So You Want to Start A Nonprofit?

By Doug Borwick, CEO/Co-founder, Outfitters4                  

For years people have been posing the following question to me: “I have a great idea for a nonprofit. How do I start one?” Over the decades, I’ve developed a standard response: “Don’t.” That does not mean that one should never create a new 501(c)(3) but that doing so should not be the default option. 

The principal reason for suggesting second (or third) thoughts about such new organizations is that few people understand the eventual complexity of managing or governing a nonprofit. They may be aware that the initial steps are (relatively) easy (though not as easy as they imagine) but not that mid- and long-term issues are thornier than they could have conceived.

Cautions

Most startup nonprofits develop out of the passion of an individual or small group of people. They see a compelling need and want to work toward limiting its negative impact on their community. It's a truly noble motivation. They incorporate (so they can accept donations and receive grants) and, because it is a legal requirement, they establish a small board of directors made up of friends sympathetic to the cause. Often this group is told that the board doesn't really need to do much; its existence is simply to satisfy the law. (This is the seed of many problems.)

The nonprofit world is crowded and becoming more so almost exponentially. Between 2012 and 2022 the number of 501(c)(3)’s in the U.S. increased from 1.1 to 1.5 million. Each one of those organizations needs to populate a board of directors and raise operating funds. The rate of growth in the sector that has been seen over the last forty years is simply not sustainable.

The law requires a volunteer board of directors to ensure that the financial benefits of being a 501(c)(3) are used to serve the public good. That means the board must be (or become) independent of the founder(s) and their vision or desires. The timing of this can vary, but it almost always develops when the organization has grown and the issues it faces become more complex. When this happens it frequently leads to internal dissension and, given the law, the founder’s will is no longer paramount. This loss of control can be disconcerting to those who formed the nonprofit. In addition, with growth, the entrepreneurial strengths of the founder(s) become less important than the need for effective management. These shifts are so common that the field has identified “Founders Syndrome” as a common source of dysfunction.

The need for a volunteer board of directors to guide and oversee the workings of the nonprofit also means that the decision-making process is cumbersome–often long and drawn out. This almost always proves frustrating to people intensely focused on the organization’s mission.

A further truth about nonprofits is that they are simply complex. Their core governance structure (the board of directors) is made up not only of volunteers but people who are also, usually, not experts in the nonprofit’s field of service. And these are the ultimate decision-makers! Additionally, the organization must manage toward its mission, and, unlike a balance sheet or income-expense statement, it is inherently abstract. Working to fulfill a mission requires translating that abstract concept into concrete actions; evaluating outcomes–a critically important management skill–is always challenging when addressing abstract goals. (This is one reason nonprofits have so much difficulty with evaluation.)

Alternatives

A simple alternative to establishing a new nonprofit is to identify organizations with purposes similar to your interests and do the work through them or propose your idea as a new program they could implement with your leadership. There are few charitable purposes that do not already have some, often many, nonprofit organizations addressing them. The field may not need more competition. Some simple research can uncover existing organizations with compatible missions. Then the important question becomes, “Does the world really need another organization in this arena consuming financial and personnel resources?”

Since the acceptance of donations and the receipt of grants is a principal motivation for forming new 501(c)(3)’s, fiscal sponsorship is a viable option. In this situation, an existing 501(c)(3) agrees to be a conduit for grants and donations. With a fiscal sponsor, the structure through which the work gets done can be much simpler than a 501(c)(3). Indeed, there may not even be a need to incorporate. This would be the simplest option, but it does not solve the problem of personal liability.

Almost any corporate structure is less complicated than a 501(c)(3). A particularly appropriate option is the LLC, one of the simplest of corporate entities; but any type will do. An unusual type that might have some potential in certain situations is the co-op. The cooperative is not nearly as well-known as the LLC, S Corporation, or C Corporation, but its membership structure might be appropriate for some mission-focused concerns.

Conclusion

The impulse to form a nonprofit is, indeed, a noble one. The desire to make communities better, safer, and healthier has characterized the “better angels of our nature” throughout this nation’s history. And, sometimes, honoring that legacy means forming a new nonprofit. However, the question, as has been shown, is a complicated one. 501(c)(3)’s are unwieldy and bear the seeds of unexpected consequences for those who start them.

At the same time, 501(c)(3)’s are a brilliant institutionalization of the desire for service to enhance the public good. They are a mechanism that has yielded major benefits to society, but they are not the answer to address every need or every new idea.