THE BLOG
06/21/2011 04:15 pm ET | Updated Aug 21, 2011

How to Start a Non-Profit

This is the first of four articles on starting a non-profit enterprise.

Personal experience will provide the passion and insights needed to build a non-profit social venture. But remember, where money is the overriding motivation, an organization should be established on the for-profit model. If the primary goal of the company is to solve a societal issue, then the company is a "social enterprise" and can be incorporated either as a for-profit or not-for-profit. It is the motivation of the owners/founders that will be the driving force behind the definition, not the legal structure.

If the key conception is to address a need that cannot be met by a for-profit model, then the non-profit is the way to go. Often, this will be due to the fact that the individuals who need the products/services in question cannot afford them. As we all know, there are vast numbers of people in the world who fit this category.

The problem you choose to deal with must be real to you, and, if practicable, you should try to experience it firsthand. Bring to bear all your energy and passion to effect a solution, but make sure your personal experience can play a role.

Picking Your Legal Structure

In the United States, the government has created the 501(c)(3) tax-exempt nonprofit corporation to help address social issues. (This status is granted by the IRS on a case-by-case basis.) A 501(c)(3) can receive donations from individuals, businesses, government agencies, and philanthropic foundations. Just a few examples of well-known not-for-profits include the Boys and Girls Clubs, the YMCA, the Red Cross, and the Sierra Club. People who donate money to these charitable organizations benefit by deducting the contributions from their taxable income.

More than a million organizations qualified for 501(c)(3) non-profit status in 2009, compared to about 600,000 in 1993. Donations, however, have declined. In 2008, 315.08 billion dollars were invested in the not-for-profit sector, compared to 303.75 billion in 2009. Competition for resources has increased, making it more difficult than ever for nonprofits to grow, or even exist.

Like any business, a not-for-profit needs to generate revenue to cover its expenses; this will be generated through donations. You will need to identify a target market and figure out how best to deliver your product or service to that market, and how to raise the money to do so (to be discussed in the third part in this series). Some important considerations exist, however, and you should be aware of them before you choose the non-profit form of structure:

The legal configuration of a social enterprise is not related to its ability to do well. Our culture encourages the belief that a social enterprise has to be a non-profit, which is not only inaccurate but can be harmful. Many people are doing good work in solving larger issues through for-profit companies. A non-profit legal structure does not make a venture more effective, or even more ethical. Non-profits can use up resources that are more valuable then the problems they are trying to solve, and sometimes their efforts can actually make a situation worse.

As Carl Schramm of the Kauffman Foundation has stated, profit can be a good thing for solving social problems. The legal structure and the motivation are actually independent of the social value of the organization. Sometimes the for-profit is more sustainable and more effective because it can raise capital more easily and incentivize its staff better.

Another factor to consider is that most money given to non-profits comes with restrictions; there are usually strict guidelines for spending the money. Grants can become liability-like; for-profits can be more flexible. Your spending will be a matter of public record, which means your competitors for philanthropic capital will know exactly what your costs are (as you will know theirs). Also, the culture of non-profits is such that its leadership is expected to be "poor"; it would be suspect for non-profit executives to appear prosperous and would make it more difficult to attract donations. The general rule: if you can incorporate as a for-profit, do it.

Despite the foregoing negatives, over fifteen million people (including myself) make a living through the one-million-plus American non-profit corporations. For the next three articles, I will talk about my experience with the non-profit company I founded, and give you tips and advice on what to do if you want to start your own.

Read part two here.

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