Should You Start a Nonprofit Organization?

It's only mid March but already we have had about seven inquiries from people looking to start a nonprofit organization.   All great ideas.   All people who are passionate about their concept.   So what is our typical response?   We try to talk them out of it.

Why?  Because the cost to start up a nonprofit and to maintain it on an ongoing basis, can eat into the funds raised in the early years essentially curtailing a great concept before it can even get off the ground.

The initial costs to start a nonprofit include incorporation fees, assistance with the IRS form 1023 to apply for nonprofit status, the IRS filing fee, and the state filing fee.   These fees can range between $2,000 and $3,000.  

The ongoing fees at a minimum include director & officers liability insurance and the administrative costs related to fundraising and the required acknowledgments.  

Instead we encourage potential new nonprofits to consider two potential courses of action:
1-Is someone already doing something similar?  Can you partner with another organization?  Would your idea work as a program within an already existing nonprofit?
or
2-Consider a fiscal sponsorship arrangement.  In this arrangement, you operate under another nonprofit's formation but you are independent from a management standpoint.   The National Council of Nonprofits has a nice discussion on Fiscal Sponsorship here.

 A new client pursued the fiscal sponsorship arrangement and found a great fiscal sponsor.  Not only were they willing to set up the arrangement, they provided advice on the business plan and set up some valuable introductions for this new nonprofit.

Sometimes a nonprofit concept has already taken off.   Similar services are not available and the concept meets a great need in the community.  There is a strong volunteer base and donors want to provide funds.    In those cases, the organization has the foundation to move forward and is ready to apply for their own status.    We can help them apply for their IRS status.  For more information email us at cbergvall@bbco-cpa.com for our white paper-Basic Guide to Starting a Nonprofit in Pennsylvania.

Fundraising, Finances, and your Future

At the Catalyst Center for Nonprofit Management we are planning for this year's seminar topics.  When we look at the popular topics for past sessions, fundraising is always the most popular.  Topics around managing your finances are not as popular.

Why is this?  Fundraising seems to promise the possibility of more money.  Fundraising can increase revenues.  It may be also assumed that finances are harder to understand.  What is often overlooked is that financial management will impact your revenues and expenses.   Fundraising without proper financial management will be less effective.  You could increase revenues but still not increase your bottom line.

This article in the February 2014 issue of INC magazine tells the story of the Murder Mystery Company.  The business was growing rapidly but finances were out of control.  By getting a handle on the finances, the Company was able to decrease spending by tracking activity; capture revenue that they were losing; and develop a new revenue stream.

So as we look to the coming year we will still offer course in both fundraising and finances.  We hope to increase the attendance at the financial sessions.  We frequently get comments about our financial training from our attendees.  They note that the topics are taught in practical, easy to understand laymen terms.  We offer follow up assistance from our sister company the accounting firm Bee, Bergvall & Co.  Our goal is that our nonprofit community is better equipped to increase both the top line and the bottom line.

Lessons Learned from Knight Foundation's Digital News Study

This article from NonProfit Quarterly summarizes highlights from the Knight Foundation's study Finding a Foothold-How NonProfit News Ventures Seek Sustainability.   While the focus in on news organizations, the observations from the study are valuable to any nonprofit:

1- compare yourself to your peers and target those from whom you can learn
2-revenue diversity with a focus on individual donations is key
3-while some donations might be significant donations from high net worth individuals, most donations were much smaller
4-the correlation between stakeholder engagement and donations
5-attack your assumptions always
6-measure what matters

If you don't have time to read the whole report, the NPQ article is a great summary and the discussion of the recommendations at the end of the report are a quick but thought provoking read.

Thinking of Serving on a Board?

Maybe one of your New Years Resolutions was to get more involved in the community by serving on a Board.   Before you jump in, check out this article in the January 2014 Journal of Accountancy   Consider This Before Serving on a Board    Amy Waldron, CPA interviews attorneys James K. Thurston and Peter J. Larkin about the possible liabilities to be aware of when serving on a Board. 

The one issue they note--personal liability for unpaid payroll taxes is one we address in our Board Boot Camp.   We have seen some nonprofit clients get behind on payroll taxes--and the Board Members are not aware.   Because Board Members can be personally liable for these unpaid taxes, it is important for Board Members to make sure their nonprofit is current.

The attorneys note a number of strategies a Board Member can take to reduce risk.

Fundraising Q&A-Auction Items

QUESTION:  What is the charitable contribution for the winning bidder of an auction item?

 

ANSWER:  The winning bidder of an auction item can take a deduction for the amount in excess of the value of the item.   For example, a bidder pays $80 for a $50 restaurant gift certificate.   Their charitable contribution is $30—the amount the price paid exceeds the value by.   If they bid $50 for the $50 gift certificate there would be no charitable contribution.

Another example,  the bidder pays $1,000 for a painting valued at $800.  The charitable contribution would be $200.

The other side of this question is—what is the charitable contribution for a donor of an item that will be used in the auction?

The donors charitable contribution will not be noted by the nonprofit.  The letter from the nonprofit should say thank you for your donation of (describe item) with no mention of the value.  The donor should determine the value.  The donors charitable deduction is limited to the donors cost for the item. 

For example, the donor asks the restaurant to donate a $50 gift card.   The gift card sells for $100.  The donors charitable contribution is zero.   If the donor purchased the gift card for $50 and donated it to the auction, their charitable contribution would be $50.

In the painting example, the artist who donated their own painting that would normally sell for $800 at a gallery, gets a charitable contribution only for the supplies—paint, canvas, etc.  Their time is not valued.

 

It Can't Happen Here

When we are asked to speak about fraud at conferences, attendees will sometimes say

"that could never happen in our organization"

I wish that was true.   I wish I didn't pick up the local paper and see articles on embezzlements at local companies, nonprofits, churches, and youth sports organizations throughout the year.  I wish I didn't read the articles and realize that in most of the cases, the fraud could have been prevented.

This article here discusses the damage that a fraud can do to a nonprofits reputation and signs to look for in your organization.

For more about what you can do to deter fraud in your organization, contact us at cbergvall@bbco-cpa.com

Fundraising Q&A-What can a participant deduct for a special event?

QUESTION:  What can a participant deduct for a special event?

ANSWER:  The general rule for special events is that participants can take a charitable deduction for the part of the event fee that exceeds the benefit to the participant.  For example: if a dinner ticket to an event in $150 per person and the value of the dinner is determined to be $100, the attendee can take a $50 charitable deduction.  It is the responsibility of the nonprofit to notify the attendee of the value they received.  This is an IRS requirement when the value received by the participant is more than $75.

QUESTION:  How should the nonprofit notify the participant of the value of the special event?

ANSWER: There are several ways a nonprofit can do this.   The notice can be printed on the ticket to the event.    $50 of this ticket price represents a charitable contribution.      It can be part of the text of a follow up thank you note from the event.   Thank you so much for joining us as we celebrated 25 years of fighting poverty.  We raised over $30,000 at our event.   Please note that the FMV of the dinner was $100 and  $50 of the ticket price is a charitable contribution.