Nonprofit Organizations

• Permission to solicit funds—Many nonprofit organizations depend on their ability to solicit funds (in the form of gifts, donations, bequests, etc.) for their very existence. Nicholas noted that whereas some states bestow a fund-raising privilege on nonprofit corporations as soon as their articles of incorporation are filed, other states require groups to fulfill additional obligations before granting permission to solicit funds.
• Low postage rates—Many nonprofit corporations are able to use the U.S. mail system at considerably lower rates than private individuals or for-profit businesses. To secure these lower rates, nonprofits must apply to the Postal Service for a permit, but this is generally not a major hurdle, provided that the nonprofit group has its affairs in order. "The importance of the mailing rate advantage is directly proportional to the volume of mail the nonprofit corporation generates in the course of its business," said Nicholas. "Membership solicitations are usually mailed third class. Nonprofit corporations that rely on membership income can use the mail even more extensively to service their members. So potential savings from a special mailing permit are considerable."
• Exemption from labor rules—Nonprofit organizations enjoy exemption from the various rules and guidelines of union collective bargaining, even if their work force is represented by a union.
• Immunity from tort liability—This advantage is not available in all states, but Nicholas observed that some states still provide nonprofit charitable organizations with immunity to tort liability. "It is important to recognize, however, that where it exists, the immunity protects only the nonprofit corporation—not the agent or employee where negligence injures someone."

In addition, nonprofit corporations enjoy certain advantages that are also bestowed on for-profit corporations. These include legal life (nonprofit corporations are guaranteed the same rights and powers of individuals), limited personal liability, continued existence beyond the involvement of original founders, increased public recognition, readily available information on operations, ability to establish employee benefits programs, and flexibility in financial recordkeeping.

But there are also certain disadvantages associated with incorporating. Nicholas cited the following as principal drawbacks:

• Costs associated with incorporation—Although these costs are usually not too excessive, especially for organizations of any size, incorporation does generally involve some extra costs.
• Additional bureaucracy—"An unincorporated nonprofit organization can be structured so informally that its operators could keep whatever records they chose on the backs of envelopes or as scribbled notes on paper napkins," said Nicholas. "Not so in a nonprofit corporation. As a legal entity, the corporation is subject to some specific recordkeeping obligations set down by the state in which it is incorporated." In addition, there are certain activity guidelines to which incorporated organizations must adhere.
• Sacrifice of personal control—Depending on where incorporation takes place, the organization may have to appoint a board of directors to oversee operations (although founders of nonprofit groups can often exercise considerable control in influencing the composition of the board and the flavor of corporate bylaws and articles of incorporation). Founders and directors of unincorporated groups are under no such obligation.

"Generally, the advantages far outweigh the disadvantages," summarized Hopkins. "The disadvantages stem from the fact that incorporation entails an affirmative act of the state government: It 'charters' the entity. In exchange for the grant of corporate status, the state usually expects certain forms of compliance by the organization, such as adherence to rules of operation, an initial filing fee, annual reports, and annual fees. However, these costs are frequently nominal and the reporting requirements are usually not extensive."

ORGANIZING A NONPROFIT ORGANIZATION

"Being enthusiastic, imaginative, and creative about establishing a nonprofit organization is one thing," observed Hopkins. "Actually forming the entity and making it operational is another. For better or worse, the exercise is much like establishing one's own business. It is a big and important undertaking, and it should be done carefully and properly. The label 'nonprofit' does not mean 'no planning.' Forming a nonprofit organization is as serious as starting up a new company." He recommended that individuals interested in forming a nonprofit organization begin by determining the organization's main purpose and functions. The next step involves choosing a category of tax-exempt status to match its functions. From there, would-be founders need to study a wide range of issues, many of which are also basic considerations for small business owners and other individuals involved in for-profit endeavors. Often, the counsel of a good attorney and/or accountant can be valuable at this stage. Primary actions include the following:

• Decide what legal form the organization will take (public charity or private foundation, incorporated or unincorporated, etc.)
• If incorporating, take necessary legal steps to make that decision a reality (devise bylaws, submit articles of incorporation, etc.)
• Investigate options and decide on principal organization programs and emphases
• Determine the leadership of the organization (directors, officers, primary staff positions)
• Define compensation for such positions
• Find a physical location for the organization (factors here can range from variations in state law to availability of reasonable office space)
• Put together a strategic plan for achieving organization goals at both community and larger levels

• Decide how to go about funding those goals (gifts, grants, unrelated income, etc.?)
• Determine which media avenues will be best for publicizing the organization's goals and securing volunteers
• Devise an ongoing business plan that 1) serves as a blueprint for institution goals and development, and 2) can be periodically reviewed and adjusted as appropriate.

FUNDRAISING

Nonprofit institutions can turn to several different methodologies to raise funds designed to support their mission. This is especially true for nonprofits that have tax-exempt status, because it permits donors to deduct their gifts from their own personal income tax liability. Major avenues of fundraising used by nonprofit organizations include the following: fundraising events (dinners, dances, charity auctions, etc.); direct mail solicitation; foundation grant solicitation; in-person solicitation (door-to-door canvassing, etc.); telemarketing; and planned giving (this includes bequests, which are given to the organization after the donor's death, and gifts made during the donor's lifetime through trusts or other agreements).

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