Starting A Non-Profit: Avoid These 4 Mistakes

If you have business skills and want to change the world, you may wish to start up a non-profit organization. However, if you don’t understand the rules or plan carefully, your organization may never see the light of day. If you’re determined to get off on the right foot, here are 4 mistakes you need to avoid in order to ensure your success. The information provided here is for general information only and should not be used as legal advice.

Starting A Non-Profit: Avoid These 4 Mistakes

  1. Lack of a business plan. In this important document, you’ll evaluate the competition, list sources of funding, and identify the product or service your organization will provide. When getting started, tap into online resources for help creating such necessary paperwork.
  2. Poor financial knowledge. Have realistic expectations regarding how much funding you’ll receive. Know the costs associated with raising money. Create a fundraising plan listing who your organization will reach out to and how it will do so.
  3. Not establishing an active board of directors. Board members should have many contacts within their sphere of influence. They should believe strongly in the organization’s mission and be committed to fundraising. Members also attend board meetings to approve budgets and contracts.
  4. Not complying with IRS statutes. As a non-profit, you could lose your tax-exemption status if you don’t comply with IRS regulations. Know the rules regarding spending, lobbying, and filing forms.

Things to Include in Your Business Plan

A solid business plan is critical to your success. It is a necessary component in order to begin operations and reach your fundraising and charitable goals. Here are the main components for this document:

  • Executive summary: An overview of your non-profit’s mission, products or services, marketing, and finances
  • Organizational structure: Lists the names of board and staff members
  • Products and services
  • Marketing plan: Lists your constituencies and competitors, market trends, and promotional efforts
  • Operational plan: Explains how you will deliver your services, where you are based, and what equipment is required
  • Capitalization: Lays out your non-profit’s holdings, loans, and debts
  • Financial plan: Lists your current and planned financial status, sources of income, and donations received

6 Common Types of Charities

There are more than 1 million public charities in the United States, and in a recent year they received $390 billion in funding. Here are common charities broken down into categories:

Type of Charity Examples
Animal charities wildlife conservation, pet and animal welfare, zoos and aquariums
Environmental charities parks and nature centers, environmental conservation
Health charities medical services and treatment, patient and family support
Education charities scholarship and financial aid services, school reform efforts
Arts and culture charities museums and galleries, performing arts, libraries, public broadcasting
International non-governmental organizations disaster relief, human rights, child sponsorship

How to Find the Right Board Members for Your Non-profit

  1. Create a nominating committee. They will determine the skils needed to be present in board members. Committee members will meet regularly and will always be on the lookout for potential new board members.
  2. Ask volunteers first. If your non-profit has already established some volunteers, consider them for your board. They are already committed and familiar with the organization.
  3. Consult your donor database. Seek out board members among those who have already donated funds to the organization.
  4. Consider business leaders. Business leaders often enjoy giving back to the community by serving on boards. They also bring significant management skills to the mix.
  5. Advertise on social media. This will help you tap into the younger crowd if you’re looking to diversify your board.

In Depth

Do you have business skills and want to change the world? If you dream of starting a non-profit organization, be sure to learn about the potential pitfalls before going any further. Not following the proper rules could result in disaster and federal prosecution. Take the example of rapper Wyclef Jean whose charity set out to provide aid to Haitian earthquake victims in 2010 by raising millions on Twitter and through a star-studded telethon.

By 2012, the New York attorney general was knocking on the rapper's door. Investigators were seeking answers regarding the management of $16 million in donations. Among other things, the non-profit had been lax about filing tax forms from the start, according to reports. Don't let yourself get into hot water by committing such fatal missteps. To help you, we listed the four biggest mistakes you can make when starting a nonprofit.

Mistake #1: Not complying with IRS statutes. The charitable tax exemption provides federal corporate and income tax exemption for most types of revenue. While we aren't lawyers and this isn't legal advice, be sure to file your tax exemption form with the IRS regularly. Failure to comply could cost you these tax benefits and subject you to prosecution. For more important information on non-profit tax laws, refer to our full guide to starting a non-profit. You can find it right beneath this video.

Failure to comply could cost you these tax benefits and subject you to prosecution.

In the case of rapper Wyclef Jean, in addition to not filing tax forms, his non-profit became mired in unpaid debts, legal disputes, and unfinished projects in Haiti. Millions in donations for earthquake victims instead went to the charity's office, employee salaries, travel, and consultants' fees, reports claimed. He denied any wrongdoing, but the charity was shut down in 2012.

Mistake #2: Lack of a business plan. Just like when starting up any for-profit business, doing proper research and planning is a must. Your business plan will evaluate the competition, list funding sources, and identify the product or service your organization will provide. For a detailed list on what to include in your business plan, be sure to read our guide to starting a non-profit. Check it out now beneath this video.

When singer Avril Lavigne launched a foundation to aid children with disabilities in 2010, she quickly learned how difficult such an endeavor was. "You have to have everything in place and have to have a really good team. It's very serious," she said.

When singer Avril Lavigne launched a foundation to aid children with disabilities in 2010, she quickly learned how difficult such an endeavor was.

Mistake #3: Poor financial knowledge. Many non-profit founders lack realistic expectations regarding how much funding they will receive as well as the cost of raising money. If this is you, your organization may not survive long enough to even get substantial fundraising underway. Avoid this fatal mistake by creating a fundraising plan.

Some famous people have started their own charitable foundations and run them with surprisingly low overhead. For instance, David Letterman's non-profit donated $1.2 million to various charities with only $25 in overhead expense. On the other end of the spectrum, some celebrity-run non-profits report high overhead costs. Rosie O'Donnell's children's foundation donated $2.9 million in grants one year, but it spent an additional $1.9 million on overhead, Forbes reported. That's 64 cents spent for every dollar of grants.

Mistake #4: Not establishing an active board of directors. The members of your board should have plenty of contacts and substantial influence within their network. They should believe strongly in your organization's mission and be committed to raising funds. In addition, the directors are the ones who approve budgets and key contracts, hire and supervise the executive director, and attend board meetings.

They should believe strongly in your organization's mission and be committed to raising funds.

Be sure to select a board president who has a leadership background and board members who you believe will work well together. They need both budgeting skills and a knowledge of reviewing contracts. And did we mention board members should be good at seizing opportunities to raise money? For our guide to finding the right board members for your nonprofit, scroll below this video to read it.

If you do your research and decide starting a non-profit is not right for you, don't lose heart. You can still give to plenty of credible, established charities that are changing the world. Many celebrities decide to do this, rather than forming their own charities. Stars like Bruce Springsteen and Lady Gaga have partnered with existing nonprofits they trust. While on her Monster Ball Tour, Gaga donated $20,000 per night to homeless organizations.

In all, starting a non-profit can be a confusing task. To help ensure your success, do your research before taking the plunge and avoid the often-fatal mistakes mentioned here. For more valuable resources, be sure to read our guide found right on this page. Check it out right beneath this video.

In all, starting a non-profit can be a confusing task.

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