a lot of time and effort and money for what
may not be necessary. And if it's preaching the word, or sharing songs,
it is definitively not necessary!
Are we necessary? The
Liahona Mission? Are we "necessary" as a non-profit? Yes. Definitely.
Our good and service - a temporary shelter and program for alcoholics
and addicts - is definitely necessary, there are others doing it in this
locality, but not as cheaply, nor providing as much, and there are no
other LDS themed sober living homes in the area. We've definitely found
our niche. And it is a sustained effort over time that will be
attracting others who wish to participate. And it needs to be corporate
owned and not individually owned for the usual reasons of liability and
continuity and growth.
And while we don't see it being
world-girdling, we have reasonable hope of some growth in our life time
and that with the appropriately chose board come some distant day that
it will outlast the death of it's founders. It's not like poverty,
alcoholism and/or addiction is going out of style any time soon. Sad to
say.
Still up for your own non-profit? Then go start on the
business plan! Not up for a business plan first? Then nevermind
playing at having a non-profit.