Six Questions to Ask Before Starting a Nonprofit

At Nonprofit Solutions, we love the excitement and passion that people have as they start a new nonprofit. People who are inspired to start a charity have a mission they want to accomplish and are excited to get started. We want all nonprofits to have a solid foundation to stand on — one that will allow them to accomplish their goals without running into problems or legal challenges.

One of the ways to build a solid charity that will endure is to consider some hard questions before you even file for tax-exempt status. These questions will help potential nonprofits determine if creating a 501(c)(3) is the best way to accomplish their mission or if there’s a better approach to accomplish the same goal.

Is this truly beneficial to the community?

Many times, the need for help is obvious. There may be a gap in existing services or a community in need of support. Those who want to start a nonprofit see the need and come up with a great idea to meet the need. But before jumping in, be sure you are communicating with those in the community. Is your plan and mission going to meet their needs? Does the approach you’re planning align with how they want their needs met?

Is anyone else already doing this work?

Sometimes, there is already a charity or organization that is doing the same work in your area. Even if you believe you have something different to offer, consider whether your time, money, or resources might be better spent supporting an organization that already has the infrastructure in place.

Having two or more nonprofits working toward the same goal leads to twice as much money spent on overhead, administrative fees, and legal costs of forming a nonprofit. Additionally, it will be harder to find donors if the potential pool of donors who want to give to the cause is split between multiple organizations.

Is there a personal benefit to you or your network by setting up the charity?

While a nonprofit might be a wonderful place for you to work in the long run, remember that a nonprofit’s purpose is to provide benefit to the community, not to any individual. A nonprofit that appears to be started to give work to the founder or someone in the founder’s network is a red flag.

Just as businesses often take time to be profitable, nonprofits often take several years before their giving can support the administrative costs of an employee. As the founder of the nonprofit, you should not count on drawing a salary for the first few years. Those who award grant monies look for administrative costs to be around 10% of the budget. If it gets as high as 20%, it’s generally a deterrent to obtaining grant funds. Individual donors also want their donation to go primarily toward the mission of the nonprofit rather than administrative overhead.

Do you have truly sustainable funding?

Paperwork and setting up the legal side of a nonprofit is expensive. Beyond the startup costs, nonprofits require sustainable funding to continue to exist. We’ve seen cases in which nonprofits believed they would have no trouble fundraising, only to find out it’s harder than they thought.

A good way to determine the availability of fundraising is to get pledges before you even apply for tax-exempt status. Typical startup costs to cover organizing documents, policies, accounting processes, and board training will run between $5,000 and $10,000. If you can get pledges from more than one source for that amount, it is an indicator that you may be able to continue to raise funds. After you’ve applied for tax-exempt status, then you can begin the process of collecting the promised funds. If you are struggling to find funding for a startup nonprofit, then funding will likely continue to be a struggle.

Have you researched best practices and compliance with state and federal law?

Tax-exempt status brings with it many rules and regulations, as well as best practices that will serve to keep your nonprofit out of legal trouble. It is best to research all that goes into complying with these laws and the related reporting requirements before you start the nonprofit. Be sure you can comply with the state and federal laws that apply.

Have you researched program requirements and regulations?

Similarly, nonprofit programming comes with requirements and regulations. Whether you are working with pets or children or simply providing food, you will be subject to all the requirements and regulations that govern pet care, child care, or food preparation. Almost any type of programming you provide will have some sort of agency regulating it. Be sure you can meet all requirements and regulations before you begin.

Spending time considering these six questions is a great first step toward starting your nonprofit. After considering them, you will know whether seeking 501(c)3 status is the best way to accomplish your mission or if there may be other ways to reach your goal of making a difference.