Starting a Nonprofit Part 1: What is a Nonprofit?

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We recently turned our parent group, Ashburn Robotics into a full nonprofit, something that a lot of teams have considered in the past. Nonprofits are great for getting sponsorship/fundraising from big corporations because everything they donate to the nonprofit is tax deductible. However, they also require some dedication, time and money.

In the first part of this series, we go over what a nonprofit is, some things to consider before starting a nonprofit and whether or not starting a nonprofit is really the right choice for your team or organization. Please keep in mind that nonprofit laws vary by state and none of us are lawyers, so make sure to do your own research before deciding either way.

What Exactly is a Nonprofit?

Legally, a nonprofit is an organization that is exempt from federal and state taxes. While there are a number of IRS designations that are technically nonprofits, the most commonly discussed is the 501 (c)3. These organizations must be operated exclusively for one of the exempt purposes as set forth by the IRS (charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and prevention of cruelty to animals or children). The organizations can make money, but all money they make must be spent on the business or furthering its exempt purpose. That’s where the term nonprofit comes from. There are also a lot of laws that go into the particulars about what a nonprofit can and can’t do, how exactly they can earn money and how exactly they can spend it. To complicate it even further, within 501 (c)3 nonprofits there are two distinct designations.

Private Foundation: Foundations are usually created by a single, primary donation from an individual or group of individuals. The funds are managed by the foundation’s trustees or directors and the main purpose of the foundation is typically financially supporting other charities. This is the default status of a nonprofit because of it’s slightly lower requirements and it is generally less desired because of lower donation limits and a far more annual tax form they have to file.

Public Charity: Charities are created for a specific charitable reason and focus almost exclusively on carrying out that mission. In our case, that was promoting hands on STEM education in our community. Because public charity is considered a preferential tax status, the IRS requires you to prove that you deserve to be a charity when you apply. That isn’t hard to do, if you’ve given some thought to being a charity, but does require planning and some sort of bigger picture.

Is Starting a Nonprofit Right for You?

That depends heavily on you, your team and your circumstances. However there are a number of factors you should probably consider before deciding to go for it.

Why do you want to start a nonprofit?/i>This is key. Nonprofits are called charities for a reason. They don’t exist to make you money. They are meant to help the public, your community. If you are going to try to become a nonprofit, you need to make sure that you have a clear idea of how you can use your nonprofit to help your community. Whether that’s by raising money to help local FTC teams, spreading STEM education or some other service, whatever you choose, the nonprofit is meant to exist exclusively to fulfill its charitable purpose.

Do you need to start one? This one has two considerations. Are there any public charities in your area that already do what you want and do you need nonprofit status to carry out what you want to do? In general, if there is already a nonprofit doing exactly what you want to do in your area, it’s easier and better to try to partner with them. That gives you all the benefits of being part of a nonprofit without the administrative work and lets that nonprofit expand its reach a little bit. It also means the two of you won’t be competing with each other over donor money and public support. The other consideration is if you even need to be a nonprofit to do what you’re doing. As a nonprofit, there is more administrative overhead and a greater need for continuity from year to year. If your team dissolves, what happens to the nonprofit? If your team has no trouble carrying out your outreach efforts and getting funds to support your team, then there is no reason to become a public charity. You won’t see any real benefits and the increased reporting burden could be trying.

Do you have the resources to form a nonprofit? This is a purely logistical question. As a nonprofit, you will need to establish a board of directors. The board should not be related to each other and should include people outside of your team, since the scope of the charity should be greater than just the people on your team. You will need to have very careful bookkeeping. If the IRS decides to audit you, you will need to have a detailed account of how all the money you earned and spent. There are actually some very strict rules about how exactly you can earn money as a nonprofit and what percentages of your total income can from those various income streams. You will also need to have a business address of record and pay for various filing fees. While it tends to cost less than $1000 all told and, at least in Virginia, the annual filing fee is nominal. Still, if you’re on a shoestring budget, even that can be too much.

What other choices are there?At this point, you can either continue as you have been or you can see if there is another team’s nonprofit that you can partner with. Before we formed our own nonprofit, we worked with a group called Making Technology Fun.We could fundraise through them without having to set up a charity of our own. This type of partnership is easy to do and requires far less commitment. While you give up some control, many teams find the lack of overhead or administrative requirements to more than make up for it.

What Next?

Congratulations, deciding to start your own nonprofit is the first step to becoming one. Next comes the fun part. Sit down as a group and think about what you really want from your charity. After deciding to go forward, determining what exactly your charitable purpose will be is the most challenging, and rewarding part of the entire process. This is when you can set down what your goals are, what you’d like to be able to do and how you want to help not just your team but other teams or your community at large. Your decisions now will shape almost every aspect of what you do moving forward.

Stay tuned for the next part of the series, Planning your Nonprofit.