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Nonprofit Education

Starting A Nonprofit: Common Mistakes For Starting A 501(C)(3)

Each year, thousands of individuals set out to start a nonprofit organization. These people are undoubtedly passionate about their cause and truly want to make a difference in their communities. Unfortunately, many individuals starting a 501c3 fail to fully develop a well-structured plan for the mission and vision of the organization.

Nearly all startup nonprofit organizations wish to be tax-exempt as well, so the terms are often confusing to the general public. Many charitable organizations, for example, are nonprofit organizations and are recognized by the federal government as being tax-exempt under 501c3. However, creating a 501c3 and becoming tax-exempt are two different processes, done at different times, and by different government agencies. In addition, there are 27 exemptions that exist under the federal tax code for different purposes, and not every organization will benefit from the same exemptions.

Keep in mind that starting a 501c3 can be very complex and requires a unique set of knowledge, skills, and abilities to be successful. Just having a passion for a cause is simply not enough. If you avoid these common mistakes, your nonprofit can succeed.

Common Mistakes Nonprofit Start-Ups Make Include:

common mistakes in starting a non profit

Lack Of Planning And Research

Research and planning are essential when you’re starting a 501c3. Most nonprofit startups don’t realize that operating within the nonprofit sector requires a lot of work and dedication from all parties involved. In addition, you need to ask yourself some key questions to ensure that the mission and vision qualify and if the needs of your cause can be addressed by the programs or services the nonprofit will provide.

Not Registering Properly

egistering a nonprofit is required in all states. Some individuals are under the impression that, because they are a nonprofit organization, they are not required to file. This is a common misconception. You will need to file to become legal as a nonprofit organization in your state, and in most states, you will also need to file a state tax exemption and charitable solicitation registration to be able to legally solicit donations from individuals and businesses within the state.

In addition to filing at the state level, you will also be required to file with the IRS if you would like the nonprofit to be tax-exempt and tax-deductible under the IRC 501c3. Just because you’re starting a 501c3 at the state level doesn’t mean you’re exempt from paying federal taxes unless you file the correct documents

A Nonprofit Must Fall Into One Of These Categories:

•Religious

•Charitable

•Scientific

•Testing for public safety

•Literary

•Educational

•Fostering amateur sports

•Prevention of cruelty to children or animals

Is It A Public Charity Or Private Foundation?

If your mission falls under one of the allowable purposes of the 501(c)(3), then you will need to determine the classification of your organization. Organizations typically will fall into either the category of public charity or private foundation.

Public Charities

Public charities are the most common type of 501c3. Some examples of public charities include educational, religious, charitable, and animal welfare organizations.

Public charities may accept donations, which will be tax-deductible. Individual donors can donate up to 50% of their income, and corporations can donate up to 10% of their revenue before being taxed on donations.

These types of charities are governed by a majority-unrelated board of directors. The IRS imposes heavy scrutiny on these types of organizations to ensure that they are following their strict criteria. In addition, the IRS requires that public charities obtain the majority of their funds through fundraisers and donations from the public.

Private Foundations

Private foundations fall into two categories: non-operating and operating 501c3 foundations. It all depends on whether active programs are offered, like a public charity. With both types of private foundation, the funding usually comes from the board of directors, an individual, or a family.

Family foundations are the most common type of private foundation. These types of organizations can donate a maximum of 30% of their income without having to pay federal taxes. The majority of private foundations are grant-giving organizations that support other charities with similar missions and visions. At times, they will also award individuals with funding.

Next Steps for starting a 501c3

Once you determine which category of the 501c3 your organization falls under, you will need to complete a 1023 application with the IRS and pay the required fees. Prior to submitting the 1023 application, you will need to ensure that your articles of incorporation or charter has been filed at the state level and that the nonprofit has adopted bylaws and a conflict of interest policy.

Once approved, a nonprofit must be familiar with all processes and procedures and be prepared for detailed reporting on an annual basis.

In addition to such forms, you may have added filings that need to be submitted when creating a 501c3. A charity registration is required in a majority of states. This form allows your business to hold fundraising events and solicit funds in your state. Additionally, some states require that a state-tax exemption form is filed. Lastly, some states offer you the option of submitting a sales-tax exemption form.

Not Having An Effective Team On The Board Of DirectorsNot Having An Effective Team On The Board Of Directors

In any business, your leadership is crucial to your success—and the same goes when starting a 501c3. Your board of directors should be as passionate as you are about the cause and population you are serving. In addition, the members on the board should be individuals who have influence, connections to funding, integrity, and expertise in a specific skill that’s essential to the nonprofit organization and its mission. 

It’s not uncommon for the initial board of a nonprofit organization to be made up of the founder’s friends and advisers. But this can set a precedent for filling future vacancies with more friends and advisers, causing the board to become stagnant instead of diverse. As with a for-profit organization, board members of diverse backgrounds and skills provide a variety of valuable perspectives and strengthen the organization.

Communication Is Key when starting a 501c3

It is important that the board of directors communicate and participate in board meetings. The IRS requires that a nonprofit board meet at least once per year at a minimum to discuss the programs and budget of the organization. Make sure to maintain copies of the corporate minutes of all board meetings (and committee meetings for committees that are authorized to act on behalf of the board, such as an executive committee).

It’s highly recommended that the board of directors meet more than once per year to discuss any issues or changes within the organization. Having frequent meetings helps to keep everyone involved in the nonprofit.

It’s crucial that the board of directors never lose sight of why they’re there, to guide the executive director or chief executive and provide oversight and strategic direction. Boards should set or review organizational priorities regularly and come to a consensus on actions and a timeline for each. The board should also implement formal processes for evaluating organizational performance, ensuring that resources are well spent.Communication Is Key When Starting A 501c3

Not Having The Financial Support Or Knowledge

A common misconception made by many individuals when starting a 501c3 is that getting donations and funding will be as easy as 1, 2, 3—after all, you’re a charitable organization, right? But it’s not that simple, unfortunately. Remember that you are just one out of 1.5 million 501c3 nonprofit organizations seeking funding in the United States.

So you’re probably asking yourself, “How will my nonprofit organization survive and be sustainable?” Begin by creating solid funding or fundraising strategies that will guide the organization in the right direction. Allocate some resources to fundraising events or activities in your community. Don’t be scared to ask for donations from local businesses, friends, family members, co-workers, and anyone who will listen to you about the nonprofit. Prepare yourself for rejection, but remember that you can’t earn if you don’t ask.

Lacking A Proper Donor Communication Strategy

Another common mistake when creating a 501c3 is failing to establish a strong communication strategy to engage with donors and supporters. Without it, connecting and getting your message across becomes difficult. A good communication strategy is vital to make your donors feel valued and influence their decision to support your cause. Make sure to utilize email, text messages, social media, and your nonprofit’s website for maximum exposure.

Once you have a donor’s attention, engage the donor and build the relationship. Focus on getting them to attend your events. Ask for suggestions and participation in volunteer work. Make them feel like a part of your team. Building strong relationships with both donors and volunteers is crucial to the nonprofit’s success. Don’t assume that donors and volunteers know everything about the nonprofit’s mission. Make good use of every opportunity to give them the full story about the challenges your organization addresses and how they can be part of making a change.

Create opportunities to meet with your donors in person. Invite them to come to your nonprofit’s events so they can see firsthand what your organization is doing. Always acknowledge donations quickly after they’ve been received. While you can use an automated system to send thank-you notes to most donors who contribute small amounts, write a personal letter to larger donors and include an invitation to an event or let them know what their donation means to the organization. Make sure your executive director signs the letter.Charitynet common mistakes while starting a non profit

Conclusions

When starting a 501c3, remember that effective communication is at the root of every nonprofit’s operations and efforts. Without it, there’s no good way to get a message across to your donors and volunteers from day to day. Therefore, before deciding to become a nonprofit organization or tax-exempt organization (or both), it’s a good idea to sit down and study all possibilities with an expert. Together you can decide on the type of exemption that best meets your organization’s needs.

If you are not sure whether your organization is a nonprofit startup or meets the requirements to become a tax-exempt organization with the IRS, please contact the offices of CharityNet USA to speak to one of our nonprofit experts at 407-857-9002 or info@bizcentralusa.com.  We can help guide you toward successfully starting a 501c3.