Yesterday, Gene and I presented at the Foundation Center in San Francisco on “Legal Issues Facing Nonprofit Start-Up Organizations.” Setting up and operating a successful nonprofit is challenging but possible under the right circumstances. Below we’ve highlighted some of the key steps and issues to consider prior to formation for determining whether a new nonprofit is the best vehicle for achieving your charitable objectives and some of the key steps and issues to consider during the formation process and in the early stages of the nonprofit’s lifecycle to help increase the chances of a healthy and vibrant nonprofit organization.
Prior to the start-up:
- Research is essential! It will likely take more resources (time, energy, money, etc.) to stop or undo a formation that was not properly thought through or prematurely set into motion than it would to properly research the decision to start a new nonprofit to begin with.
- The contemplated mission, core activities, and needs and persons to be served are critical. They must be consistent with 501(c)(3) rules and they frame and influence other considerations such as funding strategy, differentiation in the marketplace, and choice of legal form.
- The business plan must think beyond today, tomorrow, and the next year. The goal is to create a sustainable organization.
- Know your place in the market. A new nonprofit should not merely duplicate what is already out there.
- A weak organizational foundation can jeopardize long-term viability. Critical building blocks include more than funding. It also includes the right human resources (i.e., people) to govern the organization, run the charitable programs, handle administrative and compliance work, fundraise, and provide specialized knowledge when needed.
- Just because it is possible to set up a new nonprofit, doesn’t mean a new nonprofit is the best vehicle to achieve your charitable goals. Consider alternatives such as fiscal sponsorship, working with an existing nonprofit, or a donor-advised fund.
During the start-up:
- Get the contributions and input of the board in developing the mission and business plan. It's critical that the board be invested in both.
- Be careful of drafting a specific purpose statement in the articles of incorporation that is too narrow to allow for a natural evolution of the organization without requiring an amendment.
- Consider working with a lawyer to draft your bylaws, which will be the principal instruction manual of how the organization will be governed. Make the bylaws best fit your needs without falling into traps that will cause future disputes that can handcuff the organization.
- Take great care in coordinating your business plan with the issues raised in your federal tax-exemption application (Form 1023) – e.g., activities that truly further a 501(c)(3) purpose, family and business relationships among directors and officers and potential conflicts of interest.
- Remember your state may require separate filings for state tax-exemption.
- Be aware that states in which you fundraise generally require state registration – see www.multistatefiling.org.
During the early-stage management:
- Periodically review your governing documents (articles of incorporation and bylaws) and make sure you are operating consistent with those documents and that they remain compliant with applicable laws (which change over time).
- Ensure that you are nurturing the development of the board (continual recruitment and retention practices can be critically important).
- Be knowledgeable about your ongoing filing requirements (e.g., Form 990, CA FTB Form 199, CA AG Form RRF-1, CA Statement of Information).
- Talk with an insurance agent about your organization's insurance needs (consider minimally some type of general liability insurance and policy for directors and officers).
- Make absolutely sure that you have compliant employment practices (employee-related liabilities may be your greatest risk exposure).
- Understand other applicable laws that your organization must comply with, including those related to executive compensation, lobbying, electioneering, and intellectual property (e.g., copyright, trademark).
- Delegate tasks with reasonable care, both in the selection of the right people and in the provision of ample resources to such people to accomplish those tasks.
- Develop and adopt sound policies (e.g., document retention/destruction, whistleblower, executive compensation, expense reimbursement, gift acceptance, review of the Form 990).
Many of these legal issues are not specific to start-ups and can certainly present (ongoing) challenges, especially as circumstances change. Additionally, many of these concepts can become much more nuanced and complicated and organizations are encouraged to seek appropriate resources and assistance when needed. We hope though this provides a useful initial framework of key steps and issues in deciding whether to start-up and for nonprofit start-up organizations.
Thank you to the Foundation Center and the attendees!