[This post has received a lot of hits since news of Hurricane Katrina first broke. We have written a new post focusing specifically on Starting a Charity in the aftermath of Hurricane Katrina. Read this post first, and then read the new post by clicking here.
Last Friday we were forwarded an e-mail from someone asking what steps she should take in starting a charity. Here are a few thoughts and suggestions...
| The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives Jack Siegel's new book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, has quickly become the go to guide for nonprofit executives and advisors. So what are people saying about the Guide? When our Jack Siegel introduced himself to one of the leading authorities on the law of federal tax exemption after she had made a presentation at a recent conference, the speaker said, "You're the 'Jack' in the Guide! We are fighting over your Guide in our office." A second speaker held the book up to two people who were asking questions after her presentation, exclaiming "I love this book. I tell everyone at conferences to buy it." One state charity regulator has indicated that the Guide is great and has recommended it to her fellow regulators. Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour. Buy your copy today at Amazon.com, Barnes & Noble, or John Wiley (the publisher). |
START BY LOOKING FOR AN EXISTING CHARITY
Organizing and operating any organization takes time, effort, and money. Simply building the organizational architecture doesn't produce any benefit to the needy or the sick. These organizational efforts don't improve the school system or bring art to a new or wider audience. Before starting a charity, be sure that there is a need. If you Google a phrase such as "medical research", or "contemporary dance," or "foodbank for the homeless," you will discover that there are existing organizations providing these services. While everyone likes to be the big kahuna, you may actually be far more effective if you team up with an existing organization. The downside: You may have to establish credibility by performing menial tasks assigned to new volunteers before you can make policy. Those tasks may entail stuffing envelopes, updating mailing lists, packing cartons of food, or hammering nails. But don't forget, those tasks await you as the organizer of a new organization unless you have a long list of volunteers.
By working with an existing charity, your time and money is much more likely to impact mission. A good case can be made that we have too many charities, with many providing duplicative services. Each one of those charities develops a fundraising program, assembles a board and staff, implements a system of internal controls, and pays outside advisors. For the most part, all of these expenditures represent overhead that is necessary, but that siphons dollars away from the mission. Before starting a new charity, consider taking advantages of the economies of scale offered by an existing charity.
"WE HAVE LOOKED, BUT NO ONE PROVIDES THOSE SERVICES IN OUR GEOGRAPHIC AREA"
There may be a reason that there is not a contemporary dance company or a school of medieval art in your community. There may not be the need or demand for the services in question. A quick way to analyze whether the need exists is to identify a successful entity that is in geographic proximity to your community. Give them a call, and see whether they have ever considered extending their service area. They may already have a detailed study that outlines why expansion to your community is not warranted or feasible. Their insights could save you a lot of wasted time and resources. That contact could also open up "partnering" opportunities. For example, suppose you are located in a rural Connecticut, seventy-five miles outside of New York City. You are interested in classical music, but are tired of making the trek into New York City. So you and friends consider starting a symphony orchestra. That's going to require a lot of money. Instead of almost certain failure, why not contact an institution located in New York City to see whether they have ever considered an "outreach" program? You can offer organizational skills, a new source of funds, and a possible venue for a two-or-three concert summer series. The series probably won't include performances by the New York Philharmonic. But you might be able to find students from Juilliard or other schools who are looking for a venue. That's an opening that you may be able to build into a more substantial series.
WHERE'S THE MONEY COMING FROM?
All too often, people interested in starting a charity begin the process by asking the attorney to "draw up the papers." That is the wrong place to start. Begin by determining how much financial support there is for your idea. If you only have a few thousand dollars to contribute and a few like-minded friends, you are not going to get very far. Unless you can obtain pro bono legal and accounting services, you are probably looking at a minimum cost of $2,500 to $5,000 to shepherd a new organization through the formation and tax-exemption process.
But that cost will be much higher if you don't have a business plan for the charity. Yes, a business plan. Even though the charity may be a non-profit, if the charity is to succeed, it must be run like a business. At a minimum, you should have the following information before contacting a professional to help with the organizational process:
• A clearly defined mission and the specific activities that will fulfill that mission (e.g., a thrift shop operation, or a charter school, or a counseling center).
• A detailed assessment of need in the contemplated service area (e.g., identify the number of children with the life-threatening disease or who can't read at grade level).
• A detailed assessment of community reaction to the organization and its activities, particularly if the activities will be controversial (e.g., a half-way house for sex offenders or drug addicts).
• A list of individuals and organizations already providing similar services in the contemplated service area, together with as much detail about these existing service providers as is available (e.g., other clinics that treat AIDS patients).
• A list of directors and officers, and their qualifications.
• A five-year budget, with a very detailed one-year budget.
• A list of any required government approvals or licenses, with necessary contacts and approval and license applications (e.g. charter school approval process).
• A list of potential and committed funders and sponsors. If grants are contemplated, you should have a full understanding of what information must be provided to each potential funder, as well as an understanding of the application and funding process.
• If the organization will require ongoing funding, a detailed plan describing fundraising plans, assessing associated costs, and identifying potential fundraisers (e.g., use of paid fundraisers, telephone solicitation, Internet site, direct mail).
• An assessment of what resources the organization will need to fulfill its mission (e.g., music teachers, or special needs facilities for handicapped clients). If physical facilities are required, identify cost, lease terms, and availability. If specialized personnel are required, identify availability and cost.
• An assessment of insurance costs and needs.
You can certainly pay a consultant to assist you in assembling this information, particularly when it comes to fundraising and obtaining grants. But much of the legwork can and should be undertaken by the organizers.
ONCE THE BUSINESS PLAN IS IN PLACE AND VIABLE
You should contact a qualified attorney once the business plan is in place and the organization and its activities appear to be viable. At that point, you and the attorney can begin the organizational process, which will include the following steps:
• Forming a non-profit corporation (or other appropriate entity) by filing articles of incorporation with the appropriate state agency (most likely the secretary of state) and adopting organizational by-laws. Don't let the attorney handle this process by himself. Be sure to review all documents, focusing on the governance and the organization's needs.
• Name or elect an initial board of directors.
• Hold an organizational meeting, with the initial board of directors appointing officers.
• Obtain a taxpayer or employer identification number.
• Prepare and file an application for tax-exempt status with the IRS. The attorney will help you with this process, but if you have taken the preliminary steps we have suggested, you should be able to prepare many of the required schedules yourself.
• If required, file an initial registration with the charity regulator in the states in which the organization is organized, will be soliciting funds, or will be doing business. The registration requirements may be triggered because the entity holds charitable assets or plans to solicit funds in those states.
• If required, obtain workers' compensation coverage.
• File all necessary applications, registrations, exemptions from or permits required by sales and use tax, employment tax, and property tax laws.
• File and obtain any special licenses (e.g., dare care or a charter school).
• If contracting with paid fundraisers, make sure that the fundraisers and related contracts comply with applicable laws.
• Schedule and provide notices for regular board and member meetings (including annual meetings).
You should simultaneously begin working with a qualified accountant to set up an accounting system, including a system of internal controls.
ADVICE TO THE WEALTHY
Every advisor who specializes in charitable organizations has had a wealthy person ask out about setting up a foundation. The inquiry often occurs in conjunction with the sale of a closely-held business, an IPO, or thoughts about the person's legacy. Many people like the sound of their surname followed by the phrase "Family Foundation." We aren't naïve and know we can't discourage people from forming these foundations, particularly when the person is worth hundreds of millions of dollars and has very specific charitable missions firmly in mind. However, the wealthy need to recognize that family foundations are very expensive from an administrative standpoint. These foundations are subject to complex and unforgiving Federal tax rules that forbid self-dealing, political activity, certain business holdings, and certain expenditures. The foundation will require regular legal advice to avoid the pitfalls posed by these and other rules.
With that in mind, we urge the wealthy individual or family to strongly consider alternatives to the family foundation, particularly where the contemplated bequest will not exceed $10 million. The following alternatives should at least be considered:
• Making restricted gifts to a public charity or charities that carry out programs that are of interest to the donor.
• Making a gift to or creating a fund administered by a community foundation.
• Setting up a to donor-advised fund.
• Establishing a supporting organization.
Each of these alternatives provides the tax advantages associated with charitable giving, creates a legacy, provides younger family members with the opportunity to participate in the process, and, in many cases, offers more flexibility than a family foundation. Consultation with a qualified attorney is essential.
|
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2004, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for reposting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. |
Comments