2012-11-12-How to Start a Nonprofit
Seminars@Hadley
How to Start a Nonprofit
Presented by
Urban Miyares
Moderated by
Larry Muffett
October 12, 2012
Larry Muffett
Welcome to Seminars at Hadley, my name is Larry Muffett. I’m a member of the Hadley Seminars team and I also work in curricular affairs. Today’s seminar topic is starting a nonprofit organization. The presenter is a very familiar one, both in general in this week particular, Urban Miyares. Urban is a nationally known and renowned speaker, entrepreneur, sportsman, veteran’s advocate, and so much more. Urban has done many seminars at Hadley and he plays a major role both in our Foresight Center for Entrepreneurship and also in our Hadley’s Veteran’s Initiative.
Today Urban is going to share his expertise in the field of nonprofit organizations. So without any further a due, I’m going to welcome Urban and turn the microphone over to him.
Urban Miyares
Good morning Larry and everybody out there, it’s exciting again to be, the quickest in my hour in my life, every time I do one of these Seminars at Hadley programs online, the hour goes by so quickly. It’s truly thrilling to be here again and talk with all of you.
Today we’re going to cover a topic that I’m extremely familiar with and that’s how to start and launch a nonprofit. I probably help a dozen nonprofits start a year around the country if not more, and of course I’m an advisor to many nonprofits around the nation. The nonprofit industry as a whole is a tremendous industry. People don’t realize that at any given time we can have two million or more nonprofits in the United States alone but surprisingly, less than half of them are existing nonprofits that continually on a daily basis provide services or other mission fulfilling products or services to the public.
A lot of nonprofits are a dormant I would say and the IRS is constantly trying to clean pu their list of nonprofits who are idly just sitting out there. I heard last year more than a hundred charitable nonprofits lost their charitable status due to inactivity or other reasons with tax filings and all. So, the nonprofit arena is constantly evolving, changing, and growing. We’re going to cover a little about the industry and as much as we can about the business and how to get it started in the remaining time in this.
First of all, let’s get rid of that one big myth. Nonprofit does not mean that you don’t make a profit. All that it means is that the IRS views you as if you’re not making a profit. Basically, they don’t tax you. If you’re conducting or following the rules of the IRS you are not taxed on any profit you make. Get this notion out of your head that because it says not for profit or nonprofit that you’re not making a profit. After all, if you’re not making a profit, how are you staying in business? It doesn’t work.
Again, being a nonprofit or not for profit, and they both mean the same thing, it doesn’t mean you’re not making money. You have to make money to keep going and if you have staff you have to pay your staff. There has to be money left over at the end of each taxable year to cover upcoming expenses and commitments. Again, being a nonprofit or not for profit does not mean that you’re not making money.
If you read any of the financial, especially those who are major, your big boys in a nonprofit arena such as American Red Cross or something like that, you’ll be shocked at what their profit looks like. Again, nonprofit does not mean you’re not making profit; it only means that the IRS is not taxing you on your profit if you follow the rules and regulations that they impose on you. That’s the big difference.
The nonprofit arena or the not for profit arena is a business. As a matter of fact, it’s a corporation. It’s a corporation that’s tax exempt. As a business you really should look at the nonprofit sector or arena like you would look at any type of business. So if you’re thinking of starting a nonprofit, would you be a micro nonprofit just like microbusiness? Would you be a small nonprofit, a medium nonprofit or would you be a large nonprofit; the Fortune 500 type of nonprofit? What are your plans or future outlook for such an organization structure that you’re planning on starting? This will determine basically what type of purpose you should have as a nonprofit and what might change.
Each one of these sectors; micro, small, medium, or large nonprofits has a different management style completely, just like a for profit business. If you’re a one person consulting business you’re management style is one way but if you have a whole bunch of employees and doing hundreds of thousands if not millions of dollars in business, you have to change your management style or grow and expand your management style.
I know myself in business I tend to do well in the for profit arena with business with 50 employees or less. Once I get above 50 employees I am not suitable for those larger types of companies because basically there’s too many meetings to go to, too many human resource issues dealing with employees; I’m more interested in working in my capacity or my expertise is in and you should look at the nonprofit arena in the same way.
Let’s get started on the nonprofit. How do you get started? Let’s define what a nonprofit is, I already said that it’s a corporation. It’s a corporation that first you file for corporation status in your state. You have to get a state nonprofit certification first and if you file as a corporation you file as nonprofit or a tax exempt. I’m from California and let me give you the procedures, although I work with people starting nonprofits around the country, let’s do California. I know that all of you are from various states throughout the nation but in California you file your state nonprofit and often in California when you file that nonprofit it could take six months, nine or ten months before you get a response. It all depends on how many filings the Department of Corporations have and when they get to you.
To speed up the process what you do is you file as a regular corporation within a separate nonprofit exemption and you pay the corporate fees which out in California I believe they’re 800 or $900.00. So you file your 800 or $900.00 with your corporation requesting an exemption. When I’ve worked with people in California, often we get a response at 30 or 45 days later with an approval if all the paperwork is in order and a refund of the majority of that money back; generally 800 or $780.00 but you still have to buy the corporate seal and all of that.
Then when you get your state certification you file, if you want, for federal tax exemption under the IRS rules. When you file for that, the fee is nominal fee, usually 100 or 200 something dollars. I keep on forgetting what the current dollar amount is but it can be done by yourself. We often recommend that you definitely use an attorney; it’s a serious filing that you have to do right the first time because there’s no way of making amendments to your filing later is something happens in your nonprofit. “Oh I’m in the wrong type of nonprofit.” You have to go through the whole process again in most cases, but again, check your state rules and regulations because it will tell you how many board of directors you have to have and other requirements to get your state filing. An attorney often helps you along the way.
There is a book you should get and this resource will be available to Hadley on it; it’s called The Corporation Nonprofit Handbook or the Nonprofit Corporation Handbook. Sometimes they’ll have your state’s name such as in California, it’s called The California Nonprofit Corporation Handbook and it’s by Nolo Press. The author is Anthony Mancuso. Now, it’s available in paperback in most stores. This is the guide, I call it the bible to the industry, anybody has a nonprofit, and anybody who is a board of director of a nonprofit should read this book. You have to. There’s no way around it. In this book also are all the forms that you would fill out for both your state and your federal nonprofit filing application with an example in there also of completed forms. So, you have template to work from. I don’t believe it’s an accessible format so you probably have to scan it in or have someone sight it if you’re unable to read the printed word with it. But again, it’s called The Nonprofit Corporation Handbook by Anthony Mancuso of Nolo Press. The price is generally around $40.00 for a paperback; it maybe be available in libraries especially if you have a business library in your area in the reference section, meaning you probably can’t take it out. It’s a book you should at least read so that you understand.
That’s the starting point to it and now the question is, what type of nonprofit are you going to have? When you say nonprofit there are zillions of nonprofits; not all are the same. I’ll ask Larry to read some of the types of nonprofits; I might make some comment on each one. We’ve given him a list of probably 15 or 16 such nonprofits that so you have an example and broad understanding of the different types of nonprofits. After that I’ll focus on what is commonly known probably the best nonprofit to get into, and that’s the one most of you know about already, and that’s the charitable type of nonprofit or commonly known as a 501c3. So Larry, if you’ll just read the first few so we can get an idea.
Larry Muffett
Sure. There’s a 501c1 which is a federal corporation. There’s a 501c2; corporations holding title to property for exempt organizations. 501c4 is civil leagues, social welfare organizations or local employee associations. 501c5 is labor, agricultural, or horticultural organizations. 501c6 is business leagues and chamber of commerce’s, etcetera. 501c7 is social and recreational clubs. 501Cc7 is fraternal beneficiary societies. There are several more.
Urban Miyares
Yes and if you go to military organizations I think on the next page you’ll see some militaries, will you read a couple of those?
Larry Muffett
Sure, there’s a 501c19, war veterans organizations. 501d is religious and apostolic organizations. 521a is farmer’s cooperative organizations.
Urban Miyares
Okay so I think you get the idea, there are all different types. One that Larry did not read is a 501c3 and that’s the one that is the most common and one that if you are going to start a nonprofit, I strongly urge you to seriously consider this type because it’s one of the few, if not the only, to receive donations from the public and grants. A lot of the nonprofits I mentioned cannot receive charitable gifts or donations because they’re not a charity. They have another purpose. Where they get their revenue, such as a chamber of commerce or a trade association is from their membership. Clubs is an example, if you remember the Yacht Club; there are a couple of yacht clubs. That yacht club is a nonprofit, meaning they don’t get taxed on their profits, however where they receive the majority of their income is from membership dues and fees in which we pay to use the restaurant and all that, we have a minimum that we have to pay per month to keep our membership active and that’s how the yacht club survives like the golf clubs and so forth.
If you’re thinking of starting a sports group, a club, an organization, a chamber of commerce, or a trade association, you can go in that area, another type of nonprofit other than a 501c3, and again, Larry just mentioned a few examples. Now in a 501c3 there are five basic types of 501c3’s. There are 501c3’s for charitable purposes, for educational purposes such as colleges and universities; Hadley School, for religious purposes; your churches, synagogues, and where you worship are probably a charitable organization for a religious purpose, there are charitable organizations for scientific purposes, and one is for literary purposes. Those are the five basic types. Again they are: charitable, educational, religious, scientific, and literary.
You are allowed, when you file for your nonprofit status, to pick up to two of those purposes. You can’t pick more than two. So in an example, the charity that I had, The Disabled Businessperson’s Association, we are a charitable organization as well as an educational organization. At Hadley I’m sure it’s the same way. You pick a maximum of two; if you are going to file a nonprofit status and let’s say you are going to be a scientific charitable 501c3, meaning you are going to do medical research and find out if there are plants from which you can develop drugs to help medicine or pharmaceutical drugs in that area, you would probably register, if you’re going to do research and scientific research, as a scientific and charitable organization. Don’t just register as just a scientific one. You may find yourself cutting short. The reason you want to do that, to have more than one, is just because you’re a charitable organization, a 501c3, does not mean you can receive money from everybody.
Let’s say you’re a scientific organization and someone gives you money for educational purposes. They give you ten million dollars to conduct education. Your nonprofit filings says scientific; it has nothing to do with education so you cannot and should not accept that money and the donor would not be able to get a tax write-off. I get a lot of people that ask me where they can get a grant to start a business. You have to be very careful when people say they’re going to give you money as grants and all of that. If giving you money doesn’t fulfill their mission and doesn’t include one of those five purposes, although they say they’re giving you a grant, don’t be surprised if you get a 1099 which goes to your social security number as a gift later on. A gift, an award, and grants are three distinctly different purposes. If you are not qualified as a 501c3, your business, as an example, then you cannot accept that money as a tax write off nor can they take it as a donation to you.