This is the third and final post in the Starting a Nonprofit Organization series: Part 1, Part 2

Consider the following information before starting a nonprofit:nonprofit volunteering

  1. Do you really need to be a nonprofit – being nonprofit is not easy.
  2. You cannot exclude anyone as a client unless certain there is specific criteria such as Boy Scouts.
  3. You must have a representative board – i.e. get others beside yourself to buy in (AZ allows the board of one – bad idea but useful to get started).
  4. Caveat competition – which incumbents will you replace – not all nonprofits want to grow – funders should know the marketplace.
  5. Remember board controls (mission, bylaws, governance) – once you have selected them, they can fire you.
  6. Nonprofits are not for time limited events e.g. bake sales, but these activities can be part of funding sources.

Arizona requires nonprofits file financials annually. This may not be true with for-profits. Remember if you donate equipment, etc. (vs. lease or loan) and take a deduction, you cannot take things back without tax consequences. In Arizona, a nonprofit must be an Arizona corporation or LLC and file with both the IRS and the State of Arizona. Be sure articles of the nonprofit designate beneficiary if assets ever sold otherwise the county will do this for you. To provide a service, you do not need to be a nonprofit – for-profits can contract to provide service to nonprofits i.e. market themselves and their services including writing grant requests for the contract.

Please be that sure potential clients understand that success as a nonprofit requires adherence to principles for good governance and ethical practice.

This includes:

  • Legal compliance and public disclosure
  • Effective governance
  • Strong financial oversight
  • Responsible fundraising

Additionally, be sure clients carefully follow the checklist:

  • Remember the board is the governing body and can be self-perpetuating – be sure bylaws flexible and board is diverse. It also has all the liability – even though federal and state laws may protect board our society is litigious – carry board liability insurance – ideal board size 7-9.
  • Mission statement includes who you are, what you do, why you are doing it, who you serve, where you provide the service, how you provide the service – caveat you cannot be all things to all people.
  • Be sure your business plan designates goals and responsibilities in these four areas:
    •  administration / management
    • program (goals and responsibilities)
    • marketing (funders and clients)
    • fundraising strategies (research grant organizations, etc.)
  • Organization structure begins with the community that needs your service followed by a board, board committees, executive director, staff.
  • Register your name, get an application from and file articles with AZ Corp. Comm. [specifically use handout language added to state suggested wording to ensure you get IRS 501c(3)] – remember you are a non-member organization.
  • Articles must be published three times – follow rules – most cost efficient is Capitol Times (cost +/- $400 to $850) – keep articles simple – model and good resource for articles and minutes of first meeting is AZ Bar Association – be sure first minutes state 501c(3) filing – best to create your own bylaws (terms of office, frequency of board and general meetings, method of election, etc.)
  • Develop budget (pro forma projections) – include income and expense – must be approved by board since raising money is board responsibility – budget for general and board / officers liability (Nat’l. Volunteering Immunity Act not a total defense) – in AZ no trustees, only directors – be sure you have an accountant who understands nonprofit accounting (no current software is adequate to follow grants, designated gifts, etc.) – plan for annual audit and monthly statements – major accounting firms will give advice / make recommendations
  • With application IRS wants projected income and expense – (990’s may not be required if revenue under $25K) – put EIN on every page of application – tax exempt status should be confirmed by letter (not a number).
  • Hints on IRS 1023
    • all pages are in duplicate (one for you – one for IRS)
    • for activities give IRS lots of information – use key words like volunteers, etc. to show nonprofit status – where needed use attachments
    • submit 872-C in duplicate

More FAQ’s

  • IRS letter is seldom expedited – normally takes as much as six months or longer, depending on the thoroughness of the1023. Usually, IRS comes back with questions – when answer usually gets letter. If no response in 10+ months call your senator
  • Caveat UBI (unrelated business income) – if compete with for-profits income taxable – many nonprofits sustain selves with UBI (keep accounting separately) – if unique logo on tee shirts then not competing with for-profits
  • In AZ raffles are donations – caveat tickets can be requested at no cost
  • Nonprofits are not sales tax exempt in AZ – currently are property tax exempt but must file annually
  • Must file IRS and AZ filings on time to avoid heavy penalties and interest
  • Form 990 due on the 15th day of the fifth month following end of fiscal year
  • Be sure letters for all donations over $250 with proper language
  • For in-kind donations get appraisals
  • If use independent fundraisers be sure they are bonded – commissions frowned upon
  • Be sure you pay all payroll and other business taxes on time – funders will not fund your mistakes
  • The best defense for board against liability claims – show good faith by:
    1. attendance at board meetings / training sessions / quorums
    2. accurate minutes
    3. cannot profit from service on board (no conflict of interest)
    4. be in compliance with bylaws
    5. successors – bring best possible on board – screen in good faith and check them out

Check out the Non-Profit classes that SCORE holds on a regular basis.

The Ultimate Checklist for Starting a Nonprofit