Nonprofit Kit For Dummies - Phillips Frances

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they differ

      Although for-profits and nonprofits require similar professionalism and dedication from their leaders, they differ when it comes time to interpret their bottom lines and successes.

      

The biggest difference between nonprofits and for-profits is the motivation for doing what you do – in other words, the mission of the organization. For-profit businesses exist to make money (you know, a profit). Nonprofits exist to provide a public benefit.

      Evaluating the success of a for-profit endeavor is easy: Did you make money, and, if so, how much did you make? We’re not saying this to cast stones at the capitalist system or to in any way disparage the millions of folks who work for profit-making endeavors. After all, the nonprofit sector depends on profits and wealth from the for-profit sector for its support. And of course, nonprofits have to balance the books, too. Even nonprofits prefer to end the year with more money than they had when they started. They just don’t call it profit; they call it a surplus.

      For a nonprofit to be successful, it needs to change some aspect of the human condition; it needs to solve a problem, provide education, or build a monument. Because the goals of nonprofits are so lofty and progress toward achieving them is often slow, evaluating nonprofit success is sometimes difficult. See Chapter 8 for information about evaluating the results of your work.

HYBRID CORPORATIONS: NEITHER FISH NOR FOWL?

      Some states have passed legislation that allows for the formation of corporations that can earn and distribute profits to shareholders but also must pay attention to the social and public benefits of their business. Efforts to create these new corporate entities, which blend the best of the nonprofit and for-profit worlds, arise largely from the corporate social responsibility movement, which has grown substantially during the last 30 years.

      You may have heard the term double bottom line, a concept that essentially means businesses should not only try to make profits but also work toward improving the social condition of their workers and customers and the environment in which they operate. To that end, many companies have corporate giving programs that support nonprofit organizations in their communities, as well as programs that encourage employees to volunteer for local charitable groups. In the case of the new hybrids, however, corporate responsibility isn’t optional; companies are obliged to consider the social impact of their activities and work toward making the world a better place.

      The following three corporate models fall into the hybrid category. As such, they all have one thing in common: In the eyes of the IRS, they’re viewed as for-profit entities, and their income is taxable as in any for-profit business. That means if you wanted to make a donation to the work of a hybrid corporation, the IRS wouldn’t allow you to claim your contribution as a charitable gift.

      • Low profit limited liability companies (L3Cs): The L3C model was designed to better attract capital investments from investors seeking a return on their money, as well as program-related investments (PRIs) from foundations. (PRIs are typically loans from foundations, not grants.) Foundations can count the funds used to provide PRIs toward their charitable-spending requirements as long as the charitable purpose of the project furthers the foundations’ charitable purposes. The governing documents of the L3C are designed to make this approval easier to receive. So far, the IRS hasn’t approved blanket acceptance of all PRIs awarded to L3C companies. Find more information about the L3C hybrid corporation on the Americans for Community Development website (www.americansforcommunitydevelopment.org).

      • B-Corps: B-Corp organizations must adhere to certain accountability and transparency standards and have positive impacts on society and the environment. The nonprofit organization known as B-Labs (www.bcorporation.net) is leading the B-Corp accountability standards and advocacy efforts toward encouraging state lawmakers to pass legislation establishing this corporate model. B-Labs compares the B-Corp movement to Fair Trade Certification, which ensures that products are produced in an equitable, environmentally sound manner.

      • Flexible Purpose Corporations (FPCs): Sometimes called social purpose corporations, these are the newest form of hybrid corporation and are similar to the B-Corp, except that they must have a more specific charitable purpose. Accountability and transparency standards for FPCs are developed internally by the corporation rather than by an outside certifying agency.

      Although the notion of doing good in the world while still being allowed to make a profit is attractive, we recommend approaching these new corporate forms with caution. It’s still very early in this movement, and it’s difficult to predict how effective these new hybrid corporations will be. If you’re thinking of establishing an L3C or other hybrid organization, consult an attorney who’s knowledgeable in this field before moving forward.

      Using a Fiscal Sponsor: An Alternative Approach

      If you’re simply interested in providing a service, maybe you don’t want to waste your time with the bureaucratic and legal matters that can complicate a new nonprofit startup. Or maybe you have a project that will end after a year or two, or you simply want to test the viability of an idea. Why bother to establish a new organization if it’s going to close when you finish your project?

      You may not need to start a nonprofit to carry out the program you’re thinking of starting. Instead, fiscal sponsorship may be the best route for you to take. In this approach, your new project becomes a sponsored program of an existing 501(c)(3) nonprofit organization. Contributions earmarked for your project are tax-deductible because they’re made to the sponsoring agency.

      A fiscal sponsor is sometimes called a fiscal agent, but this term doesn’t accurately describe the relationship between a fiscal sponsor and the sponsored project. The term agent implies that the sponsoring organization is acting on behalf on the project, when really the project is acting on behalf of the organization. After all, the project is technically a program of the sponsoring nonprofit.

      

This distinction may seem nitpicky, but it’s an important one to keep in mind because you must satisfy the IRS requirements for this type of relationship. The 501(c)(3) sponsoring organization is responsible to both the funders and the IRS to see that the money is spent as intended and that charitable goals are met.

FISCAL SPONSORSHIP AS A FIRST STEP

      Using fiscal sponsorship as a temporary solution while establishing a new nonprofit corporation and acquiring a tax exemption can be an effective approach for the following reasons:

      • You have an opportunity to test the viability of raising funds for your idea.

      • You have time to establish an organizational infrastructure and to create a board of directors in a more leisurely manner.

      • You can pay more attention to building your program services in the crucial beginning stages of your project.

      • Your fiscal sponsor can provide bookkeeping, human resources, and other types of expertise, enabling you to focus primarily on developing your programs and activities.

      • You have time to determine if your program is effectively meeting the needs you intend and can develop benchmarks to support the organization if and when you pursue your own 501(c)(3) entity.

       Examining common details of a fiscal sponsorship relationship

      Here are some important points to keep in mind if you decide to go the fiscal sponsor route:

      ❯❯ The mission of the fiscal sponsor must be in alignment with the project. In other words, if you have a project to provide free food to the homeless, don’t approach your local philharmonic orchestra as a potential sponsor. Find a nonprofit that has similar goals in its mission statement.

      ❯❯ The board of directors of the sponsoring organization should approve the sponsorship arrangements or delegate

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