non-profit business Archives - The Blue Heart Foundation

Top 4 Challenges of Starting a Non-Profit

Top 4 Challenges of Starting a Non-Profit And How to Solve Them

There are many reasons people start non-profits, and most involve a desire to help others. While it would be wonderful if a worthy cause translated to an easy process, most of the time it doesn’t. In fact, starting a non-profit is challenging in a variety of ways.

Getting Tax Exempt Status

To operate as a non-profit organization, you must apply for and be awarded tax exempt status by the Internal Revenue Service. Most charities are organized as 501(c)(3) corporation. The IRS defines these as:

Operating for a purpose identified as exempt under section 501(c)(3), including charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international sports competition and preventing cruelty to children or animals.

If charitable, the organization just provide charity in its accepted legal sense, which includes relief of the poor, distressed, or underprivileged; advancement of education, science, or religion; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions, eliminating discrimination and prejudice; defending human civil rights secured by law; and combating community deterioration and juvenile delinquency.

Any organization that meets these requirements and wishes to be granted non-profit status must complete Form 4220 and go through the complete application process.

Constraints on the Operation of Non-Profit Organizations

Organizations that are granted 501(c)(3) status must adhere to certain constraints as laid out by the Internal Revenue Service.

There are two primary requirements.

The first requirement states that 501(c)(3) companies may not operate as “action” organization, meaning that it may not work or lobby on behalf of any political party or candidate, and that it may not attempt to influence legislation “as a substantial part of its activities.” The last part is clearly open to interpretation, but it’s safe to say that any non-profit that aggressively lobbied legislators would be in danger of losing its status.

The second requirement is that the money brought in by the non-profit may not “inure to the benefit of any private shareholder or individual.” This part of the law can be confusing, and sometimes people misunderstand it to mean that nobody working for a non-profit can be paid. The law makes a distinction between fair pay for work and excessive pay or profit.

Financing Challenges of Starting a Non-Profit

Every non-profit organization needs money to stay afloat. For most non-profits, the money they take in comes from a few sources.

Individual and corporate donors may donate funds to a non-profit organization. In many cases, the donor may deduct some or all the donated amount on their income taxes.
Government agencies and private companies may award grants to individuals and organizations. Grant money is most often given with a specific purpose and does not need to be repaid.

It sometimes happens that a non-profit organization is founded with seed money from the person whose name is on the charity. However, that is the exception and not the rule.

Research shows that 30% of all nonprofit organizations fail within 10 years. Cash flow is a common problem. As of 2018, approximately half of all charities in the United States had less than one month’s worth of cash in reserve, and between 7% and 8% are technically insolvent.

Organizational Challenges of Starting a Non-Profit

A lack of financing isn’t the only element that can challenge non-profit founders. Other potential issues include:

The lack of a comprehensive business plan. Non-profits are still businesses, and it’s essential to have well-thought-out business plan to guide your operations and keep your organization on track.

A lack of strategic goals. To be successful, a non-profit must have a minimum of three years’ worth of strategic goals, although five years of goals are preferable. Goals help direct your operations and ensure that you’re headed in the right direction.

Poor volunteer management. Many charitable organizations use volunteer labor to supplement their regular staff’s work. However, mismanagement of volunteers’ time and skills can sink a charity even when everything else is working as planned.

The takeaway here is that careful planning, both financially and organizationally, is a must if you want your non-profit organization to succeed in its mission.

Challenges of Starting a Non-Profit | Should You Hire a Non-Profit Lawyer?

One of the ways to avoid the most common mistakes that non-profit start-ups encounter is to hire a non-profit lawyer. The benefits of having a lawyer who specializes in non-profits are:

It saves time. For someone who is not experienced, it may take a long time to fill out the appropriate tax paperwork and create internal and external policies to govern your operations. An experienced non-profit lawyer will be able to help you do these things quickly, leaving you free to focus on other aspects of running your charity.
It saves money. A charity that starts with no written policies – or with poorly written policies – may end up losing money in a variety of ways. One of the most obvious is losing their tax-exempt status, which can happen if funds are mis-handled.
It helps avoid other problems. An experienced non-profit lawyer can help you to handle every legal aspect of starting a non-profit, including potential issues with your organization’s name, logo, and tax status.

You may not want to spend money to hire a lawyer but think of it as an investment in your non-profit’s future

Challenges of Starting a Non-Profit| Questions to Ask a Non-Profit Lawyer

Before you choose a lawyer, you should ask questions to determine if their skills and experience are a good fit for your non-profit.

Do you have experience working with non-profit organizations?

What type of work have you done with non-profits?

Will you handle our work yourself or assign it to a junior partner or associate?

What is your fee structure for non-profits?

Are you open to alternative fee arrangements?

Approximately how long will it take to complete the work we want you to do?

These questions will help you get a handle on the lawyer’s experience, time frame, and fee structure. You should weigh all these factors before you sign a contract – and keep in mind that in some cases, you may want to hire more than one attorney depending upon your needs.

Together We Rise!

At The Blue Heart Foundation, we believe in empowering African American boys by equipping them with more than just academic knowledge. Our mission is to nurture a strong, positive mindset, instill the value of higher education, and introduce the transformative wisdom of metaphysical principles. We are committed to helping these young leaders develop the confidence, critical thinking skills, and spiritual grounding they need to overcome obstacles, excel academically, and lead with purpose.

Email
support@theblueheartfoundation.org

Location
San Diego CA 92154

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How Do Non-Profit Business Owners Get Paid?

by April Ray | nonprofit business

Ask people what it means to be a non-profit business organization and you’re likely to get an array of answers, many of them incorrect. For people who aren’t familiar with the ins and outs of how non-profits work, it can be confusing to hear about executive and employee compensation and earnings.

But, guess what? It’s an actual thing!

Because non-profit organizations provide essential services, it’s important for the people who interact with non-profits to understand how they work and especially, how non-profit business owners get paid. Here’s what you need to know.

So, What Does It Mean to Operate as a Non-Profit Business?

Let’s start at the beginning with an explanation of what it means to be a charitable non-profit organization. According to the IRS, a non-profit charity is:

In operation for one or more of the exempt purposes set forth in section 501(c)(3) of the tax code, including charitable, religious, educational, scientific, literary, testing for public safety, fostering natural or international amateur sports competition, or preventing cruelty to children or animals.

Of a charitable nature, using the generally accepted legal sense of the word. Examples include relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

The IRS also states that “no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual.”

A non-profit charity takes in money from donations and other sources. The key part of the IRS definition is that the net earnings may not profit any shareholder or individual.

What’s Included in the Net Earnings of a Charitable Organization?

The area of the IRS definition that confuses people is the bit about net earnings. Let’s talk about what is included in net earnings.

For any business, net earnings (sometimes called net income) are calculated by subtracting operating expenses from revenue. Non-profit charities get revenue from donations, grants, and memberships. They may also get revenue from selling branded products.

A non-profit organization’s expenses may include:

Rent or mortgage payments
Purchase of necessary supplies
Transportation/Gas
Utilities
Money for essential services
Employee salaries and compensation

The last item is one that can cause a great deal of confusion, particularly when some charities are in the news for what seem to be unnecessarily high salaries paid to executives.

How Do Non-Profit Business Founders Earn Money?

The number one question people have about running a non-profit is how non-profit owners – who are usually referred to as founders – get paid. If the IRS rules say that the earnings of a non-profit may not “inure to the benefit of any shareholder or individual,”

…how is it possible that non-profit owners and employees can earn a salary for the work they do?

Let me try to break it down for you.

The IRS differentiates between a benefit and fair compensation for work that is done. A non-profit founder may pay themselves a fair salary for the work they do running the organization. Likewise, they can compensate full-time and part-time employees for the work they do.

Non-profit founders earn money for running the organizations they founded. They often put in long work hours and make far less money than executives at for-profit organizations. When running a non-profit is their sole employment, it is reasonable for them to draw a salary for the work they do.

One of the things that can lead to confusion around the issue of compensation for non-profit owners is that there is no hard-and-fast rule about how much they may be paid. However, the IRS can and does penalize organizations that overpay executives or employees.

You may have seen stories in the news about unscrupulous non-profit charities and their mismanagement of money. One of the most infamous cases was the one involving the United Way, whose former CEO was convicted of fraud in 1995.

The bottom line is that non-profit founders and employees are paid from the gross revenues of the organization. These salaries are considered part of the operating costs of the organization.

What is Considered Reasonable Compensation?

The primary guidelines for both executive compensation and employee compensation at non-profit organizations are that the wages paid must:

Meet all local, state, and federal guidelines for the minimum wage; and
Be reasonable, fair, and not excessive; and
Include all benefits as part of the total compensation package.

Non-profit charities must walk a fine line between keeping their operating expenses low and competing with the for-profit sector for qualified employees; not an easy task. It is the responsibility of every charity to navigate the process of determining fair salaries that also manage to be competitive enough to attract the employees they need.

For executives, the road can be very difficult to travel. The recommended best practices from the Council of Non-Profits says that:

Executive salaries must be disclosed to and approved by the non-profit’s executive board on an annual basis.
The compensation voted upon must include all benefits.

In other words, a non-profit founder’s compensation package might include:

An annual salary
Medical benefits
Paid time off
A pre-approved bonus structure

Having the board vote on an executive’s compensation package is one of the best ways to ensure that the payment is not excessive and that it allows the bulk of the charity’s revenue to be put toward the organization’s mission.

How to Check on a Non-profit Business

When you interact with a charitable organization, whether it’s as a donor, member, or recipient of goods or services, it’s important to do some research to determine the charity’s status regarding its financial management, including employee compensation.

There are several organizations that track charities and grade them based on how they operate. They are:

These organizations track and rate charities based on criteria that may include:

The charity’s classification
Its descriptions of its activities and financial management
In-depth review of financial statements
In-depth review of tax returns

The goal with the ratings is to provide the public with a tangible way to measure a charity’s financial status and management of funds. The drawback is that in most cases, a charity must have at least seven years’ worth of financial reporting and tax returns to get a rating. That means that newer charities may not yet be rated as in the case with Blue Heart.

Although Blue Heart has been around for 10 years, it’s only been in the last 2-3 years that we have actually been receiving help from grant monies.

If a charity is not rated, there are still some ways to get a feeling for how a charity operates. One popular method is to examine the charity’s overhead percentage. On average, charities spend about 20% of their revenue on overhead.

However, the percentage of overhead being high is not necessarily an indication that the charity is misusing funds or even overspending. In fact, charities that skimp on overhead may not operate as efficiently as they could – and that inefficiency can have a negative impact on their ability to deliver services to the people who need them.

What’s The Point

Before you start coming up with speculative assumptions about how a Non-profit business should get paid, understand that both executives and employees of charitable organization must receive fair compensation for the work they do. Volunteers play a role as well, but people who are employed by non-profit organizations in an official capacity are paid according to their experience and responsibilities. That includes executives and owners, many of whom put in long hours to ensure that the charities they work for meet their obligations to the communities they serve.