Understanding the language of nonprofits

With all the press about how bad things are, it's comforting to know that we still have a human need to help, to make things better.

A lot of awfully nice people out there want to do really nice things for people. If there is a perceived need, there is almost always someone who wants to fill it, and most of them feel that starting a nonprofit is the way to do that.

Doing those nice things effectively is not so clearly defined.

   

One of the first obstacles that greets many people is understanding what it takes to legally become a tax-advantaged nonprofit.

 

One of the core principles is that any non-profit must operate for the "public" good. The problem is that the term "public" doesn't just mean "for someone's benefit other than the founder(s)."

Benefitting just one person or a few families isn't what the term implies. When used in the strictest legal sense, it means to benefit a class of beneficiaries.  For instance, the class could be low-income children or victims of domestic violence.  The class can be geographically localized, such as low-income children in a specific city, but the mission has to be inclusive enough to have a wide-ranging impact within that geographic border.

Case in point.  One person sees a young person who needs assistance in paying for college, and wants to start a charity to benefit that one person.  That's not "public". It's targeted to that one specific beneficiary. Although the mission is purely philanthropic, it would not qualify to receive tax-exempt status.

Another person sees that low-income children in general have a hard time finding money for college.  The proposed charity is meant to acquire funds to help children in that area immediately, and any subsequent qualifying children going forward in time. Although these children may live within a specific area, such as a city, town or county, the mission is aimed at all of them. The potential area of impact might be a population of several thousand.

The latter is defined as operating in and for the public (general) good.

Another example of a non-qualifying charity would be one that exists to  benefit the founders in some way. One of the most common requests I get is for people who want to generate personal income by starting a charity.

It doesn't work that way. Once you start a charity, any funds collected belong to the public.

For instance, a person owns some undeveloped property and needs to derive income from it.

The person decides to start a charity and rent the land to urban farmers. Although on the face of it  the charity could claim that it was promoting healthy nutrition, the underlying principle is to generate income for the founder. If the rental income is principally used to pay a salary to the property owner, it is not being operated "for the public good"  in the sense that the law intends.

One of the thinnest lines any charity has to walk is the one involving use of funds. Funds have to be used primarily to advance the purpose for which they were collected. An awful lot of the legislation generated around charitable giving is to assure that the "public" derives the maximum benefit from the collected funds. Some states have even proposed legislation requiring charities to spend at least 60-80% of the funds for direct program costs, not administrative funding.

While that doesn't preclude a founder taking a salary from the charity, the salary has to be for the advancement of the mission, not to provide a job for the charity's key personnel.

You can't "sell" a charity or its assets in the way you do personal or traditional business property, i.e. for personal profit. All proceeds have to be used for the "public" good, such as by donating the assets or the proceeds of any sale of them to another charity.

These are just a few of the things that potential nonprofit founders have asked me when contemplating starting a charity of their own.

If you need more information or would like to contact me about your nonprofit plans, drop me a line at rightwords@ida.net.

Can you pay for grant writing via commission payments?

Every grant writer gets letters or emails like this:

" We are looking for a grant writer to help us get funds for (fill in the blank). We will only pay for awarded grants, but we will pay 10% of the grant award. We anticipate you writing at least three grants a month."

Ethical grant writers normally refuse this arrangement, and it's not because they are greedy capitalists who don't "get" nonprofits.

The grant writer understands that the nonprofit doesn't normally mean to do anything illegal or unethical. They just don't understand the process or the consequences. The organization does know they have no money, so to them only paying for a positive outcome just makes sense. They reason that if the grant writer's income is dependent on getting grants they will try harder.

So, what's the problem?

That's the organization's side of the fence. What about the other side?

Put aside the fact that these folks are asking for a minimum of 30 hours a month in free labor. Also disregard the high probability that the organization may not qualify to apply to three grants a quarter, much less three each month. We can also ignore the statistical fact that there are approximately 100 nonprofits that need money for every grantor that has money to give. Those are all drawbacks for the grant writer, but they aren't unethical or illegal.

What is unethical and possibly illegal is the process necessary to collect the commission. It almost always requires both the grantee and the grant writer to commit fraud.

With rare exception, grant funding never allows the recipient to pay for expenses incurred before the grant was funded. In addition funding is often restricted, i.e. it can only be used for the direct expenses of a program. The grantee has to attest to the use of the funds in a "use-of-funds" report or statement to grantor, and the grantor can ask for the return of funds not used as specified in the grant.

At the very least, commission arrangements often result in nasty little social media spats over payment once the grantee discovers they can't use the grant funds for that purpose. At worst, it could result in a filing in small claims court.

Assuming that the grant writer actually get does paid, he/she will have to bill for the commission after the funds are awarded (which can be as much as a year later), and he/she usually can't state on the invoice that the funds are for writing the grant. Instead the invoice would have to attest that the funds are for some allowable expense of the program.

In other words, you have to assist the grantee in lying to the grantor to get your money.

There are a very few usually government-funded grants that might allow for grant preparation. I think in fifteen years I've seen three that specifically stated that there was an allowance for "application preparation". This amount is often as little as one to three percent of the awarded funding, putting a 10% commission out of the realm of possibility.

What's the alternative?

So what's a brand-new, broke nonprofit to do? Ask for a volunteer, making it clear that there is no financial compensation. Some students or recent graduates might do it just for the experience, or perhaps it is a way for a volunteer to support that specific charity. Some online job boards that cater to nonprofits have a section for people to ask for volunteers. That's absolutely fine, and totally ethical.

 

If you want to get your feet wet in the world of grant funding at no cost to you, post an ad for a volunteer or visit your local college or even civic groups and ask for help. You could even take some of the comparatively inexpensive online introductory courses and do it yourself.

You can pursue other fund-raising strategies until you have enough funding available to employ the services of a grant writer. Grantors also like applicants that have proven that they can raise funds in several ways.

   

Caveat Emptor

There is no specific universal law against soliciting or performing grant writing services on a commission basis, although some professional organizations do include such a prohibition in their professional code of ethics, for all the reasons stated above.

Are there people out there who will accept your invitation to write grants on a commission basis?  Sure. A few of them may even be qualified to write grants. They may write grants for big award amounts, hoping against hope that one will connect. Or they might write dozens of low-dollar appeals hoping to keep a little money coming in to pay the bills. In the meantime, they may ignore other revenue-generating opportunities such as in-kind or product donations, since there is no commission to be earned.

Eventually the lack of income will result in fewer and fewer grants being written. In the meantime, the organization is racking up a pretty consistent history of being denied funding, and that can hurt their chances with future grantors.

If, and it's a big if, the grant does allow for post-award grant writing reimbursement, and the grant writer agrees to the arrangement, then the commission-based arrangement may work out. If so, include that information when you solicit services on a commission basis. Just be sure that you understand the pitfalls before entering into the arrangement.

Should you become an entrepreneur?

There are probably 92 gazillion articles out there on how to be an entrepreneur. Most of them assume that you've already decided to go it alone and are ready to become the next Steve Jobs, Larry Page or Anita Roddick.

That sort of ignores the people who are sitting at a desk or their breakfast table and asking "should I become an entrepreneur" because let's face it, the idea of having no one to turn to but yourself when things get rocky is just plain scary.

Here are 5 questions to ask that may help you take the plunge.

1.  Is there a compelling need for what I want to do or make?

Notice I didn't a say "a market for" something. Demand can be created. That's sales, not vision. What you need is the vision to see where something you do or have solves a problem for someone. We are not talking about inventing the internet here. For example, the dawn of the computer age created a need for smaller, more mobile devices, which led to laptops, which led to the smart phones of today and a market for creating apps.

2.  Does your passion line up with your personality?

Are you a bulldog or a greyhound? Some entrepreneurs are fabulous at conceiving an idea and taking it to a certain level, but then they get bored and want to move on to the next big adrenaline rush. Others are prepared to handle every aspect of an idea in minute detail. Each type can be successful, but they can also waste a lot of money and effort by not matching their personality to their passion.

3.  Can you ask for and accept help?

The most attractive part of being "self-employed" for many people is the "self" part. The idea of not having a boss can cause some people to think that asking for help is a sign of failure. No one knows everything or does everything perfectly.  Know your weaknesses and recruit to overcome them, not to showcase your strengths.

4.  Are you a planner?

In my business I work with a lot of fledgling businesses, both for-profits and nonprofits. I can absolutely attest to the truth of the old saying that those who don't plan absolutely do fail. Planning is about facing reality. If you are afraid to confront facts, you are dragging a ball and chain into your new venture.

Philosophically, it might be better to try and fail than to never try at all, but it's also damned expensive.

Lay it all out on paper.  Sure, maybe you will come to the conclusion that your idea is not viable. So what? Isn’t it better to find out now before you bankrupt yourself? More likely though, your plan will reveal a smoother path to success by identifying and steering you around the rocks in the path or even to a new and better path.

5. Do you know how much entrepreneurship you can afford?

It doesn't matter if you want to save the world or invent the next great fly swatter. It all takes cash and there is only so much of it to go around.

One of the hardest things for me to get through to would-be entrepreneurs is that there is no money fairy. In any business plan, there is something called a SWOT analysis…Strengths, Weaknesses, Opportunities and Threats. The most common weakness is not  being under-capitalized, but having no strategy to overcome that problem.

You may know exactly what the pinnacle of success looks like to you, but you can't start there.

The only business I know of where you can start on top is grave digging, and the only place to go with that is down. It's unlikely that someone is going to give you a million tax-free dollars to start your business so be realistic. If that means starting your business in a garage, well, a couple of guys named Steve were pretty successful with that approach.

When the 1023EZ may not work for you

Ever since the IRS released the new short form application for filing for charitable status, my inbox has overflowed with requests to help people file it.

The first thing I have to say to all of you is:

READ THE INSTRUCTIONS FIRST.

There are some specific areas that may require you to file the long form application instead, and there are some implied drawbacks.

The two areas that sentence applies to are organizations already incorporated as LLCs and organizations that envision grants as a primary income stream.

Part II of the instructions specifically prohibits LLCs from filing using a 1023EZ, although they can apply using the long form. Sole proprietorships, partnerships and "loosely affiliated groups of individuals" are excluded as well.

Of perhaps greater importance to most of the people contacting me is the $50,000 annual revenue restriction for the first three years

For organizations hoping to access grant funding, the 1023EZ simply doesn't indicate or require enough basic verified data that is available in the public domain to satisfy the background checks required by most grantors or institutional funding sources. (The EZ does not require any sort of verification of your claim that you will not exceed the 50K threshold, such as the financial projection worksheet in the standard 1023.)  Just remember that when you file, you are "attesting", i.e. making a legally binding statement that you are not going to exceed the revenue cap.

While it is probably true that nearly all new organizations will not exceed the revenue cap in their first three years, and thus are only required to file the 990-N (postcard) report, that document is not accepted by grantors, again because it doesn't require or report enough data to make a determination about your effectiveness or financial integrity.

If you exceed the cap and have filed a long form 1023, no  harm, no foul. If you have applied and been approved using the EZ, the IRS might have a problem, or more accurately, you might have a problem with them.

There are also certain mission categories that require more information to be submitted to the IRS than is contained in the short form application. These include, but are not limited to, charitable risk pools, credit or financial education or assistance, schools, colleges and universities, organizations with donor advised funds and churches or church associations.

Having said that, some organizations are quite well-qualified to use the short form. One that comes to mind is a group that wanted to provide cross-translated children's books to ESL students, i.e. have the child's native language story books contain the English translation displayed under the native language text, and make those books available as videos or PowerPoint presentations to any bona fide community organization, library or educational institution that needed them. The translations were all being done by qualified volunteers, so their initial capital needs were quite low.

Of course after the three year qualifying period, should your organization suddenly come into significant funding, you can file the long form 990 and provide the appropriate reporting to satisfy the IRS as well as donors.

I do provide an initial feasibility study that can help you decide if your organization should file the EZ, as well as a review of your prospects for survival through those first critical three years.  For more information visit http://www.cloudlancerwriting.com and click on the consulting link.