I Want to Form a Non-Profit
Part I: Are You Sure?

So you want to start a non-profit
You have a charitable idea you and want to start a non-profit. Great! Aaronson Lavoie Streitfeld Diaz & Co., P.C. specializes in 501 (c) (3) applications, the most common form of tax-exemption. Before you plunge in, I have some questions for you.

Can You Share Control?

 501 (c) (3) organizations require a board of directors that oversees their operations.  You can handpick them in the beginning and be a member of that board.  But members and agendas change and you could find yourself disillusioned or eventually even fired.  Maintaining a board aligned with your vision and yet strong enough to be effective can be a tricky task.

 Do You Have a Business Model?

Yes – it is a great idea for helping others. But you are also planning to start a business.

Revenues can come from programs, donations, grants and even unrelated business ventures (subject to tax).  Going the grant route?  Do you know/can you employ someone who knows the grant-writing landscape? Government funds are shrinking and foundations are overwhelmed with applications.  There ARE opportunities AND it will  take time and resources to access them.

Is your business model an existing for-profit enterprise that you want to take the tax-exempt route? Be careful.  If you are already paying income taxes on a healthy business, the IRS will be skeptical that all of a sudden you have a charitable purpose.  Establishing a non-profit foundation funded by the for-profit may be a better alternative.

Can You Afford It? (Application)

 The IRS application fee ranges from $400 to $850, depending on the proposed scale of your organization.  You may need to engage an attorney or accountant to prepare the application, and that could easily be at least $1,000; it is not an automatic process and the IRS may well reply to your application with questions, which extends the process and your professional expenses.  Sadly I have seen clients plow halfway through the process and then delay or even abandon the process for lack of funds.

Can You Afford It? (Approval)

 Is this where you are expecting to earn your livelihood? It usually takes time to ramp up, so you may well need to exist off savings or other income for a while.  Even when times are good, you are entitled to a reasonable salary and not a direct share of any increased “profit”.  And your salary if you are in charge is public record, via Guidestar, which publishes the IRS Form 990.

Have You Explored Other Options?

You do not have to be tax-exempt to do good work.  And there are new hybrid models out there, like the L3C, which is a for-profit model that allows non-profit investment and a double bottom line.  (The L3C is effective in Rhode Island as of July 1, 2012).  Or you might wait to apply– incorporate as a non-profit in your state, but find an existing 501 (c) (3) to receive tax deductible donations on your behalf while you establish yourself. It may be a small price to pay a fiduciary while you find out if you really have a viable idea worth such a major investment of time and money.

If I have not scared you off yet – great! Stay tuned for Part II – the application, Form 1023.

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