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.