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by Peri H. Pakroo, J.D.

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Starting & Building a Nonprofit A Practical Guide

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by Peri H. Pakroo, J.D.

1st edition

Starting & Building a Nonprofit A Practical Guide

FIRST EDITION APRIL 2005

Editors LISA GUERIN

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Cover Design TONI IHARA

Book Design TERRI HEARSH

Index ELLEN SHERRON

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Pakroo, Peri. Starting & building a nonprofit : a practical guide / by Peri H. Pakroo

p.cm. ISBN 1-4133-0090-1 1.Nonprofit organizations--Management. I. Title: Starting and building a nonprofit. II.

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Acknowledgments Huge thanks to Lisa Guerin and Stephanie Bornstein for their crack editing and hard

work pulling this book into shape, and for their kindness in trying to keep me on

schedule.

Thanks to Jake Warner for everything: your ten-minute voicemail messages; your

helpful advice when I was stuck; even the swarms of questions scrawled all over the

first draft. I’ll deeply miss working with you.

Thanks to Janet Portman, Beth Laurence, and the rest of the Nolo editors for

welcoming me back on the team during my extended stay in Berkeley. Thanks also

to Ilona Bray for sharing her nonprofit fundraising info with me.

Thanks to Betsy Erbaugh, Katayoon Kia, Sara Jamieson, and Melina Salvador for

research and all sorts of other help along the way.

Loving thanks to my parents, Kay and Reza Pakroo, my sister Zara Pakroo, and

my grandmother Eunice Jones for cheering me on throughout.

Thanks to Sue Moon and Sandy de Lissovoy for warmly welcoming me to Grant

St. for my book editing retreat.

Thanks to all the folks who contributed to the book: Randolph Belle, David

Dabney, Erika Harding, Michael Hohner, David Kaseman, Giovanna Rossi, and Mona

Lisa Wallace. Your real-world experience is a real asset to the book.

Thanks and love to my homegirls, now scattered across red and blue states alike:

Alexis Mollomo, Stacey Stickler, Laura Louise Taylor, and Carolyn Nelson. I’d be

lost without you. Love also goes to my beautiful friends Inga Muscio and Samantha

Campostrini-Medeiros, and to my identical cousin Parisha Pakroo.

Thanks to WFMU (www.wfmu.org) for providing the soundtrack. Freedom is

freeform!

Thanks to Flying Star for allowing me to escape my lonely home office and

letting me write and edit this book for countless hours in your cheerful café. Juno

and I are grateful for the Petio and all the tasty snacks.

Oceans of love and thanks to Turtle, my very best friend. You make my heart

swell every day.

About the Author As a media developer and consultant, Peri Pakroo specializes in developing consumer-friendly materials on legal, nonprofit, small business, and intellectual

property issues. She owns and runs p-brain media (www.pbrainmedia.com), a

new media firm that develops content for Web, print, video, and other media. As a

nonprofit founder and board member, Peri is also actively involved in community

issues such as providing legal resources for artists and supporting local, independent

businesses.

Peri received her law degree from the University of New Mexico School of Law in

1995 and a year later began editing and writing for Nolo, focusing on small business

and intellectual property issues. She is the author of two Nolo books on starting a

small business, The Small Business Start-Up Kit and The Small Business Start-Up Kit

for California, and has edited several other Nolo titles. In between road trips she

lives in New Mexico.

I Doing Good and Doing It Well A. Who Should Read This Book .......................................................................... Intro/2

B. Nonprofit Basics ............................................................................................... Intro/3

C. Running a Nonprofit ........................................................................................ Intro/6

1 Naming and Structuring Your Nonprofit A. Choose a Name for Your Nonprofit ...................................................................... 1/2

B. Should You Incorporate? ........................................................................................ 1/5

C. Do You Want Tax-Exempt Status? ........................................................................ 1/15

D. Should You Have Voting Members? ................................................................... 1/24

2 Developing Your Strategic Plan A. Components of a Strategic Plan ............................................................................ 2/3

B. Decide Who Will Participate .................................................................................. 2/4

C. Develop Your Mission Statement .......................................................................... 2/5

D. Outline Specific Goals, Objectives, and Activities .......................................... 2/10

E. Assess Your Resources .......................................................................................... 2/12

F. Identify Strategies .................................................................................................. 2/13

G. Edit and Finalize Your Plan .................................................................................... 2/14

Table of Contents

3 Developing Your Initial Budget A. Set Up Your Budget .................................................................................................. 3/3

B. Estimate Income ....................................................................................................... 3/4

C. Estimate Expenses .................................................................................................... 3/5

D. Assemble Your Budget ............................................................................................ 3/8

4 Your Board of Directors A. What Makes a Good Board ..................................................................................... 4/3

B. The Board’s Duties and Tasks ................................................................................. 4/6

C. Board Policies and Procedures .............................................................................. 4/9

D. Recruiting Board Members .................................................................................. 4/13

E. Holding Effective Board Meetings ...................................................................... 4/16

F. The Role of Committees ...................................................................................... 4/20

5 Your Workforce: Staff and Volunteers A. Developing a Management Strategy .................................................................... 5/2

B. Hiring an Executive Director ................................................................................. 5/7

C. Hiring and Managing Staff and Volunteers ....................................................... 5/10

D. Employees and Independent Contractors ........................................................ 5/14

E. Required Paperwork, Filings, and Taxes ............................................................. 5/17

6 Fundraising A. The Golden Rules of Successful Fundraising .................................................... 6/3

B. Your Fundraising Plan .............................................................................................. 6/5

C. Define Your Fundraising Targets and Budget ..................................................... 6/6

D. Find Prospective Donors ......................................................................................... 6/8

E. Define Your Fundraising Campaign .................................................................... 6/11

F. Fundraising Tools .................................................................................................... 6/14

G. Funding From Grants ............................................................................................. 6/25

H. The Law of Fundraising ......................................................................................... 6/28

I. Working With Professional Fundraisers ............................................................ 6/30

7 Risk Management and Insurance A. Common Legal Problems ........................................................................................ 7/2

B. Who Is at Risk? ........................................................................................................... 7/7

C. Managing Your Nonprofit’s Risks ........................................................................ 7/12

8 Understanding Contracts and Agreements A. Contract Law Basics ................................................................................................. 8/2

B. Using Contracts in the Real World ........................................................................ 8/7

C. Typical Contract Terms ............................................................................................ 8/9

9 Marketing Your Nonprofit A. Marketing and Public Relations at Work ............................................................. 9/3

B. Fundamental Marketing Tools ............................................................................... 9/6

C. Creating a Website ................................................................................................. 9/11

10 Publishing Informational Materials A. Decide Whether to Publish .................................................................................. 10/2

B. Create a Publishing Plan ....................................................................................... 10/4

C. Copyright Basics for Nonprofit Publishers ..................................................... 10/11

11 Managing Your Finances A. Bookkeeping and Accounting Overview ........................................................... 11/2

B. Tracking Income and Expenses ........................................................................... 11/6

C. Creating Basic Financial Reports ....................................................................... 11/10

D. Audits, Reviews, and Compilations .................................................................. 11/15

E. Reporting Requirements ..................................................................................... 11/16

12 Getting Professional Help A. Relationships Are Critical ..................................................................................... 12/2

B. Working With Lawyers .......................................................................................... 12/2

C. Working With Accountants and Other Professionals ..................................... 12/6

Appendixes

A How to Use the CD-ROM A. Installing the Form Files Onto Your Computer ..................................................A/2

B. Using the Word Processing Files to Create Documents ...................................A/2

B State Secretary of State or Other Corporate Filing Offices

C State Charitable Solicitation Registration Offices

D State Tax Agencies

E State Sales Tax or Seller’s Permit Agencies

F Forms and Checklists Checklist: Naming and Structuring Your Nonprofit

Checklist: Developing Your Strategic Plan

Checklist: Developing Your Initial Budget

Checklist: Your Board of Directors

Checklist: Your Workforce: Staff and Volunteers

Checklist: Fundraising

Checklist: Risk Management and Insurance

Checklist: Understanding Contracts and Agreements

Checklist: Marketing Your Nonprofit

Checklist: Publishing Informational Materials

Checklist: Managing Your Finances

Checklist: Getting Professional Help

Contractor Work-for-Hire Agreement

Volunteer Assignment Agreement

Nonprofit’s Initial Budget

Index

C H A P T E R

1 Introduction

Doing Good and Doing It Well

A. Who Should Read This Book ............................................................................. Intro/2

B. Nonprofit Basics .................................................................................................. Intro/3

1. Nonprofit Corporations ............................................................................... Intro/3

2. Tax-Exempt Status .......................................................................................... Intro/5

C. Running a Nonprofit .......................................................................................... Intro/6

1. Importance of the Nonprofit’s Mission .................................................... Intro/6

2. Collaborative Management ......................................................................... Intro/6

3. Finding and Keeping Qualified Staff .......................................................... Intro/6

4. Raising Money ................................................................................................ Intro/7

I/ 2 STARTING & BUILDING A NONPROFIT

whether to form a nonprofit in the first place, to

engaging in strategic planning, managing your

finances and taxes, developing a website, and much

more. The first chapter explains some of the choices

you’ll have to face at the outset, such as what to call

your nonprofit, whether to incorporate, and whether

to apply for a tax exemption. Each subsequent

chapter focuses on an issue you will face when

launching your nonprofit, such as choosing a board

of directors, fundraising, and marketing. Armed with

the information in this book, you’ll be ready for the

challenges—and rewards—that await you in the

nonprofit sector.

A. Who Should Read This Book

This book is intended for anyone who is consider-

ing starting a nonprofit or reorganizing an existing

group. You may be working with a group in its em-

bryonic stages and coming to realize that you need

to organize more formally. (Often, a group’s lack of

structure makes it ineligible for grants, unprepared

to hire paid employees, or simply ineffective in its

day-to-day operations.) Or, you may just have a goal

or passion in mind and want to learn how to create

an organization devoted to achieving that goal. You

may be a budding founder of a new group, or a staff

member or volunteer at an existing group that needs

an overhaul. No matter what position you hold or

how far along you are in the process of bringing a

group together, this book will give you all of the

information on nonprofit organization, planning,

structures, management, and marketing you need.

For the most part, this book assumes that the

reader is a founder or board member of an exist-

ing or future nonprofit group. However, you may

be an executive director, manager, staff member, or

volunteer who is researching nonprofit management

in order to create or improve your group. Where the

information in this book is directed not at the board

or founder but at the executive director or other

manager, it is noted explicitly.

C hanging the world is not a one-person job.

Of course, one person can make a differ-

ence: Committed, motivated individuals

are often the seeds of major social movements or

the subjects of inspiring stories about how ordinary

people, through passion and tireless dedication, can

move mountains for a worthy cause. But there is

strength in numbers, and those who want to bring

about change are most likely to succeed when they

come together with like-minded comrades to work

towards a common goal. Nonprofit organizations

exist to bring together the people and resources

necessary to mount these noble efforts. If you’re

considering trying to bring about change in your

corner of the world by starting a nonprofit, this

book will help you make your venture a success.

Many people believe—mistakenly—that all

nonprofits are underfunded labors of love, kept

afloat by the scrappy and tireless efforts of self-sac-

rificing, long-haired activists. While this description

probably fits more than a few nonprofits, there are

also plenty of nonprofits that bring in millions of

dollars each year, pay hefty salaries to their workers,

have swanky corporate offices, and even impose a

dress code. In between these extremes, there are

scores of nonprofits with varying assets, diverse of-

fice cultures, and a wide array of political leanings.

While the volunteer-driven model of nonprofits

is alive and well, more and more nonprofits are

adopting the entrepreneurial strategies and busi-

ness models developed in the for-profit world. Many

nonprofit managers and staff members have discov-

ered that working for a nonprofit is a satisfying way

to meet important community and societal needs

and make a living at the same time, which can be

more difficult in the for-profit arena. Whether you’re

driven purely by a passion for your mission or you

want to combine your activist aspirations with a

solid career, starting and running a nonprofit can be

a great way to achieve your goals.

This book explains all of the practical steps

necessary to start and run a nonprofit, from deciding

DOING GOOD AND DOING IT WELL I/ 3

Icons Used in This Book

Throughout this book you will notice symbols,

or icons, that are designed to alert you to

certain types of information, as described

below.

This icon highlights a practical tip or

good idea.

This icon alerts you to potential problems.

This icon indicates that you should

consult with an attorney or other expert.

This icon lets you know that you can skip

information that may not be relevant to

your situation.

This icon refers you to related information

somewhere else in this book.

This icon refers you to other helpful

books or resources on a topic.

This icon indicates that something is

included on the accompanying CD-ROM.

B. Nonprofit Basics

The term “nonprofit” is often used loosely to

describe all kinds of groups that are bound together

by a desire to achieve a mission, rather than to

make a profit. By itself, the term “nonprofit” does

not indicate any specific type of legal structure.

If a nonprofit group incorporates, it is a nonprofit

corporation; if not, it is an unincorporated nonprofit

association. For example, a group of people interested

in keeping a local park litter-free would likely be

called a nonprofit, as would a group of soccer dads

who sell candy bars to fund their children’s trips to

soccer tournaments around the state. Both groups

could be called “nonprofits” because both are

mission-driven, not profit-driven—but they could

have different legal structures. If the park group

never did anything to create a formal structure, it

would technically be considered an unincorporated

nonprofit association. If the soccer dads filed inco-

rporation papers with the state, the group would be

a nonprofit corporation.

1. Nonprofit Corporations

A nonprofit corporation is an organization that has

a mission to serve the public interest and has filed

incorporation papers with the state. Because the

corporation works for the public good, it receives

exemptions from state and federal taxes it would

otherwise have to pay—which means that these

groups are, to a certain extent, publicly subsidized.

The mission-driven nature of nonprofits sets them

apart from traditional private businesses, but they’re

not part of the government, either. (In fact, they are

sometimes called nongovernmental organizations

or NGOs.) Nonprofits occupy a unique position

between the public and private worlds and share

some characteristics of each. In exchange for being

exempt from many of the taxes that normally apply

to private businesses, nonprofits must dedicate

themselves to the public interest and govern them-

selves according to certain rules designed to ensure

accountability.

To ensure that nonprofit corporations are, in fact,

working for the public good—and earning their tax

breaks—state laws require them to establish certain

organizational structures. A nonprofit corporation

must have a board of directors (sometimes called a

board of trustees), which is responsible for keeping

the organization on track, working toward its stated

nonprofit mission. Other state rules impose legal

duties on the board—for example, the duty to act

with care and the duty to be loyal to the organiza-

tion—and ensure that the board does not stand to

gain personally from the nonprofit’s activities. (These

duties are discussed in more detail in Chapter 4.)

a. Corporations in General

To create any type of corporation, nonprofit or

for-profit, you must file paperwork with the state

government—usually the secretary of state’s office.

The document you must file with the state to create

a corporation is typically called “articles of incor-

poration.” Once you file this document, you have

“incorporated” and created a separate legal entity:

your corporation.

I/ 4 STARTING & BUILDING A NONPROFIT

In the simplest terms, a corporation—whether

nonprofit or for-profit—is a type of business struc-

ture. Other types of business structures include sole

proprietorships, partnerships, and limited liability

companies (LLCs). Some states also recognize

associations: groups of individuals who work togeth-

er for some common goal but haven’t taken steps to

create a specific legal entity. (Chapter 1 explains the

pros and cons of structuring your nonprofit as an

unincorporated association.)

The main differences between the various

business structures lie in how they handle two

important issues: personal liability and taxation.

• Personal liability. Some business structures (such as corporations) protect their owners

from personal liability, while others (such as

sole proprietorships) do not. If the business

structure limits its owners’ personal liability,

the owners’ personal assets will be protected

if the business is sued or otherwise finds itself

in debt. If the business structure does not

limit its owners’ liability, the owners’ personal

assets—such as houses, cars, bank accounts,

and so on—can be taken to satisfy business

debts or a lawsuit judgment. Many nonprofits

choose to incorporate primarily to receive this

liability protection.

• Taxation. In some business structures (such as partnerships), business profits are taxed

as if they are simply the personal income of

the business owners. This is known as “pass-

through” taxation—the profits “pass through”

the business to the owners, who report the

income on their own personal tax returns.

Other business entities (such as corporations)

pay and report their own taxes, separate from

the owners’ personal incomes. The business

files its own tax return, as if it were a per-

son. (In fact, you may hear people refer to

a corporation as a separate “legal person”;

legally, the corporation is a distinct entity that

exists separately from its owners.) Nonprofit

corporations are separate tax entities but have

different—and more favorable—tax rules than

for-profit corporations.

b. Forming a Nonprofit

The steps you must take to form a nonprofit cor-

poration are similar to the procedures for starting a

regular corporation, but a bit more involved. Starting

a nonprofit corporation is something like getting a

commercial driver’s license: The process for getting

a commercial driver’s license is very similar to that

for getting a regular driver’s license, and the same

agency grants both licenses, but you must satisfy

a few extra rules to gain the additional privileges

and responsibilities that accompany the commercial

driver’s license. Likewise, creating a nonprofit

corporation is very similar to creating a for-profit

corporation: To do either, you must apply to the

same agency and follow a similar process—but to

create a nonprofit corporation, you must satisfy a

few extra rules.

Corporation Rules Vary by State

All corporations—nonprofit and for-profit alike—are creatures of state law. Although state laws that govern corporations are, for the most part, similar throughout the nation, there are important differences. For example, states vary on the minimum number of directors required for nonprofit boards, as well as other eligibility rules for directors. And corporate tax laws can vary significantly from state to state.

In addition, corporations created in one state are not automatically qualified to do business in others. If you create your nonprofit corporation in Wisconsin, for example, it is technically a “Wisconsin corporation.” Other states will view it as a “foreign corporation” and will generally require you to file paper- work and pay a fee before allowing you to do business within their borders.

If you do not plan to engage in nonprofit activities in other states, then incorporating in your home state alone is probably sufficient, at least in your early days. If, on the other hand, you expect the scope of your activities or ser- vices to extend into other states, you should investigate the requirements for operating as a nonprofit corporation in those other states.

DOING GOOD AND DOING IT WELL I/ 5

2. Tax-Exempt Status

Whether or not you chose to incorporate, you

may be eligible for another benefit as a nonprofit

organization: tax-exempt status from the federal

government. There are several types of federal tax-

exempt status, but the most favorable is known

as “501(c)(3)” status. This moniker refers to the

specific section of the IRS tax code that not only ex-

empts certain nonprofits from having to pay federal

income taxes, but also makes contributions to these

organizations tax-deductible to the donor. Other

sections of the federal tax code (such as 501(c)(4) or

501(c)(6)) also offer exemptions from income taxes

for nonprofits, but do not allow donors to deduct

their contributions. In this way, 501(c)(3) status

confers especially favorable tax treatment to orga-

nizations that qualify: Tax deductibility is often a

crucial factor in attracting donations.

As you can imagine, not just any old group can

obtain 501(c)(3) tax treatment. Only groups created

for specific exempt purposes—religious, charitable,

scientific, educational, or literary purposes that

benefit the public—are eligible. Groups that haven’t

incorporated (often called “unincorporated associa-

tions”) can still be eligible for 501(c)(3) status as

long as they meet all other requirements. Groups

that don’t qualify for 501(c)(3) status might be

eligible for other types of tax-exempt status—for

example, social clubs are eligible under section

501(c)(7), and trade associations are eligible under

section 501(c)(6).

To obtain 501(c)(3) status, an organization must

file an application with the IRS and be approved.

The organization must submit additional documents

with the application, such as its articles of incorpora-

tion and bylaws, which must show that the entity is,

in fact, dedicated to one or more of the specific non-

Characteristics of Various Business Entities Entity Type Description Liability Taxation

Corporation

For-profit Legal entity with one or more owners, which has filed incor- poration papers with the state. Owners (shareholders) of for-profit corporations can reap corporate profits.

Owners/directors are protected from personal liability.

For-profit corporation: Prof- its are taxed as corporate income at corporate tax rates.

Nonprofit Legal entity with one or more directors, which has filed incor- poration papers with the state. Directors of nonprofit corporations may not reap corporate profits; profits must stay in the nonprofit corporation.

Nonprofit corporation: May obtain various types of federal and state tax-exempt status, including 501(c)(3) status. If tax exemptions are not obtained, profits are taxed as corporate income.

LLC Legal entity with one or more owners working toward a profit, which has filed LLC papers with the state.

Owners protected from personal liability.

Profits pass through to the owners and are taxed as personal income (unless the owners elect otherwise).

Partnership Legal entity with two or more owners working toward a profit.

Owners can be subject to personal liability.

Profits pass through to the owners and are taxed as personal income.

Sole proprietorship Legal entity with one owner work- ing toward a profit.

Owner can be subject to personal liability.

Profits pass through to owner and are taxed as personal income.

I/ 6 STARTING & BUILDING A NONPROFIT

profit purposes outlined above. (Chapter 1, Section

C, covers these steps in more detail.)

In most states, a nonprofit that obtains an

exemption from federal taxes automatically obtains

an exemption from state taxes as well, so “tax-

exempt” generally means exempt from both federal

and state taxes. Unless stated otherwise, throughout

this book, the term “tax-exempt” refers to federal tax

exemption.

Recommended reading on obtaining 501(c)(3) status. For a detailed discussion of the process of applying for and obtaining 501(c)(3)

status, including step-by-step instructions for filling

out the necessary forms, see How to Form a Non- profit Corporation, by Anthony Mancuso (Nolo).

C. Running a Nonprofit

Many experienced business owners and managers

are surprised to find that running a nonprofit is

quite different from running a traditional profit-

driven business. Assuming you’re an entrepreneurial

type, you will probably figure things out quickly—

but you should understand up front that running a

nonprofit involves different approaches, judgments,

and working styles than running a for-profit business.

1. Importance of the Nonprofit’s Mission

The legal distinction between a for-profit and a

nonprofit corporation hinges on the purpose of the

corporation’s existence: The purpose of a for-profit

business is to earn a profit, while a nonprofit exists

to further a mission in the public interest. Beyond

this legal role, a nonprofit’s mission also drives many

of the day-to-day operations of the nonprofit.

Because a nonprofit’s purpose is to pursue a

mission independent of any profit motive, success

is measured differently than it is in a for-profit busi-

ness. A business is considered a success if it makes a

profit—and a failure if it doesn’t. A nonprofit, on the

other hand, is judged by whether it is accomplishing

its mission. As you can imagine, success or failure

in these terms is not always easy to measure—you

can’t come up with an answer by running a simple

profit/loss analysis, for example.

Of course, just because nonprofits are mission-

driven doesn’t mean they can ignore financial

concerns. In reality, a nonprofit won’t be judged

purely on how well it’s achieving its mission without

figuring financial health into the equation. If a non-

profit has achieved success in pursuing its mission—

say, in raising literacy rates in a particular city

district—but has no money in the bank or financial

prospects for the future, it can’t be called an

unqualified success. Even though many nonprofits

are supported by volunteer staff and may be quite

adept at making the best use of scarce resources,

no organization can run on fumes forever. Because

almost every nonprofit faces a delicate balancing act

between financing itself and achieving its mission,

defining and measuring “success” in the nonprofit

sector can be a challenge.

2. Collaborative Management

For-profit businesses typically place a significant

amount of decision-making authority in a few top-

level positions—president, CEO, director, and so

on—from which leaders exercise control with little

input or interference from others. Nonprofits, on the

other hand, are required by law to have a board of

directors that oversees operations; as a result, they

are typically run in a more collaborative manner.

Board members cannot make unilateral decisions

but must vote as a board to approve or nix various

proposals for action. If a nonprofit has an executive

director, he or she is chosen by and accountable to

the board—not an autonomous decision maker, like

the head of a private company. For many people

who are used to the relative freedom of running a

for-profit business, dealing with the collaborative

management style of a nonprofit can pose a new

challenge.

3. Finding and Keeping Qualified Staff

Finding people to work for your nonprofit is likely

to be one of the biggest challenges you’ll face—

particularly in the early days, when your entire

organization will probably be on short rations.

Many start-up nonprofits lack the resources they

need to attract talented, experienced staff people

DOING GOOD AND DOING IT WELL I/ 7

who want to make a good living, often measured in

competitive salaries and benefits.

Another nearly inescapable reality of the nonprofit

sector is that there are never enough volunteers to

do everything the nonprofit needs (or wants) to do.

You may think that you won’t have trouble finding

folks to help because your nonprofit mission is so

important or you live in a progressive community

where everyone likes to pitch in. Unfortunately,

people lead incredibly busy lives these days and guard

their free time jealously. Much of the volunteer work

people do is for well-established organizations

and causes with well-defined volunteer needs that

can be carried out easily, with little direction. New

nonprofits, on the other hand, rarely have needs

that are so clear-cut—you may be figuring out your

needs through trial and error, which can put too

much responsibility on the casual volunteer. Finding

volunteers and staff people is not impossible, as

Chapter 5 explains; you’ll just need to be ready for

the unique challenges of finding and developing a

nonprofit workforce.

4. Raising Money

Nonprofit organizations don’t typically earn their

money by selling a product or service, like for-profit

businesses do. Instead, nonprofits are supported

by grants from public and private foundations, in-

dividual contributions, and/or membership fees. As

compared to for-profit selling, nonprofit fundraising

can be much more complicated and political.

Nonprofit fundraising certainly requires market-

ing and sales skills, however. You must be able to

convince potential funders that your nonprofit is the

best or most compelling organization to which they

can contribute their hard-earned dollars. If you hate

selling and have convinced yourself that nonprofit

fundraising will be different, think again.

Fundraising can be difficult and time-consuming;

as a result, most nonprofits are perennially under-

funded. Also, because a nonprofit is bound to a

public interest mission and overseen by a board of

directors, it doesn’t have as much flexibility —or as

many options—as a for-profit business would when

trying to get out of financial trouble or turn around

a cash shortage. In short, nonprofit fundraising isn’t

for everyone; it requires lots of energy, enthusiasm,

and creativity—and the ability to work on a shoe-

string budget.

Chapter 6 is dedicated to fundraising. Refer to Chapter 6 for an overview of fundraising

methods and specifics on how to create a fundraising

plan. For detailed information on fundraising, see

Effective Fundraising for Nonprofits, by Ilona Bray (Nolo).

Much like starting a typical, for-profit business,

starting a nonprofit requires ingenuity, passion, and

an entrepreneurial spirit. But nonprofit ventures

offer unique rewards that many people find more

compelling than the lure of financial gains in the

for-profit world. For many socially minded entre-

preneurs, starting a nonprofit is an ideal way to

maintain a commitment to causes they care about

while pursuing a career at the same time. This

book describes the nonprofit organizational model

that makes this possible and outlines all the steps

and tasks involved in setting one up. When you’re

finished reading, you’ll have a clear understanding

of what it takes to run a successful nonprofit, and

you’ll be ready to pour your efforts into the impor-

tant work ahead of you.

■

C H A P T E R

1 Chapter 1

Naming and Structuring Your Nonprofit

A. Choose a Name for Your Nonprofit ........................................................................ 1/2

1. Avoid Trademark Conflicts ................................................................................. 1/2

2. Consider Domain Name Availability ................................................................ 1/3

3. Name Requirements for Nonprofit Corporations ......................................... 1/4

B. Should You Incorporate? ........................................................................................... 1/5

1. Liability Issues ....................................................................................................... 1/6

2. Tax Exemptions .................................................................................................... 1/11

3. Financial Accountability .................................................................................... 1/12

4. Other Considerations ........................................................................................ 1/13

5. Incorporation Paperwork and Fees ................................................................. 1/14

C. Do You Want Tax-Exempt Status? ........................................................................... 1/15

1. Tax-Exempt Status in General ........................................................................... 1/16

2. 501(c)(3) Tax-Exempt Status ............................................................................... 1/18

3. Unrelated Business Income Tax ...................................................................... 1/22

4. State and Other Tax Exemptions ...................................................................... 1/22

5. How Important Is Tax Exemption to Your Organization? ........................... 1/22

D. Should You Have Voting Members? ...................................................................... 1/24

1. Why You Probably Don’t Want Voting Members ......................................... 1/24

2. Practicalities of Having Voting Members ....................................................... 1/25

1/ 2 STARTING & BUILDING A NONPROFIT

T his chapter explains nonprofit structures in

detail and outlines some factors to consider

when deciding how best to organize your

specific group. It also explains some of the basic

decisions you’ll have to make at the outset, including

what to call your group, whether to formally incor-

porate, and whether to apply for tax-exempt status

from the government. Here, you’ll find information

on:

• how to choose a name for your nonprofit

(Section A)

• how to decide whether incorporation makes

sense for your group (Section B)

• the different types of tax exemptions available

to nonprofits, and factors to consider in decid-

ing whether to apply for them (Section C), and

• how bringing formal members into your non-

profit will affect its operations (Section D).

A. Choose a Name for Your Nonprofit

Once you decide to organize a nonprofit, you’ll have

to figure out what to call your group. This process

is a bit more involved than simply picking a name

that sounds good. Of course, you’ll want to come

up with a name that describes your nonprofit’s pur-

pose or work, one that the public will understand

and remember. But you’ll also need to make sure

that your name is not already being used by another

business or group, either as a trademark or as a

domain name. You’ll also have to choose a name

that complies with your state’s legal requirements.

1. Avoid Trademark Conflicts

If your name is already being used by another non-

profit or business, trademark laws (and a closely

related area of law that prohibits unfair competition)

may prevent you from using it. A trademark (some-

times simply called a “mark”) is any word, phrase,

logo, or other device used to identify products or

services in the marketplace. The ins and outs of

trademark law are beyond the scope of this book,

but this section will quickly review key rules and list

some resources you can use to find out whether the

name you want to use is available.

Nolo has resources on name and trademark issues. For in-depth information on trade- marks (including the legal criteria that determine

whether you are infringing on—that is, unfairly

using—another business’s mark, and the process

of name searches and registration), the best source

of information is Trademark: Legal Care for Your Business & Product Name, by Stephen Elias (Nolo). You can also find lots of free information on trade-

marks and other business name issues on Nolo’s

website, at www.nolo.com.

Generally speaking, when a business or nonprofit

owns a trademark, it can prevent anyone else from

using it in a way that is likely to confuse consumers.

If you “infringe” someone else’s trademark, the

trademark owner can take you to court to try to stop

you from using it and even sue you for monetary

damages.

Although owners can register trademarks with the

U.S. Patent and Trademark Office, you don’t have

to register to create an enforceable trademark. You

are the trademark owner if you are the first to use a

name in connection with a business, trade, product,

service, or activity. Because use of a name, rather

than formal registration, creates trademark owner-

ship, lots of trademarks cannot be found in any

local, state, or federal databases. To avoid potential

trademark fights later on, you’ll have to do some

research to find out whether anyone else is already

using a name that’s identical or similar to the one

you want to use.

The potential for name conflicts has grown with the rise of the Internet. In the pre-Web world, small, local businesses and nonprofits didn’t

have to worry too much about trademark conflicts

as long as no one in their area was using a similar

name. Today, however, the Web has created a global

marketplace, in which physical location is almost

irrelevant. Particularly if you plan to put your non-

profit online, you’ll have to worry not only about

trademarks used online, but also about names

used almost anywhere the Web reaches—which, of

course, is just about everywhere.

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 3

The good news is that trademark conflicts are

far less common among nonprofits than they are in

the for-profit world. One legal test for determining

whether similar names are likely to cause consumer

confusion is whether the entities using the names

actually compete with each other. The less the entities

compete, the less likely a court is to find a trademark

violation. Because most nonprofits aren’t heavily

engaged in sales or other commerce, the risk of com-

petition is significantly less than it is for commercial

businesses.

Nonetheless, you don’t want to make the mistake

of choosing a well-established trademark for the

name of your nonprofit or for any of its programs,

services, or products. This is particularly true if

you plan to conduct any business activities, such as

retail sales. (See Chapter 6 for the rules regarding

nonprofits conducting business-type activities and

earning unrelated business income.) To find out

whether the name you want is already in use, check

some or all of the following resources:

• The Web. Start with the Internet, which is huge, fast, and free. By using search engines

like Google or Yahoo!, you can quickly de-

termine whether (and how) a specific term is

in use. You should also check to see whether

the name you want is being used as a domain

name, which may present a trademark conflict.

Go to the Network Solutions website, at www

.networksolutions.com, and search for variations

of the name you want to use.

• Phone directories. Don’t overlook the humble phone book as a valuable source of local

name information. If you find that someone is

using the name you want in your local area,

there’s no reason to waste time and money

searching further—instead, start brainstorming

to come up with another name for your group.

• Industry sources. Trade publications and business directories can be great sources of

name information. You can also call local

trade associations and chambers of commerce

to ask whether they provide lists or directories

of businesses in your area.

• Federal trademark database. If you use a trademark that’s registered in this federal

database, you can be sued for “willful infringe-

ment”—a legal violation that can carry hefty

monetary penalties. To start your federal

trademark search, go to the free trademark

database of the U.S. Patent and Trademark

Office (PTO), at www.uspto.gov. Or, you can

visit your local Patent and Trademark Deposi-

tory Library (PTDL)—there’s at least one in

every state—and use its research materials.

You can also use any large public library or

a special business and government library,

which should carry the federal trademark

register, a publication that lists all federal trade

and service marks arranged by categories. For

more information on trademark searches, see

Trademark: Legal Care for Your Business &

Product Name, by Stephen Elias (Nolo).

• State trademark registries. Contact the Secretary of State’s office in your state (see

Appendix B) to find out which government

agency is in charge of trademark registries.

Ask that agency for information on how to

conduct a search, or you can hire a trademark

search firm to do the work for you.

• County fictitious name databases. Many counties maintain a database of fictitious busi-

ness names (FBNs) that have been registered

there. An FBN is a business name that does

not include the legal name of the entity that

owns it—for example, if a nonprofit named

Nurses for the Homeless, Inc. ran a clinic

called Healthy Horizons, the clinic name

“Healthy Horizons” would be an FBN that

probably has to be registered with the state

or county. Even if you won’t be using an FBN

yourself, it’s a good idea to check the FBNs

used by other businesses in your county or

state to see whether the name you want is

already in use.

2. Consider Domain Name Availability

If there’s any chance at all that you’ll want to set up

a website (see Chapter 9 for information on how to

do it), you should make sure that the name you want

to use—or some logical abbreviation or acronym—is

available as a domain name. Your domain name is

1/ 4 STARTING & BUILDING A NONPROFIT

part of the address visitors will use to access your

site, such as akitarescue.org or cleanourcreeks.org.

Because your domain name is the main part of

your website’s address, you will need to choose a

domain name that is not already owned or being

used by someone else. You will also need to decide

on the appropriate suffix for your domain name—

most nonprofits use “.org” instead of “.com” to

indicate that they have a noncommercial purpose.

Governmental entities use “.gov,” while educational

entities use “.edu.”

Clearly, it will be easier for your supporters to find

you if your domain name and nonprofit name are

identical. To be in the happy position of using your

nonprofit name as your domain name, you’ll need to

choose a name that isn’t already being used, which

can be tricky these days—it seems that virtually

every word and phrase has already been registered

as a .com or .org address. To find out whether a

name is available, go to an online registrar such as

Network Solutions (www.networksolutions.com).

You can enter the domain name you want and find

out immediately whether it’s available. If the name

you choose for your nonprofit is being used by

another group or business as a domain name, you

will not only have to choose a different domain

name for your group, but you may also face claims

of trademark violation.

EXAMPLE: A new nonprofit peace group wants to name itself Families for Peace, and checks

to see if familiesforpeace.org is available. They

find it is already taken by a group called The

Peace Initiative.

Not only will the new group be unable to

register the domain name familiesforpeace.org,

but they might get into trademark trouble by

choosing Families for Peace as the name of

their nonprofit. By using the familiesforpeace.

org domain name, the other group (The Peace

Initiative) owns some level of trademark rights

to the phrase and may be able to prevent the

new group from calling itself by that name,

even if the new group uses a totally different

domain name. The new group would be wise

to choose a different nonprofit name altogether—

preferably one that also can be used as its

domain name.

Even if a domain name is available, trademark

law may prevent you from using it if the name is

already being used by another entity. For example,

say there’s an animal protection organization in

Maine called “Rural Pet Rescue,” which doesn’t

have a website. If a different animal rights group in

Colorado sees that ruralpetrescue.org is available, it

should not automatically assume that it can safely

register and use that domain name. If it did, the

Colorado group would be courting a trademark

infringement lawsuit from the original Rural Pet

Rescue in Maine, which may have been using the

name for years. In short, domain name availability is

no indicator of whether a name is safe to use under

trademark law.

If your nonprofit name is on the long side, you

might want to adapt it for your domain name.

Consider any obvious abbreviations that the public

would likely use. For example, a nonprofit called

New York Arts Alliance might try nyartsalliance.

org. Similarly, the Shawnee Independent Business

Alliance might consider shawneeiba.org.

3. Name Requirements for Nonprofit Corporations

You will need to be concerned about trademark

conflicts and domain name availability whether

you incorporate your nonprofit or not. However, if

you decide to incorporate, you will have a couple

of additional issues to contend with. First, you’ll

need to choose a name that’s not already in use

by another business or nonprofit. Second, you’ll

have to follow your state’s rules regarding nonprofit

corporate names. If you don’t follow these rules in

choosing your corporate name, your state’s corpo-

rate filing office may not approve your name—and

may reject your articles of incorporation. (See

Section B5, below.)

a. Avoid Corporate Name Conflicts

Your state’s corporate filing office—often the

Secretary of State’s office—will reject your name if it

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 5

is already in use by another corporation (nonprofit

or for-profit) or is confusingly similar to the name

of another corporation in your state. Some states

will also check your proposed name against other

business databases, such as listings of state limited

liability corporations or limited partnerships. If your

proposed name is already in use, you’ll be out of

luck.

To save time and headaches, do some research

before you file your articles of incorporation to

find out whether your proposed name is available.

You can usually call or write the state filing office

to check on name availability; many states also

allow you to check names online. Ask your state’s

filing office about its search procedures, or check

your state filing office’s website (listed by state in

Appendix B).

Once you find an available name, reserve it if you

can. Most states allow you to reserve a corporate

name for a specified period of time, sometimes for a

small fee. Reserving a name is a good idea because

it prevents someone else from taking your name

before you have a chance to file your articles. For

more information on selecting and reserving a cor-

porate name, including a sample name reservation

letter, see How to Form a Nonprofit Corporation, by

Anthony Mancuso (Nolo).

b. Other Name Requirements

Many states require nonprofit corporations to use

certain words in their corporate name—and/or

to avoid other words. For example, you may have

to use the word “corporation” or the abbreviation

“inc.” in your corporate name, or avoid using words

that falsely imply a particular business structure or

affiliation, such as “bank,” “trust,” “cooperative,”

“federal,” or “insurance.” Of course, if your nonprofit

really is a cooperative or trust, you may be able to

use these words in your corporate name—check

with your state’s filing office to make sure.

If you plan to apply for tax-exempt status (see

Section C, below), you should also avoid any words

implying that your nonprofit might not be eligible

for a tax exemption. For example, if you used the

words “trade association” or “political action group,”

you might not sound like the kind of charitable

organization that is entitled to avoid paying federal

taxes. This is not a requirement of state or federal

law—instead, it is a commonsense precaution that

will prevent possible problems down the road, when

you apply for your tax exemption.

B. Should You Incorporate?

You don’t necessarily have to incorporate your group

to accomplish your nonprofit goals. (The same goes

for obtaining 501(c)(3) or other tax-exempt status,

which is covered in Section C, below.) Many small

groups operate perfectly well without incorporating

and happily remain what’s sometimes referred to as

an unincorporated association. In fact, many groups

decide to incorporate only when faced with some

pressing reason to do so—for example, because the

group won’t be eligible for a grant unless it incorpo-

rates.

When you incorporate as a nonprofit (by filing

papers with your state’s filing office—see Section

B5, below), you create a separate legal entity that

pays its own taxes and protects the people who

run it and work for it from personal liability. If an

organization does not incorporate, its legal status is

fuzzier. As discussed below, unincorporated groups

are treated differently from state to state—some

states treat them like corporations in some respects;

others don’t.

You don’t have to incorporate to obtain tax- exempt status. Unincorporated associations can apply for and obtain 501(c)(3) status (and other

types of tax-exempt status as well). Keep this in

mind if you are considering applying for a grant

that is available only to groups that have 501(c)(3)

or other tax-exempt status—it’s not necessary to

incorporate to get 501(c)(3) status and be eligible

for the grant. Still, it’s often a good idea to incor-

porate, anyway. A group that plans to seek federal

tax-exempt status will likely benefit from the more

formal corporate structure.

In the absence of a clear need to incorporate, the

members of a nonprofit group may wonder whether

incorporating makes any sense at all. Some may

think it’s the right thing to do based on a vague

1/ 6 STARTING & BUILDING A NONPROFIT

notion that it will protect board members from

personal liability or because it sounds more official.

Others may not want to incorporate, fearing the

dreaded corporate paperwork or simply feeling that

incorporating is an unnecessary expense of time,

money, and other resources. While there may be

some truth in each of these notions, it’s important

to get past these generalities and consider specific

reasons why your particular group will or won’t

benefit from incorporating.

Broadly speaking, the main reason most nonprofits

incorporate is to protect those who work for the

organization from personal liability. In addition to

limited liability, other considerations may be impor-

tant to your nonprofit, such as whether your group

plans to obtain federal tax-exempt status, whether

it plans to handle large sums of money, whether it

seeks to gain credibility by incorporating, or how

unincorporated associations are treated in your state.

The sections below look at each of these factors in

more detail.

Are You Sure You Want to Incorporate?

As discussed in this chapter, incorporating

allows you to take advantage of sometimes

favorable corporate tax treatment and protec-

tion from personal liability. But some groups

won’t realize many benefits by incorporating;

for them, there’s no reason to spend the time

and money required to incorporate. If your

liability risks are minimal to nonexistent, and

if incorporating doesn’t make any additional

tax advantages available to your group, it often

makes more sense to keep things simple and

operate as an unincorporated group until

growth or other changes warrant a more formal

organizational structure.

1. Liability Issues

One of the most compelling reasons to incorporate

a group is to protect directors, officers, and staff

from personal liability. If the nonprofit corporation

loses an expensive lawsuit or finds itself in debt,

creditors typically won’t be able to get at the assets

of the people who run the nonprofit. Only the assets

of the corporation itself will be vulnerable, not the

personal assets of the board and staff.

If your nonprofit is lucky enough to have sizeable

assets, losing them to debt would of course be dev-

astating. But a more common and serious problem

occurs when creditors go after board members or

staffers with deep pockets, instead of targeting the

nonprofit itself (which may be cash- and asset-poor).

If the group is not incorporated, the people running

the organization might find themselves personally

liable for the nonprofit’s debts. This possibility

creates a pretty powerful incentive for many non-

profits to incorporate. But, as discussed below, other

laws might protect your members from liability even

if you don’t incorporate, and your group’s actual

liability risks may be quite low. In short, not every

nonprofit has to incorporate to adequately protect its

members from liability.

Corporate protection from personal liability is not absolute. In some unusual circum- stances, individuals may be held personally liable

for corporate debts. Often called “piercing the

corporate veil,” this individual liability is usually

reserved for cases of extreme mismanagement

or self-dealing. In these situations, the corporate

structure may not shield an individual who commits

improper, unethical, or criminal activities. (Liability

is covered in greater detail in Chapter 7; you’ll find

information about the duties of nonprofit directors

in Chapter 4.)

So, how worried should you be about liability

issues? The answer will largely depend on what

your activities and potential risks will be, and

whether other sources of protection offer enough

of a shield to make incorporation unnecessary. (For

information on assessing risks and risk management

strategies, see Chapter 7.)

Incorporating won’t shield the nonprofit’s assets. Forming a corporation limits only personal liability—that is, the liability of those who

work for the nonprofit. If a successful lawsuit is filed

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 7

against a nonprofit corporation, the nonprofit’s staff

and volunteers may not have to pay a penny, but

the assets of the nonprofit itself can be wiped out.

Taking risk management seriously—by evaluating

your activities, making any necessary changes to

minimize risk, and purchasing needed insurance—

will help you keep your nonprofit out of financial

and legal trouble. (Risk management and insurance

are covered in more detail in Chapter 7.)

a. Assess Your Risks

Start your risk assessment by reviewing your

expected activities. If your group will regularly

engage in activities that involve physical or financial

risk (including any plans to solicit large amounts of

money), incorporating may be the wisest choice.

(Or consider changing your activities—see “Other

Risk Management Strategies,” below.) For example, a

bicycling team, a children’s gym, an environmental

organization that plans to clean up hazardous waste,

or an independent business alliance that holds large

conventions would be well advised to incorporate.

On the other hand, if you anticipate very little

risk, you may reasonably conclude that avoiding

personal liability doesn’t justify the time and

expense of incorporating. For example, a neighbor-

hood association, a slam poetry group, a gathering

of French-language enthusiasts, or a group that wants

to improve a rose garden at a local park might

not face much liability risk during their activities.

If there’s little or no risk of injury and everyone

reasonably agrees that a lawsuit would be extremely

unlikely, operating as an informal, unincorporated

group may be an entirely sensible path to take.

Lots of groups will fall somewhere in between,

with activities that could pose a small to moderate

amount of risk—say, a weekend soccer league or

a group that periodically holds food drives for the

homeless. Before jumping into incorporating, groups

like this should consider some other sources of

protection from liability exposure, discussed below.

Other Risk Management Strategies

As discussed in more detail in Chapter 7, there

are many different ways that groups of all types

and sizes can minimize their liability risks.

Be sure to consider these simple, effective

strategies:

• Adapt your activities. If your group identifies a specific activity that exposes

the group and its members to risk, con-

sider changing that activity or eliminat-

ing it altogether.

• Use signed waivers. When appropriate, get participants to sign waivers releasing

the group from liability.

• Find an umbrella group. If an umbrella group exists for your type of organization,

operating under it can help minimize

your liability exposure. For example,

sports teams typically play in leagues

or enter tournaments sponsored by

umbrella groups, which often allow and

may require every participant to sign up

for the group’s insurance plan.

Whatever your true risks are, make sure your volunteers, staff, board members, and others are comfortable with your organizational structure. If you find that potential directors, employees, or

volunteers are reluctant to work for the organization

without the protection of the corporate structure,

you’ve got a problem on your hands. If you feel their

worries are unwarranted—for example, every player

on your softball team is covered by comprehensive

insurance provided by the American Softball Asso-

ciation—you might try to address their concerns and

convince them they are not facing as much risk as

they think. On the other hand, their fears may be a

sign that it’s time to incorporate your nonprofit.

1/ 8 STARTING & BUILDING A NONPROFIT

b. Insurance

For groups whose principal volunteers and staffers

face low (but not entirely negligible) liability risk,

basic liability insurance might offer adequate protec-

tion, making incorporating unnecessary. A simple,

reasonably priced policy can shield members or

workers of a group from a wide range of liability

risks, from typical trip-and-fall claims to cases of

mismanagement or fraud.

Take, for example, the food drive group men-

tioned earlier. If someone was injured by a falling

box of canned goods and sued the organization,

there’s a good chance that neither the organization

nor its individual members would be liable in the

first place. But even if a lawsuit was successful,

liability insurance coverage would probably pro-

tect individual group members from having to pay

medical bills or legal damages, even if the group

was not incorporated. As discussed in Chapter 7,

it’s a good idea for any group to consider at least

some basic insurance—but it’s especially smart for

those that don’t have the protection of the corporate

structure.

c. State Laws Protecting Members of Unincorporated Associations

Some states have enacted laws providing at least

some limited liability to people involved with

unincorporated groups. Depending on the state,

this protection may cover paid and/or volunteer

workers; other specifics also vary from state to state.

In addition, some states have adopted the Uniform

Unincorporated Nonprofit Association Act (UUNAA),

which, among other things, limits the liability of

members and functionaries of unincorporated

associations for personal injury (tort) and contract

lawsuits. (See “What’s in the Uniform Unincorpo-

rated Nonprofit Association Act?,” below, for more

information on the Act’s provisions and the states

that have adopted it.)

Other states have no laws at all regarding the

liability of those associated with unincorporated

groups. Even though you probably won’t be on the

losing end of a lawsuit, it’s nevertheless important to

recognize that these states offer no personal liability

protection to the people who work for unincorpo-

rated associations. (But the federal law does—see

Subsection d, below.)

d. The Federal Volunteer Protection Act

In addition to the variety of state laws that pro-

tect the people who work for nonprofits, federal

law provides some basic protections to volunteers

who work for nonprofit groups, whether or not

they incorporate. The Volunteer Protection Act

(VPA) of 1997 provides limited immunity to unpaid

volunteers—including directors, officers, and

trustees—for any injuries or damages they cause in

the course of their volunteer activities. (42 U.S.C.

§§ 14501 and following.) The group must either have

federal 501(c)(3) tax-exempt status or be operated

“for public benefit and operated primarily for chari-

table, civic, educational, religious, welfare, or health

purposes” to qualify for this protection. (42 U.S.C.

§ 14505(4).) The group does not have to be incorpo-

rated or possess any tax-exempt status to meet the

second definition.

Because the VPA is a federal law, it provides what

amounts to a mandatory minimum level of protection

for nonprofit volunteers in all 50 states. In states that

have no law governing volunteers’ liability, the VPA

will apply. In states that provide even more protec-

tion to volunteers, state law trumps the VPA. (For

more information on the VPA and liability issues in

general, see Chapter 7.)

The Volunteer Protection Act does not prevent lawsuits against nonprofit organi- zations. The VPA protects only the volunteers who work for a nonprofit, not the nonprofit group itself.

Similarly, the VPA does not prevent a nonprofit

from suing a volunteer for damages; it just shields

volunteers from lawsuits by third parties. But, as

mentioned earlier, nonprofits themselves usually

aren’t sued because they so often have minimal

assets. Much more often, it’s a volunteer with a

fat bank account who faces a lawsuit. This is the

situation that the VPA protects against.

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 9

What’s in the Uniform Unincorporated Nonprofit Association Act?

2. It provides limited liability for members and functionaries of the groups for per-

sonal injury (tort) and contract claims.

3. It gives groups the right to sue and be sued as associations.

4. It creates a procedure for disposing of the property of inactive associations.

5. It allows an agent of the association (such as the activities coordinator, the

president, or just a simple member) to be

designated for service of process—the

designated person then has the authority

to receive legal papers on the group’s

behalf.

The states that have adopted the UUNAA as

this book went to press include:

Alabama

Arkansas

Colorado

Delaware

District of Columbia

Hawaii

Idaho

Texas

West Virginia

Wisconsin, and

Wyoming

For more information on the UUNAA,

including the full text of the law and any recent

state adoptions, visit the National Conference

of Commissioners on Uniform State Laws on-

line at www.nccusl.org.

In 1992, the National Conference of Commis-

sioners on Uniform State Laws drafted the

Uniform Unincorporated Nonprofit Association

Act (UUNAA). The Act was an attempt to

encourage involvement in small community

groups and other organizations that aim to

benefit the public but don’t want to establish

a formal corporate structure. Recognizing that

unincorporated groups do much good for the

public but can be hampered by their vague legal

status, the Conference created the UUNAA as

a model law for states to adopt; so far, 11 have

done so.

Under the UUNAA, unincorporated non-

profits are given the legal status of a separate

entity for purposes of liability. This means that

people who work for an unincorporated non-

profit won’t be held liable for the actions of

the nonprofit or other people working for it

merely by virtue of their involvement with the

group. The UUNAA definition of unincorpo-

rated nonprofit associations is broad: “[Two] or

more members joined by mutual consent for a

common, nonprofit purpose.” Members may

be individuals, corporations, other associations,

or governmental agencies. Both volunteer and

paid workers are protected.

The UUNAA gives five benefits to unincorpo-

rated nonprofits:

1. It gives the associations the legal capacity to receive, hold, and transfer real and

personal property.

1/ 1 0 STARTING & BUILDING A NONPROFIT

Balancing Liability Considerations

Once you’ve assessed your risks and looked at

the various ways to protect your group and its

people from liability, you’ll be in a much better

position to decide whether incorporation makes

sense in your situation. Consider the following

example.

EXAMPLE: The New Mexico Cactus Lovers (NMCL) is a group of about 25 people

who get together every other month or

so to view and photograph various cactus

plants. They post the pictures and other

informative material at a small website.

Keeping the group organized and planning

its activities falls to a group of five people

who call themselves the steering commit-

tee. The folks on the steering committee

plan outings, notify members of the time

and place for each outing, and coordinate

getting the cactus photos and information

from members to post at the website,

among other basic tasks.

At the last outing, one member slipped

and fell into a prickly pear. She wasn’t hurt

too badly and has no intention of suing,

but it got NMCL’s steering committee

thinking about their liability risks. Even

though people could get hurt during their

outings, the steering committee concludes

that the chances of a successful lawsuit

against the group or its members are small.

Because all of the members are friends

and outings are not open to the public,

there’s a low likelihood of a member suing

in the first place. Still, a lawsuit is possible

and could be expensive to defend, even if it

was ultimately unsuccessful. The commit-

tee isn’t worried about the group’s assets,

which don’t typically exceed $1,000 at any

given time; what concerns them are the

assets of the group’s individual members.

They do a quick search of laws online

and learn that New Mexico has not adopt-

ed the Uniform Unincorporated Nonprofit

Association Act. However, they see that

New Mexico’s laws do provide some other

protections for unincorporated associations

and their members. They find New Mexico’s

Corporations statute, Unincorporated

Associations chapter, which states in

Section 53-10-6B: “Any money judgment

obtained against an unincorporated asso-

ciation shall bind only the joint or common

property of the association.” They plan to

ask a lawyer about this but surmise that it

means individual members can’t be held

personally liable for judgments against the

group.

Continuing their research, the steering

committee reads about and discusses

the Volunteer Protection Act. They note

that the VPA applies only to volunteers of

501(c)(3) tax-exempt nonprofits, or those

operated “for public benefit and operated

primarily for charitable, civic, educational,

religious, welfare, or health purposes.”

After some discussion, they agree that

they’ll want to keep the primary focus on

the Cactus Lovers’ educational website and

other informative activities (as opposed to

purely recreational purposes), so that their

group will be covered by the VPA.

After discussing their likely risks and the

existing sources of protection available to

NMCL and its members, the steering com-

mittee decides that the risks to the group’s

members are minimal, so incorporating

doesn’t appear to be essential at this point.

They plan to look into a general liability

insurance policy for the group to protect

against accidents that might happen during

their outings. They also agree to revisit the

issue if their group grows significantly or

starts to engage in new activities.

To see how taking on new activities will

affect your liability risks—and in turn the

need to incorporate—consider some different

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 1 1

2. Tax Exemptions

Generally speaking, there are two ways that a

nonprofit can enjoy exemptions from federal or

state taxes. As discussed in more depth in Section

C, below, a nonprofit that meets federal and state

requirements can:

• avoid paying federal and state taxes on

income, and

• for charitable nonprofits (those that qualify

under section 501(c)(3)), offer tax-deductibility

to donors for the value of their contributions.

These benefits can be quite valuable, but your

group doesn’t have to incorporate to get them. Your

group’s eligibility for any sort of tax exemption

will depend on your nonprofit’s activities—not on

whether or not it is incorporated.

If it meets all other requirements, an unincor-

porated association can obtain tax-exempt status

from the IRS (including exemption from taxes and

tax deductions for contributors), as long as the

group has a written organizational document, often

called articles of association. Many states allow

unincorporated groups to file articles of association

with a state office (usually the Secretary of State),

possibilities for the New Mexico Cactus Lovers.

The chart below shows how the group’s need to

incorporate might change as its activities grow.

Low Need to Incorporate Borderline Need to Incorporate High Need to Incorporate

NMCL’s loose group of cac-

tus enthusiasts visits public

lands to take photographs of

interesting cactus specimens,

which they post at a website.

Everyone who participates in

the park outings signs a liability

release form each year.

NMCL posts notices in local

calendars and other media

inviting the public to join in the

park outings. Participants must

make their own travel arrange-

ments and sign a waiver releas-

ing NMCL from liability.

Two to four trips are offered

each month to the public and

to NMCL’s 100 or so members.

NMCL offers transportation

to those who want it. Release

forms are required. Trips

venture into areas with hazards

such as steep rocks, rattle-

snakes, and extreme tempera-

tures.

These are just general guidelines, but they show

that increasing levels of risk will make incorpo-

ration look more and more attractive.

in much the same way as corporations file articles

of incorporation. (See Section B5, below, for more

information on articles of incorporation.)

Follow IRS rules when filing articles of incor- poration or association. If you plan to apply for tax-exempt status, your organizational document

must pass IRS muster. For corporations, the IRS says

that articles of incorporation must be date-stamped

by the state in order to be valid. For unincorporated

associations, the articles of association must be

signed by two or more people and must be dated.

Further, if you plan to apply for 501(c)(3) tax-exempt

status—as opposed to tax exemption under other

IRS provisions, such as 501(c)(4) or 501(c)(6)—your

organizational document must include specific

language regarding your tax-exempt purpose and a

limitation on political activities, among other things.

This applies to associations and corporations alike.

If you file your state organizational paperwork with-

out knowing exactly what will be required if you

decide to apply for tax-exempt status, you could

create a lot of unnecessary trouble for yourself

down the road.

1/ 1 2 STARTING & BUILDING A NONPROFIT

Even though you don’t have to incorporate in

order to pursue tax-exempt status, it can still be a

good idea. Adopting the formal corporate structure

will force you to be more organized and approach

important tasks—like defining your mission, clari-

fying roles within the organization, and managing

your finances—more seriously. These tasks are espe-

cially important for groups that plan to seek federal

tax-exempt status, because these groups will be

legally required to stay true to their mission, keep

good records, and carefully manage their finances.

In short, you will be in a stronger position to obtain

tax-exempt status if you incorporate your group,

because incorporation forces you to impose and

maintain a higher degree of organization.

On the flip side, remember that incorporation

alone doesn’t automatically make you eligible for

the tax-exempt status you want. Your ability to

obtain federal tax-exempt status will depend on

your nonprofit’s activities, which may or may not fall

within a specific tax-exempt category. For example,

a bridge-playing group probably wouldn’t be eligible

for 501(c)(3) status, which is generally reserved for

charitable nonprofits. (See Section C, below.) If the

bridge group incorporated to obtain 501(c)(3) status,

it would be out of luck (unless it overhauled its

activities substantially).

As for state income taxes, each state follows its

own rules as to granting exemptions to nonprofit

groups. State laws differ, so you should check

yours to see whether your unincorporated group

will be eligible for a state tax exemption. If not,

incorporating might be your best option. State rules

for income tax exemptions are covered in Section C,

below.

If you plan to incorporate, do it before apply- ing for federal tax-exempt status. You should apply for tax-exempt status only after you finalize

your business structure. If you decide to incorporate after obtaining tax-exempt status, the IRS will re- quire you to go through the tax-exempt application

process all over again. By incorporating, you will

have created a business entity separate from your

prior association—and that new entity will need its

own tax exemption.

3. Financial Accountability

While nothing prevents an unincorporated associa-

tion from having well-developed and well-organized

financial systems, sometimes the additional formality

of the corporate structure helps promote sound

financial management. Because a corporation is

legally required to fill certain board and officer

positions (and each position has important legal

duties), the people working for a nonprofit corpora-

tion often have a clearer sense of accountability and

how important it is to manage funds with care. In

an unincorporated group that doesn’t have these

built-in legal responsibilities, it’s not uncommon

for financial systems to be messy or nonexistent.

In short, if membership dues, fundraising events,

private contributions, or other sources bring in even

a few hundred dollars per year to the nonprofit,

your group might benefit from the greater financial

accountability that comes with incorporation.

Incorporating can also help you show outsiders

that your group is a serious endeavor—and that they

should support it financially. Potential contributors

often want to see financial systems and account-

ability in place before they commit any funds to a

group. In particular, foundations and other large

grant providers may not consider giving financial

support to unincorporated groups, precisely because

the formality of the corporate structure provides

additional assurance that the money will be man-

aged in a professional manner. So, when it comes to

attracting and securing contributions, incorporating

may be a practical necessity.

Do you really want to start a for-profit busi- ness? Even though you may feel certain that you want to pursue your goals with a nonprofit, be

open to the possibility that your ideas may be better

served by starting a for-profit business. You can be

as socially progressive with your business as you

and your partners want but will not be bound by the

special tax and other rules that govern nonprofits.

Many foundations give money only to non- profit corporations with 501(c)(3) status. If your potential funding sources don’t give money

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 1 3

to groups without 501(c)(3) status, you’ll obviously

want to obtain that exemption. Section C, below,

offers detailed information on what groups are

eligible for this type of tax-exempt status, as well

as other kinds of federal tax-exempt status. For

line-by-line instructions on filling out the 501(c)(3)

application, read Nolo’s How to Form a Nonprofit Corporation, by Anthony Mancuso. If you’re not eligible under 501(c)(3), you’ll find some alternatives

in Section C, below.

On the other hand, if your group collects a few

bucks from its members every other month to cover

photocopying expenses, or holds a yearly bake sale

to help cover the cost of a trip to the Grand Canyon,

incorporating may well be more costly and compli-

cated than it’s worth. Unless there are other reasons

to incorporate—liability issues, for example—it often

doesn’t make sense for small groups with minimal

funds to take on the formality and complexity of the

corporate structure.

Incorporating may enhance your group’s credibility. Many people are just more inclined to respect an organization that has gone to

the trouble to incorporate, whether or not it truly

deserves that respect. Of course, credibility and

reputation are important for any nonprofit, and

you’ll build them by running your organization well.

But if credibility is a particular concern for your

group, you might want to consider incorporating

sooner than later to establish your bona fides early

on.

4. Other Considerations

Besides the big issue of liability and consider-

ations related to taxes and financial management,

other factors may affect whether or not you should

incorporate. Here are a few to consider.

a. Likely Duration

Generally speaking, incorporating is more appro-

priate for groups that expect to have a lifespan

of at least a few years. If your group is short-term

in nature—for example, you banded together

to prevent a big box store from moving into the

neighborhood—it probably doesn’t make sense to

incorporate. If the issue will likely be resolved one

way or the other fairly quickly, precious time and

energy could be better spent on the campaign, not

on building and maintaining the corporation. But if

your group sticks together after the initial battle and

redefines its mission as creating and maintaining

appropriately sized neighborhood shopping areas, it

might be a good idea to form a corporation.

Look at your organization’s goals and evaluate

whether you will be able to meet them relatively

quickly, or whether they will require an ongoing,

long-term effort. Unless you expect to be pursuing

your mission for quite a while, incorporating may be

more trouble than it’s worth.

EXAMPLE: A group of neighbors frustrated with the litter at a neglected local park decides

to band together for a Clean Up Our Park

Weekend. They organize an event to clean up a

lake and a forested area in the park. They take

risk management seriously and plan to have

all participants sign a release from liability.

Beyond that, they don’t worry about forming

any organizational structure.

The weekend clean-up event is a huge

success, drawing dozens of participants from

the surrounding neighborhoods. The Clean

Up Our Park organizers decide that lots more

work could be done at the park if they held

similar events regularly throughout the year.

They develop new goals, including restoring

natural vegetation and aquatic life to the lake,

eliminating diseased trees, and improving park

trails. With their new mission, they realize that

they will need contributions and grants, as well

as cooperation from the city and the parks de-

partment. Because their planned activities will

keep them busy for at least the next two years,

they decide that a more formal organization is

in order. They make plans to form a nonprofit

corporation and seek tax-exempt status.

1/ 1 4 STARTING & BUILDING A NONPROFIT

b. Overlap With Similar Groups

Before starting your own nonprofit (whether incor-

porated or not), you should find out if any other

nonprofit in your area is working towards the same

goals. You should certainly figure this out before

you incorporate and establish your nonprofit more

permanently.

Politically speaking, it’s important not to in-

vade another nonprofit’s territory—at least without

communicating first and having good reason to go

ahead with your own nonprofit. You may well find

that the best way to pursue your goals is by joining

forces with the other nonprofit, rather than starting

your own and spending time and energy on the in-

corporation process and other legal and tax issues.

The other group may have already made valuable

progress in terms of raising money and awareness,

forging alliances, and so on.

Instead of incorporating your group, you might:

• study the list of nonprofits already active in

the same area and join their efforts as a volun-

teer, board member, or employee

• identify existing groups in your area that are

compatible with your ideas and meet with

them to explore creating a special project or

initiative, or

• explore the list of national organizations in

your area of interest and find out whether a

local chapter is needed in your geographic

area.

EXAMPLE: After the successful Clean Up Our Park Weekend, the organizers decide that lots

more work at the park could be done if they

organized similar events regularly throughout

the year. They discuss incorporating the group

in order to minimize ongoing liability risks and

to develop a strong organizational framework

to handle more money and activities.

One of the members suggests that they

first do some research to find out whether any

other local or regional groups are doing similar

work. Sure enough, a quick search of the Web

turns up Neighbors Helping Parks, a 501(c)(3)

nonprofit in their state that is dedicated to

mobilizing neighbors and local businesses

to help improve and maintain neglected city

parks. Neighbors Helping Parks is set up to

work with local groups just like the Clean Up

Our Park folks, and provides insurance, train-

ing, and other resources to the local groups.

Even better, Neighbors Helping Parks has a

simple application process local groups can

use to request and receive funds to use in their

efforts.

The Clean Up Our Park organizers agree

that it makes much more sense to work with

Neighbors Helping Parks rather than incorpo-

rate on their own and reinvent the wheel.

5. Incorporation Paperwork and Fees

To create a corporation—whether nonprofit or for-

profit—you must file formal paperwork with the

state and pay a filing fee. You will also need to un-

dertake some additional formalities, such as drafting

bylaws. And you’ll have to keep up with various cor-

porate requirements, including regularly convening

meetings of the board of directors, keeping minutes

of board meetings, filing annual reports, possibly

filing tax returns, and more. Although these tasks

aren’t overly burdensome, they do make incorporat-

ing your nonprofit more costly and time-consuming

than simply operating as an unincorporated group.

Get step-by-step instructions for creating your articles, drafting your bylaws, completing your federal 501(c)(3) application, and much more. This chapter provides only a brief overview of the

paperwork requirements associated with forming a

nonprofit corporation. For detailed instructions on

completing all of the necessary forms—and all of

the information you’ll need to make sure that your

paperwork complies with your state’s rules—see

How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).

a. File Articles of Incorporation

Your corporation’s legal existence doesn’t begin

until your state’s corporate filing office (usually an

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 1 5

agency within the Secretary of State’s office) accepts

your articles of incorporation. The articles simply list

basic descriptive information about the corporation,

such as the corporation’s name and address, the

names of the initial directors, and the corporation’s

purpose. Most states provide downloadable, fill-in-

the-blanks articles forms, so you don’t have to draft

yours from scratch. To get information and a copy of

your state’s form, contact your state’s corporate filing

office or visit its website (you’ll find contact informa-

tion in Appendix B).

If you are planning to apply for federal 501(c)(3) tax-exempt status, your articles must include specific language that satisfies the IRS’s requirements. For example, you should specify a tax-exempt purpose that meets the IRS’s

criteria and state that your nonprofit’s assets will

be used for tax-exempt purposes upon dissolution.

For detailed information on these requirements and

sample language you can use in your articles, see

How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).

State filing fees range from less than $50 to

several hundred dollars. While these fees are usually

not prohibitively expensive, attorneys’ fees may be if

you hire a lawyer for help. With hourly rates ranging

from $75 to $300 or more, a lawyer’s bill can easily

reach into the thousands of dollars. It’s not uncom-

mon for lawyers to offer a package of incorporation

services for a flat fee, ranging from $2,000 to $5,000

for a simple corporation.

b. Draft Corporate Bylaws

While the articles of incorporation legally “create”

your nonprofit corporation, its bylaws outline basic

rules for the corporation’s internal operations. By-

laws generally contain standard provisions that

set forth the rules for board meetings, elections,

compensation, nominating procedures, and officer

positions, among other things. Many states regulate

these issues, so you’ll want to make sure that your

bylaws reflect your state’s requirements.

You can either draft your own bylaws, using a

resource such as How to Form a Nonprofit Corpora-

tion, by Anthony Mancuso (Nolo), or hire a lawyer

to put them together for you.

C. Do You Want Tax-Exempt Status?

As you’re undoubtedly aware, many nonprofits

don’t have to pay taxes on much of their income. If

a nonprofit is eligible and has obtained the proper

tax-exempt status from the IRS and the state, income

derived from business activities that are related to

the nonprofit’s mission will not be taxable as income

to the group. In addition, if a charitable nonprofit

qualifies under section 501(c)(3) of the IRS code,

contributors to the group can claim a federal tax

deduction for the value of their donations.

For many organizations, obtaining tax-exempt

status is a top priority. It’s easy to understand why—

after all, who wouldn’t want to get out of paying

taxes? Well, slow down for just a second. There are

several reasons why it may not be worth your while

to apply for tax-exempt status:

• Unless your organization brings in taxable

income, obtaining a tax exemption won’t do

you much good. For example, if your animal

welfare group is supported solely by contribu-

tions and grants, then you don’t have income

tax issues to worry about, because contri-

butions and grants aren’t taxable. It doesn’t

make sense to jump through hoops to get tax-

exempt status if you won’t owe any taxes in

the first place.

• Some income-producing activities will be tax-

able even if you obtain tax-exempt status. If

you raise money through a business activity

that’s not related to your nonprofit mission,

you owe taxes on that income regardless of

your tax-exempt status. This is usually re-

ferred to as “unrelated business income tax,”

sometimes abbreviated as UBIT. So if your

only income comes from an unrelated business

activity, obtaining tax-exempt status won’t

save you a dime—you’ll still owe taxes on that

income. (See Chapter 6 for more on UBIT.)

• Your donors may not be looking for a tax

deduction. Although contributors often expect

to be able to deduct their donations, that

isn’t always the case. For example, a group

1/ 1 6 STARTING & BUILDING A NONPROFIT

organized to restore a small local rose garden

might well conclude that potential contributors

won’t care whether their donations are tax

deductible or not, making 501(c)(3) status

unnecessary.

• Not every nonprofit is eligible for 501(c)(3)

status. Only nonprofits organized to conduct

certain activities qualify for 501(c)(3) treat-

ment. You may find that certain aspects of

your nonprofit must be changed in order to

qualify for 501(c)(3) status, or that you’re

simply not eligible at all.

There are many types of tax-exempt status. Many groups mistakenly think 501(c)(3) is the only type of tax-exempt status. 501(c)(3) status is

certainly the most coveted, because it gives the most

favorable tax treatment: It not only offers exemption

from income taxes but also allows donors to claim

their contributions as tax deductions. But there are

plenty of other types of federal tax-exempt status

that also offer exemption from income taxes. What

these other types don’t offer is a tax deduction for donors.

This section explains the various types of tax-

exempt status the IRS offers and how this status

can impact a nonprofit’s various tax obligations.

Understanding what taxes can or can’t be avoided

by obtaining tax-exempt status will help you figure

out which kind of exemption—if any—looks best

for you.

1. Tax-Exempt Status in General

If a nonprofit is “tax exempt,” that generally means

one or both of the following:

• Tax exemption for the nonprofit itself, so

that it does not have to pay taxes on income.

Broadly speaking, the main effect of federal

tax-exempt status is to relieve the nonprofit

of the obligation to pay federal income taxes

(and usually state taxes, and possibly other

taxes like sales or property tax). This rule

applies to all nonprofits that have obtained

any IRS tax-exempt status.

• Tax deductibility for donors, so that they

can deduct contributions they make to your

nonprofit. If a nonprofit has 501(c)(3) status,

contributors can claim a tax deduction for any

donations they make to the nonprofit. The

IRS will grant 501(c)(3) status only to organiza-

tions pursuing a short list of specific goals, as

discussed below.

As used in this book, the term “tax-exempt”

generally refers to the basic exemption from income

tax given to all tax-exempt nonprofits. To refer

specifically to the special exemption enjoyed by

501(c)(3) groups, this book uses terms like “tax

deductibility for contributors” or “501(c)(3) tax-

exempt status.”

This section takes a closer look at the first

definition: the general exemption from income

taxes that all tax-exempt nonprofits enjoy. Tax

deductibility for contributors is covered in Section

C2, below.

a. What Taxes Does Tax-Exempt Status Avoid?

Lots of folks have misguided notions about what it

means to be tax-exempt, largely because they don’t

have a clear understanding of what income is tax-

able for a nonprofit in the first place.

Broadly speaking, the IRS classifies a nonprofit’s

income as either contributions or gross receipts.

You generally won’t have to pay taxes on contribu-

tions, whether or not you have tax-exempt status.

Contributions include payments to the nonprofit

that were made with nothing expected in return,

such as donations from individuals, grants, or some

membership fees (though membership fees can get

sticky; see “Classifying Membership Fees,” below).

If your only source of income is contributions, then

getting tax-exempt status won’t make any differ-

ence to your tax bill—although it may make a huge

difference in your eligibility for certain grants.

Many funding sources will give money only to groups with 501(c)(3) status. If your poten- tial funders restrict their grants to 501(c)(3) groups,

obtaining this status may be a practical necessity.

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 1 7

It can be tough to figure out whether member-

ship fees should be categorized as contributions

or as gross receipts. Very generally speaking,

a membership fee will be considered a non-

taxable contribution if the basic purpose of

the fee is to provide general support for the

organization. This is true even if the nonprofit

does in fact provide services, admissions to

events, merchandise, or other things of value

to its members, as long as these things are just

incidental benefits. Remember, contributions

are not taxable, whether or not your group has

obtained tax-exempt status.

But if the nonprofit solicits membership

fees primarily as a way to sell admissions, mer-

chandise, services, or other things of value to

members of the general public who don’t have

any common interest other than wanting the

admissions, merchandise, or services, then the

IRS will consider the membership fees to be

gross receipts. This means that they are taxable

if you don’t have tax-exempt status. They may

well be taxable even if you do have tax-exempt

status, if the IRS deems the fees unrelated to

your nonprofit purposes.

The tax rules regarding membership fees

can get a lot more complicated than this. If, for

instance, a nonprofit offers a subscription to its

monthly newsletter to people who join and pay

a membership fee, it will need to grapple with

awfully nitpicky IRS rules about whether that

membership fee is a contribution (money given

without expectation of something in return), or

gross receipts (payment in exchange for some-

thing of value). For detailed information on how

membership fees should be classified, you may

want to consult a nonprofit-savvy accountant or

lawyer.

As you can see, the only type of taxation that

depends on your tax-exempt status is tax on

business income that’s substantially related to

your nonprofit purposes. Contributions and

grants are never taxable, and business income

that’s not substantially related to your nonprofit

purposes is always taxable, whether you have

tax-exempt status or not.

Classifying Membership Fees

Type of Income Without Tax-Exempt Status With Tax-Exempt Status

contributions (donations, grants, and so on.)

not taxable not taxable

income from a business activity substantially related to the nonprofit’s exempt purposes

taxable not taxable

income from a business activity not substantially related to exempt purposes

taxable taxable

1/ 1 8 STARTING & BUILDING A NONPROFIT

Gross receipts, on the other hand, may be tax-

able; these include payments made to the nonprofit

in exchange for something of value. Think of gross

receipts as income from business-type activities,

in which the payer expects something specific in

return for the payment: admission to an event,

merchandise, access to the nonprofit’s facilities, and

so on. If something is expected in return for the

payment, it will likely be classified as gross receipts.

If you don’t have tax-exempt status, then all gross

receipts are taxable. But with tax-exempt status, a

big chunk of gross receipts may be exempt from

taxation, depending on whether it was earned from:

• a business activity substantially related to the

nonprofit’s exempt purposes, or

• a business activity not substantially related to

exempt purposes.

With tax-exempt status, you will escape paying

taxes on income earned from the first category:

business activities that are substantially related to

your exempt purposes. For example, if your tax-

exempt nonprofit is devoted to educating the public

about how to use technology for social activism,

any money you charge for seminars and classes on

that subject will not be taxable, because the classes

are intrinsically tied to your nonprofit purpose.

But if your group also operates an Internet café as

a moneymaking enterprise, that activity probably

won’t be considered substantially related to your

exempt purposes, and you will owe taxes on that

income.

b. IRS Tax-Exempt Categories

The IRS offers tax-exempt status to a wide range

of organizations: charitable groups, civic leagues,

trade associations, social clubs, fraternal societ-

ies, title holding corporations, teachers’ retirement

fund associations, black lung benefit trusts, veterans

organizations, and cemetery companies, to name

just a few. Each tax exemption is authorized under a

particular section of the IRS code. Recreational and

social groups can obtain tax-exempt status under

section 501(c)(7); fraternal societies are eligible for

exemption under 501(c)(10); childcare organizations

are eligible under 501(k); and so on.

Each tax-exempt category has its own require-

ments and taxation rules. Broadly speaking, however,

the essential tax rule for all these categories is much

the same: Tax-exempt organizations do not have to

pay tax on income earned from activities substan-

tially related to their nonprofit purposes. In other

words, as long as a nonprofit has applied for and

been granted tax-exempt status, it can raise money,

tax-free, from its business activities, as long as the

activities are substantially related to the group’s

nonprofit purpose. (Certain categories—such as

501(c)(3) groups—have additional benefits as well.)

The following chart is from IRS Publication

557, Tax-Exempt Status for Your Organization. You can get a copy of the entire publication, as well

as other helpful information and publications, by

calling 800-TAX-FORM, visiting your local IRS office,

or going to the IRS website, at www.irs.gov.

2. 501(c)(3) Tax-Exempt Status

What sets 501(c)(3) status apart from the other types

is that it not only exempts an organization from

having to pay federal income taxes but also allows

donors to deduct contributions to the organization

on their personal tax returns. Clearly, being able to

offer your contributors a tax deduction for their gifts

can be a big help in attracting funds for your orga-

nization.

a. IRS Criteria

A group is eligible for tax-exempt status under

Section 501(c)(3) only if its primary activity is

pursuing one or more of the following purposes:

• charitable

• religious

• educational

• scientific

• literary

• testing for public safety

• fostering national or international amateur

sports competition, and

• prevention of cruelty to children or animals.

This fundamental requirement is known as the

“organizational test.” If your nonprofit’s primary

activities include any purposes that aren’t on this

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 1 9

Organization Reference Chart (excerpted from IRS Publication 557, Tax-Exempt Status for Your Organization)

1/ 2 0 STARTING & BUILDING A NONPROFIT

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 2 1

list, then you will not meet the organizational test

and won’t be able to obtain 501(c)(3) status. Put

another way, if you pursue activities that are not on

the list, they cannot make up a substantial part of

your nonprofit’s work.

Your nonprofit may engage in more than one of

the exempt activities listed above—for instance, it

can pursue both charitable and educational activities.

But if your nonprofit pursues any nonexempt

purposes as a primary activity—social, recreational,

or business activities, for example—then it would

not be eligible for tax-exempt status, even if it also

pursues exempt purposes.

Perhaps you find yourself asking, “What if our

nonprofit only occasionally dabbles in social or

recreational activities? Does that mean we aren’t

eligible for 501(c)(3) status?” The good news is that

it’s okay for a nonprofit to engage in nonexempt

activities—as long as they are insubstantial. An

occasional social or recreational event is probably

fine, as long as your nonprofit’s primary activities

continue to be related to exempt purposes.

If you expect that nonexempt activities like social

and recreational events will be more than an insub-

stantial part of your nonprofit’s work, you should

consider pursuing a different type of tax-exempt

status. Alternatives include:

• A 501(c)(4) organization—civic leagues, social

welfare organizations, and local associations

of employees. These groups are allowed

to engage in more social and recreational

activities than 501(c)(3) groups but cannot

have social/recreational activities as their

primary purpose.

• A 501(c)(7) organization—social and fraternal

clubs. These groups may engage primarily in

social activities.

If you intend to apply for 501(c)(3) tax-exempt

status, you should take the time before you incor-

porate to find out whether your nonprofit will be

eligible. If it’s not eligible, you may decide not to

incorporate after all, or you might want to change

aspects of your organization to make it eligible. If it

is eligible, you’ll need to include specific language

in your articles of incorporation that states your

nonprofit purposes and limits them to allowable

501(c)(3) activities.

Applying for 501(c)(3) status. To seek 501(c)(3) status, you must file IRS Form 1023,

Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. You can get a copy of this form, instructions for filling it

out, and helpful IRS publications (such as Publica-

tion 557, Tax-Exempt Status for Your Organization) by calling 800-TAX-FORM, visiting your local IRS

office, or going to the IRS website, at www.irs.gov.

Be forewarned, however, that the IRS estimates it

will take the average person more than four hours

to learn about the form—and another eight hours

to fill it in and return it to the IRS! For detailed, line-

by-line instructions that will make filing out a federal

501(c)(3) application much easier (and quicker), see

How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). Mancuso’s book provides informa-

tion on state—as well as federal—tax exemptions.

b. Creating a Separate Fund

If your organization is not eligible for 501(c)(3)

status but is eligible under a different category, you

may still be able to set things up so that you can

offer tax deductions to contributors. Some nonprofits

set up a separate fund to receive money exclusively

for allowable 501(c)(3) purposes (religious, chari-

table, scientific, literary, or educational purposes;

fostering national or international amateur sports

competition; or the prevention of cruelty to children

or animals). If it’s done right, this fund can obtain

501(c)(3) status and all the benefits that flow from it.

Of course, the money in this separate fund must

actually be used only for those purposes—in other

words, you can’t set up a 501(c)(3) educational fund

and use that money for your backgammon club’s

operating expenses. But you could use that money

for an educational website on the history of back-

gammon or similar educational pursuits. Some non-

profits find that this is a good way to finance certain

activities that would be eligible for 501(c)(3) status,

even if the organization overall is not eligible.

Because setting up a separate fund requires

specialized knowledge of nonprofit tax laws and IRS

rules, you should consult an attorney if you’re con-

sidering this strategy.

1/ 2 2 STARTING & BUILDING A NONPROFIT

3. Unrelated Business Income Tax

One type of income that’s always taxable—whether

your nonprofit has tax-exempt status or not—is

income from a regularly operated business activ-

ity that is not substantially related to your nonprofit

purposes. The shorthand for this is “unrelated

business income,” and it is subject to income tax

(unrelated business income tax, or UBIT) just as if

you were a for-profit business. For nonprofit cor-

porations, corporate tax rates will apply. For un-

incorporated associations, the way the group will

be taxed depends on the laws of your state. (The

discussion below assumes that your group is incor-

porated.)

If your gross receipts from an unrelated business

activity exceed $1,000, you’ll have to file IRS Form

990-T to report and pay tax on that income. If you

bring in less than $1,000, you don’t have to file the

form. (For more information on filing requirements,

see Chapter 11.)

If the business activity is not regular—say, an

occasional rummage sale or silent auction—then it is

not subject to UBIT. Other types of income that are

not taxable as unrelated business income include:

• volunteer operations—income from a business

activity in which substantially all the work is

performed without pay (such as a volunteer

bake sale)

• activities for the convenience of members—in-

come from a business activity that is primarily

for the convenience of its members, students,

patients, officers, or employees (such as a

school cafeteria), and

• sales of donated merchandise—income from

a business activity that consists of selling

merchandise that the organization received as

gifts or contributions (such as thrift shops).

Many other types of income are also exempted

from UBIT; these include dividends, interest,

royalties, certain rental income, certain income from

research activities, and gains or losses from the

disposition of property.

For more detailed information on the unrelated

business income tax rule, be sure to read IRS

Publication 598, Tax on Unrelated Business Income

of Exempt Organizations.

4. State and Other Tax Exemptions

Most states exempt a nonprofit from state income

taxes if it has obtained federal 501(c)(3) status.

In these states, the state exemption should apply

whether the group is incorporated or not, though it’s

wise to check with your state to be sure. Depending

on the state, the exemption may be automatic, or the

group may have to submit paperwork showing that

the federal exemption has been granted. Some states

exempt a nonprofit from state income taxes regard-

less of whether it has received 501(c)(3) federal tax-

exempt status. In other states, a nonprofit must go

through a separate process to determine whether it

will be exempt from state income taxes, even if it

has already obtained federal tax-exempt status.

Similarly, the rules vary as to whether a nonprofit

will be subject to other state or local taxes, such

as sales tax or property tax. Some states and local

governments may grant an automatic exemption

if you have obtained 501(c)(3) status; others may

require you to jump through some hoops.

Appendix B offers state-by-state contact informa-

tion for nonprofit corporation filing offices. Contact

your state’s office for information about exemptions

from state income tax for nonprofits. For other

types of taxes, such as state sales tax, contact your

state and local tax authorities (state contacts listed

in Appendixes D and E) to find out how they treat

nonprofits.

5. How Important Is Tax Exemption to Your Organization?

Now that you have some basic tax information,

give some thought to how important it really is

for your nonprofit to be tax-exempt or to offer tax

deductibility to donors. Ask yourself the following

two questions:

1. Will your organization bring in enough taxable income to make avoiding taxes a real concern? If your organization doesn’t bring in any income from

business activities, it won’t owe taxes in the first

place. And if the income is from a business activity

that’s not related to your nonprofit purposes, then

that income is taxable with or without tax-exempt

status. If, on the other hand, you have (or plan to

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 2 3

have) a business activity that’s related to your non-

profit purposes, tax-exempt status can save you real

money. In this case, obtaining some type of tax-

exempt status should be near the top of your “to do”

list.

2. Will you need 501(c)(3) status to be eligible for grants or to attract contributions? While some organizations depend on sizable contributions and

major grants, plenty of others do just fine with

individual contributions in the $10 to $50 range.

If eligibility for grants isn’t an issue, and if your

organization doesn’t plan to go after the big bucks,

you may find that your group does just fine raising

money from folks who don’t care about deducting

their small donation come tax time. But if your

organization’s activities depend on obtaining at least

some large contributions or grants from foundations

or other sources, having 501(c)(3) status is crucial.

People or organizations asked to provide $100 or

more will usually want to know (or will assume)

that their contributions will be tax-deductible. And

grant criteria often include having 501(c)(3) status.

Put bluntly, without 501(c)(3) status, your chances

of attracting large-scale financial support will be

significantly hampered.

EXAMPLE: The New Mexico Cactus Lovers (NMCL) has grown into a group with approxi-

mately 100 members. The group incorporated

last year in order to limit its liability and create

a more formal organization. It now has a board

of directors, plus three paid staffers who main-

tain the group’s website and organize and lead

hiking trips. It hasn’t yet obtained tax-exempt

status but is considering doing so.

When it was a young organization with 25

or so members, the only real money the group

handled was $20 contributions from each

member, which went towards the costs of its

website, gas money for hiking trips, and other

minor operating expenses. Its only income was

from nontaxable contributions (given by donors

who didn’t expect anything of value in return),

so there wasn’t any point in obtaining tax-

exempt status. Even when NMCL engaged in

unrelated business activities to earn money, the

activities weren’t regular enough to qualify the

proceeds as unrelated business income. If the

activities ever had become more regular, taxes

would have been due on that money anyway,

even if the group had tax-exempt status.

Now, however, the group earns money

from several sources, some of which are

currently taxable but would not be if NMCL

obtained tax-exempt status. Besides a $75

annual membership fee, NMCL charges fees

for its hiking day trips. The trips are held fairly

regularly, usually every other week. In addition,

the group operates a small store from its office

where it sells cactus plants to the public. It

also has self-published two books on desert

ecosystems, which bring in revenues of roughly

$4,000 annually.

Currently, all participants must provide

their own transportation to the hiking day trips,

but NMCL wants to raise money for a vehicle so

it can offer transportation to those who want it.

They also want to expand the website and add

more scientific articles about desert ecosystems.

They plan to apply for grants for these larger

funding needs.

At a recent board meeting, the directors

agree that it is time to seek tax-exempt status.

While their membership fees would probably

count as nontaxable contributions (because

they are used for general operating expenses),

the fees for the trips might very well qualify as

gross receipts from a business activity which

would be taxable without tax-exempt status.

Because the trips are substantially related to

NMCL’s mission of educating the public about

cactus plants and desert ecosystems, the

income they generate would be tax-exempt

if the group obtained tax-exempt status. In

addition, obtaining 501(c)(3) status will help

the group meet eligibility requirements for

grant money.

Using the above example, consider the increas-

ing need to obtain tax-exempt status as the NMCL

becomes involved in new activities and starts to

bring in income that would otherwise be taxable.

1/ 2 4 STARTING & BUILDING A NONPROFIT

Low need to obtain tax-exempt status

Borderline need to obtain tax-exempt status

High need to obtain tax-exempt status

The New Mexico Cactus Lovers

(NMCL) has about 20 members

who pitch in $25 a year for the

group’s website, gas and travel

expenses for hiking trips, and

T-shirts.

NMCL has about 50 members

who contribute $45 per year to

the group’s general fund. Those

who participate also pay $25 for

each trip, which are organized

every month or so. The group

also earns income from occa-

sional fundraising events such

as cactus sales, art auctions, and

concerts, some of which are

unrelated to NMCL’s mission.

NMCL wants to solicit grant

money to expand its website

and to offer educational hiking

trips to the public. The group

organizes hiking day trips every

other week and charges fees to

participants. NMCL also sells

cactus plants and publishes two

books on desert ecosystems

in New Mexico, which bring in

about $4,000 a year.

Need help preparing bylaws and articles? For step-by-step instructions on drafting

bylaws and articles, including detailed information

on membership provisions, see How to Form a Non- profit Corporation, by Anthony Mancuso (Nolo).

Often, a nonprofit with voting members will be

called a “membership” nonprofit, and a nonprofit

with no voting members is called a “nonmember-

ship” nonprofit (or sometimes a “directorship” non-

profit, reflecting the fact that only the directors have

the right to vote). However, this distinction can be

confusing, because most states allow nonprofits to

have nonvoting members. Instead of framing the

question as whether to adopt a membership or non-

membership structure, you may find it clearer to

consider whether you want your members to have

voting rights in nonprofit affairs.

1. Why You Probably Don’t Want Voting Members

If your members have voting rights, they can have

a major say in steering your nonprofit. If they don’t,

then only the board will have voting rights—and

the legal power to guide the nonprofit. In practice,

involving all members in corporate affairs is too

burdensome for many small nonprofits. To keep

D. Should You Have Voting Members?

If you incorporate your nonprofit, you’ll need to

decide another issue: whether to allow people to

join your nonprofit as members with voting rights in

nonprofit affairs. (This is sometimes referred to as

choosing a membership or nonmembership structure,

as described below.) Generally speaking, state laws

give legal voting rights to members of nonprofit

corporations, allowing members to participate along

with directors in corporate decision making. Among

other rights, voting members of a nonprofit corpo-

ration have legal rights to elect board members, to

approve or reject changes to the nonprofit’s articles

or bylaws, and to vote for a merger or dissolution of

the nonprofit.

Voting rights and other membership specifics

should be detailed in your nonprofit’s bylaws. If

your bylaws don’t address the issue (or you have no

bylaws at all), the laws of your state will apply as a

default. Some states ask you to specify a member-

ship or nonmembership structure in the standard

articles of incorporation. If your state’s standard

articles ask you to choose a membership structure,

make sure that your articles are consistent with your

bylaws, which will undoubtedly cover the issue at

more length.

NAMING AND STRUCTURING YOUR NONPROFIT 1/ 2 5

things simple and avoid the hassles involved in

allowing members to vote—convening and giving

notice of meetings, especially—most nonprofits

choose not to give members voting rights. Even

though these participants may not have the right

to vote, they can be treated much like voting

members—for example, they can receive benefits

like a newsletter or reduced admission to events.

If a nonprofit does not want voting members,

it can opt not to have members at all. Or, in most

states, it can set up a special class of members

with no voting rights. If the nonprofit doesn’t have

members or if no members are given voting rights,

only the board of directors has the power to vote.

However, bear in mind that state laws and pro-

cesses governing membership rights vary consider-

ably, so proceed with caution if you want to allow

people to become members but don’t want to give

them voting rights. Restricting voting rights from

some members doesn’t mean that those members

have no rights at all under your state’s laws. For

example, state laws typically establish rules for

expelling members, which will generally apply to

nonvoting members and voting members alike.

2. Practicalities of Having Voting Members

If you do choose to have legal, voting members,

you’ll need to be ready for the administrative

burdens of managing membership. These include

maintaining membership lists and processes for

joining the nonprofit, which may or may not involve

paying dues. Thankfully, most of these practical

details are up to the nonprofit and not set in law.

What are legally mandated, however, are the proce-

dures you’ll need to follow whenever a matter is up

for a vote. You’ll need to provide adequate notice

to all voting members before the vote is held and

follow careful rules of order during discussions and

the vote itself.

The board president is in charge of running meet-

ings, so he or she will need to have decent skills in

order to oversee well-organized meetings and votes

involving a general membership. (See Chapter 4 for

information on running meetings effectively and

using formal meeting procedures such as Robert’s

Rules of Order.)

The following checklist is included as a form

in Appendix F and, in digital version, on the

CD that accompanies this book.

1/ 2 6 STARTING & BUILDING A NONPROFIT

Checklist: Naming and Structuring Your Nonprofit

Do some research before choosing a name for your nonprofit. Be sure to choose a name that

does not infringe on anyone else’s trademark

rights. Also consider domain name availability

when picking your nonprofit name.

Don’t jump into incorporating—and assuming the responsibilities of nonprofit corporate

management—without considering whether

it’s really necessary to incorporate. Consider

whether incorporating will reduce your

liability risks, offer tax benefits, or help estab-

lish your nonprofit’s credibility or financial

accountability.

Understand the different types of federal tax exemptions available to nonprofits, and

decide whether tax-exempt status will be a

benefit to your nonprofit. If you plan to apply

for grants, find out whether 501(c)(3) status is

required for the grants you’ll seek.

If you decide that you will pursue tax-exempt status now or in the future, decide which type

of status you plan to seek, and make sure you

set your nonprofit up so it will be eligible for

that type of exemption.

Decide whether your nonprofit will have members with voting rights or whether you

want only directors to be able to vote in

corporate affairs.

■

C H A P T E R

1 Chapter 2

Developing Your Strategic Plan

A. Components of a Strategic Plan ............................................................................... 2/3

1. Keep It Simple ....................................................................................................... 2/3

2. Choose a Time Frame .......................................................................................... 2/4

B. Decide Who Will Participate .................................................................................... 2/4

C. Develop Your Mission Statement ............................................................................ 2/5

1. What Is a Mission? ................................................................................................ 2/5

2. A Clear Mission Is Critical .................................................................................. 2/5

3. Defining Your Mission ......................................................................................... 2/7

D. Outline Specific Goals, Objectives, and Activities ............................................. 2/10

E. Assess Your Resources ............................................................................................. 2/12

F. Identify Strategies ..................................................................................................... 2/13

G. Edit and Finalize Your Plan ...................................................................................... 2/14

2 / 2 STARTING & BUILDING A NONPROFIT

O nce you and your cohorts have committed

to your idea for a nonprofit, it’s time to

sit down and create a strategic plan—the

working document that will chart your nonprofit’s

course through the coming years. A strategic plan

identifies your nonprofit’s goals for a certain time

period (generally one to five years, as described

below) and outlines how you will achieve them.

While your nonprofit will undoubtedly engage in

other planning for specific activities, think of the

strategic plan as the “master plan” for your organiza-

tion.

Translating your hopes and dreams into concrete

plans is an essential undertaking for lots of reasons.

First and foremost, making specific plans will help

you get beyond your idealistic visions to focus on

exactly what your group hopes to accomplish—and

what you can realistically expect to get done, based

on your available resources. Drafting a plan trans-

forms abstract ideas into specific “to do” items,

which is a critical step in setting your nonprofit’s

wheels into motion.

Your planning process may redefine your basic nonprofit idea. As your group works on its strategic plan, you may come up with some

new ideas or challenges you hadn’t yet considered.

For example, a group dedicated to preventing teen

pregnancy may decide to branch out into AIDS edu-

cation. Or, it may learn that a local church will loudly

boycott any organization that offers explicit sex

education for teens. While unexpected options or

obstacles can make your collective heads spin, don’t

panic. Opening your mind to broader opportunities

—even if you decide in the end not to embrace

them—is always a positive learning experience. And

if your planning process reveals such a substantial

flaw in your idea that you decide not to start the

nonprofit after all, your strategic planning has done

its job: helping you realistically assess whether—and

to what extent—you can achieve your goals.

Having a clear strategic plan in place will also

serve you well when you seek to raise money and/

or build community support. People may be mildly

interested in your mission and goals, but their main

question will always be, “What does your nonprofit

do?” If you can’t clearly describe your planned

activities—for example, teaching adult literacy class-

es, researching endangered fox habitat, or running

an after-school music program—it will be hard to

win the hearts and minds of potential supporters.

Strategic planning doesn’t mean coming up with

a 100-page manifesto exploring every aspect of your

nonprofit’s operations; you just need to nail down

some key basics about what your nonprofit actually

plans to do. The extent of the planning process

will vary from one nonprofit to the next. In a tiny

organization with a highly focused goal, members

may be able to hammer out a perfectly adequate

one- or two-page plan during a couple of hour-long

meetings. A bigger operation with a large budget

will likely need to devote a number of meetings to

the process and produce a more detailed plan.

This chapter will help groups of all sizes prepare

a solid and functional strategic plan that defines

your mission; outlines your goals, objectives, and

activities; assesses your resources; and identifies

strategies. Unless your fledgling nonprofit is starting

out with an enormous budget or plans high-profile

activities from the get-go, there’s no need for your

strategic planning process to be a complicated affair

involving outside consultants, board retreats, or

review protocols. The information in this chapter

will help you come up with a basic plan that will

work for your nonprofit, without spending all of

your time and energy on the planning process.

Strategic planning is an ongoing process. While strategic planning is a crucial start-up task, it’s also important for existing organizations

to revisit existing plans every year or so to make

any necessary amendments. As your organization

grows and brings in more money, people, and

other resources, your goals, budgets, and programs

may change—and the strategic planning process

will necessarily become more complex. The basic

approaches to, and elements of, strategic planning

that you’ll learn in this chapter will give you a solid

foundation for your future planning efforts.

DEVELOPING YOUR STRATEGIC PLAN 2 / 3

Starting a Nonprofit: Why Do Something Like That?

Randolph Belle is the Director of Information

at the East Bay Nonprofit Center in Oakland,

California. Over the past decade he has coun-

seled hundreds of nonprofits in all stages of

development, from initial planning to maturity

and expansion. He offers the following advice

for nonprofit start-ups working their way

through the idea stage:

“When people come to me with the pro-

nouncement, ‘I’d like to start a nonprofit,’ my

first question is ‘Why?’ Sometimes the response

is silence, which is not a good sign. For those

who dare answer, ‘Because I care deeply about

…’ whatever issue, I’m compelled to introduce

them to some harsh realities of the world of

nonprofits. The truth is, whether your nonprofit

will succeed and find support will depend not

so much on the fact that you care about your

mission, but on whether you’ve tackled the

fundamentals in developing your purpose,

planning your organization, and building your

community.

“In developing its purpose, a fledgling

nonprofit needs to craft a position of value,

understanding that any nonprofit does only

one of two things: increases human potential

or decreases human suffering. It’s important

to find the words that explain what it is that

you hope to change, not just what activities

you plan to do. Your goal is to create a solid,

unduplicated program, addressing a pressing

community need.”

A. Components of a Strategic Plan

Your start-up strategic plan should consist of four

sections, none longer than a few pages. It should

include:

• a mission statement

• an outline of goals, objectives, and activities

• an assessment of current resources, and

• a strategic analysis.

Planning your fundraising activities. All new nonprofits will need to take some time to

hammer out a plan for raising money. These details

will be covered not in your strategic plan but in a

separate fundraising plan, as described in Chapter 6.

1. Keep It Simple

You’ll want to keep your strategic plan short and

sweet—a big-picture overview of what your non-

profit will accomplish, not a detailed blueprint

showing how you will carry out each and every area

of operations. In other words, your strategic plan

should specifically outline what you’ll do, without

going into great detail about how you’ll do it. Leave

the specifics—such as how often you’ll hold board

meetings, how you’ll approach potential donors,

or how many staff members you plan to hire—for

another day. Including too many operational details

is sure to bog down the strategic planning process

and divert your attention away from the big picture,

which should be your focus now.

EXAMPLE: Robots Care is a nonprofit dedicated to helping disabled people live independently

with the help of robotic technology. The group

pursues two main activities: developing new

robotic technology to provide home care for

people with disabilities, and donating finished

robots to disabled people who meet certain

criteria (its “robot rescue” program).

The strategic plan of Robots Care includes

information about its two program areas: tech-

nology research and development, and the

robot rescue program. The plan includes details

such as the type of new technology that is the

focus of development efforts, what robotic

products it plans to develop each year, who

will qualify for a free robot, the group’s plan

for training its clients about using the robots,

and how it plans to publicize its programs

to reach potential donees. Other operational

details—such as where the group will purchase

equipment and supplies, who will work at the

laboratory, what questions will be included on

the application for a free robot, and how the

group will deal with donated robots that turn

2 / 4 STARTING & BUILDING A NONPROFIT

out to be defective—are left out of the plan.

These details are addressed separately, as part

of developing the programs themselves.

2. Choose a Time Frame

While some established nonprofits plan five years

in advance, most nonprofits plan for one to three

years into the future. When creating a strategic plan

for the first time, choosing a period of one or two

years usually works well. Planning for more than

a year or two is often a waste of time, because

new nonprofits rarely find that their first years go

according to plan. Instead, plan for your first year

(or possibly two), and then compare your plan to

what actually happened as your first year winds

to a close. Once you hit years two and three, your

plans will likely become more realistic, and you

can consider extending your strategic plan for three

years or so into the future.

Randolph Belle—Director of Information, East Bay Nonprofit Center, Oakland, California

Write, write, and keep writing. A plan isn’t a

plan until it’s in writing. If it doesn’t pencil out

on paper, you probably have more work to do.

I’ve found that when you write, you come up with

answers to questions that haven’t been asked yet.

B. Decide Who Will Participate

Whether you’ve already incorporated and chosen

board members or you’re still just a loose group of

organizers, you’ll need to decide who will play a

part in the strategic planning process. If your group

consists of one committed, passionate person (you),

then now is the time to think about bringing in

other interested people.

For small nonprofits with up to six or seven orga-

nizers or board members, it usually makes sense for

everyone to participate. Once ten or more people

are involved, however, it can be quite unwieldy and

inefficient to include everyone. In this case, it’s often

more effective to assign parts of the planning pro-

cess to smaller committees that can more efficiently

tackle specific issues or tasks and then present their

results to the full group for comment and approval.

A new nonprofit’s first strategic planning efforts

might feel a bit awkward. The people involved

probably don’t have defined roles at this early stage.

The group may not have incorporated yet, or it

may have just the statutory minimum number of

board members, with plans to add more in the near

future. When a loose group of initial organizers

tackles the nonprofit’s first strategic plan, they may

not know who else will join the board once they

incorporate—or even whether they will serve on it

themselves.

Building your board is covered in Chapter 4. Chapter 4 explains how to recruit the

right people for your board and covers common

questions such as how large your board should be,

how often it should meet, and how to run effective

board meetings.

No matter where you are in your group’s develop-

ment, however, the initial planning process will be

valuable. If your group hasn’t yet incorporated or

chosen its full slate of formal board members, don’t

worry—just keep in mind that your strategic plan

will have to be acceptable to the board that is even-

tually selected. Because the folks who participate

in the strategic planning will likely end up on the

group’s board after it incorporates, this usually isn’t

a problem.

Besides organizers or board members, you may

also want to include others in your strategic plan-

ning efforts. Potential funders and other supporters

are particularly helpful strategic planning partici-

pants, at least in some limited way. Their input can

help your group fine-tune its activities and goals to

keep these supporters interested and willing to help.

Of course, you shouldn’t design your programs sole-

ly to please potential supporters, but keeping the

lines of communication open and developing good

relationships with your natural allies will make your

job easier once you begin fundraising and trying to

develop community support.

Similarly, if your group will depend on a specific

grant or other donation—for example, a local school

DEVELOPING YOUR STRATEGIC PLAN 2 / 5

has offered you free office space, or you plan to

launch your group with a donation promised by a

local bank—be sure to keep those key supporters

involved every step of the way. The more you will

rely on their support, the more you will need to

make sure that they approve of your plans.

If you’re one of the few new nonprofits that

have already hired an executive director at this

early stage, then be sure to include him or her in

your strategic planning process. Similarly, if you’ve

hired any professionals such as fundraisers or

management consultants, they should be included—

they can often contribute valuable information and

perspectives to your strategic plan. Some nonprofits

even hire experts specifically for the planning

process. For example, you can hire a strategic

planning consultant who is trained specifically to

help nonprofits work through the tasks involved

in creating a strategic plan. As mentioned earlier,

however, most start-up nonprofits won’t need, want,

or be able to afford to hire outside consultants.

At the end of the day, it’s the board of directors

(or the people in charge of an unincorporated group)

that will need to approve the strategic plan, no

matter who generates it—committees, consultants,

or anyone else. While it’s useful to include a diverse

range of voices in the process, you don’t want to in-

clude so many that the nonprofit’s essential direction

gets lost in a cacophony of different viewpoints and

ideas.

C. Develop Your Mission Statement

Every nonprofit needs a mission statement: a clear

description of the reason the nonprofit exists. Your

mission statement should be the first section of

your strategic plan and will set the stage for all that

follows. Because all nonprofits are mission-driven,

you must take care to define your mission clearly.

If the group is unclear about its mission, it can

easily drift off course. Straying from the mission is

an obvious problem for practical reasons, because

it can lead to wasted energy, inefficient use of time

and resources, and failure to reach your goals. It

can also result in losing your status as a nonprofit

corporation under state law or losing tax-exempt

status under federal and state law.

Some people who start nonprofits believe that

they already know exactly what needs to be done

and that it won’t take more than a few minutes to

come up with a mission statement. Think again—

drafting your mission statement deserves more care

and attention. While you shouldn’t agonize over

your statement, it’s important to put some careful

thought into articulating the mission that will guide

your organization for years to come.

1. What Is a Mission?

Essentially, your mission is your broad goal—your

reason for being. Why did you start your organization?

The short answer to this question will likely be a

good first stab at your mission statement.

Here are some clear, concise expressions of non-

profit missions:

• “To create a youth choir for the disabled

children of El Paso, Texas.”

• “To stop a Wal-Mart from moving into

Corrales.”

• “To provide veterinary services to the pets of

homeless people in Atlanta.”

• “To stop the filling of Johnson Bay and restore

its watershed to its natural condition.”

Your organization will also undoubtedly have

many tactical goals, such as organizing events, rais-

ing money, finding volunteers, and more. Although

these activities should all be designed to further

your mission, they aren’t part of your mission per se

and should not be included in your statement.

2. A Clear Mission Is Critical

While it may not be difficult to define many

aspects of your mission, it’s not a task that should

be approached lightly. Remember, all the activities

you’ll engage in for at least the next few years

should flow from your stated mission. Also, crucial

questions of scope and purpose that will almost

surely come up in the future will often be answered

by revisiting your mission statement.

This section takes a closer look at the benefits of

having a well-defined mission.

2 / 6 STARTING & BUILDING A NONPROFIT

a. A Well-Defined Mission Focuses Your Organization

Taking care to define a clear mission statement will

ensure that all of the decision makers in your orga-

nization have a role in deciding exactly what your

mission should be. You may think your mission is

obvious. Once you try writing it out, however, you

will probably find that there are unresolved questions

or issues that have to be addressed. For example,

will your choir for disabled youth include children

who are physically disabled, developmentally dis-

abled, or both? If you’re fighting to keep Wal-Mart

out of your town, what about Home Depot or Ikea?

Will your organization to stop bay fill also conduct

educational programs about the many valuable

ecological attributes of wetlands?

EXAMPLE: A group comes together to form Youth Music, inspired by their desire to promote

music education in a specific school district.

What should Youth Music do if a group of

parents approaches them asking for help sup-

porting or implementing art programs? At least

some Youth Music board members may have

sympathy for these parents and may be tempt-

ed to assist their cause, especially because it’s

so similar to the group’s original purpose.

If the music organization hasn’t taken the

time to define its mission carefully, these board

members may find themselves in conflict with

other parents who believe that focusing solely

on music programs makes more sense. But if

Youth Music has clearly defined for itself the

mission of “promoting music education in the

Cibola County school district,” then it would be

easy for it to decide the issue—absent a formal

mission change, visual art education is beyond

the organization’s scope.

When in doubt, start with a narrow mission. Rather than bite off more than you can chew, start your nonprofit with a more tightly defined

mission. Later, when you have a few successes

under your belt, you can consider whether it makes

sense to broaden the mission.

Your mission statement doesn’t have to be written

in stone. It’s fairly common for an organization to

broaden or redefine its mission as circumstances

change. For example, if a group working to prevent

bay fill is offered a major grant to do community

education on the value of maintaining healthy wet-

lands, it might wisely decide to expand its mission

statement to include bay-related environmental

education. But even if particular circumstances

don’t cause you to change your mission statement,

it makes sense to formally revisit it every few years.

Situations change, organizations grow and evolve,

and you may find that your group has begun to take

on new challenges that call for a careful reexamina-

tion of its mission and goals.

Whether your mission evolves or stays the same,

it must be defined—and understood—by the people

involved in the organization. This will give you a

point of reference to use not only in planning your

activities, but also in resolving disagreements about

your group’s scope. Your mission statement is at the

heart of your enterprise, so any ambiguity or flaws

in it will almost certainly result in a less effective

organization.

b. A Well-Defined Mission Can Attract People and Resources

Besides helping to focus your organization internally,

a clear mission provides another crucial benefit: It

can attract people and resources to your cause. Your

mission statement can and should clearly commu-

nicate to outsiders what your nonprofit is all about.

The more compelling your mission statement, the

better you’ll be able to appeal to like-minded folks

and get them on board. This doesn’t mean you

should pander to potential funders or the public .

On the contrary, trying to create a trendy program is

almost sure to fail, as popular tastes change quickly.

But a clear, compelling mission statement plays the

important public relations role of explaining exactly

what your nonprofit does—which will help you

communicate your purpose and goals to those who

may wish to get involved in your work.

When you speak to people about the nonprofit—

whether they are potential funders, reporters,

government officials, or anyone else—you should

DEVELOPING YOUR STRATEGIC PLAN 2 / 7

be able to state your mission in just a few simple

sentences.

EXAMPLE: Wild Horizons is a nonprofit created to bring children from poor urban

neighborhoods in Wisconsin to national forests

and wilderness areas. In the very early days

of the nonprofit, before the board of directors

sat down to carefully define the group’s mis-

sion, they weren’t effectively communicating

the purpose of their nonprofit to others. Many

people mistakenly believed the main focus of

Wild Horizons was to teach the children out-

door survival skills, when in fact the goal was

simply to introduce kids from often troubled

urban neighborhoods to the great outdoors as a

healthy point of reference.

The volunteers that Wild Horizons tended to

attract were almost exclusively outdoor adven-

ture enthusiasts eager to teach the kids skills

like rock climbing, long-distance backpacking,

and river kayaking. But Wild Horizons also

wanted to attract social workers, outdoor

educators, and counselors who understood

the issues of at-risk youth—and these folks

were conspicuously absent. While camping

and backpacking trips were part of the plan,

the Wild Horizons directors really wanted the

group to focus on the special needs of at-risk

youth, not on the outdoor skills themselves.

They realized that they needed to do a bet-

ter job of communicating that their group had

a social work focus so that they’d attract the

people with the crucial youth-counseling skills

they lacked.

Once it realized the problem, the board

decided to draft a clear mission statement. They

prepared by surveying people in the field for

input on how Wild Horizons could best meet

the needs of the at-risk youth they wanted to

help. After receiving and considering that input,

they drafted the following mission statement:

“Wild Horizons is dedicated to introducing

children from low-income urban neighbor-

hoods in the state of Wisconsin to national

parks, forests, and wilderness areas. Our

primary goal is to address the issues of at-

risk youth through outdoor education and

wilderness experiences, led by experienced

counselors. Our activities will encourage per-

sonal growth and broaden the experiences of

Wisconsin’s at-risk urban children by providing

them the opportunity to spend time in beauti-

ful, natural, nonurban environments.”

c. A Well-Defined Mission Can Help You Get 501(c)(3) Status

When drafting your mission statement, remember

that your mission will be of crucial importance if

you decide to apply for 501(c)(3) or another type of

tax-exempt status. As discussed in Chapter 1, the IRS

has criteria for each type of tax-exempt status, and it

will look closely at your nonprofit’s mission to make

sure that you meet the requirements.

To obtain 501(c)(3) status, your nonprofit’s

mission must be charitable, religious, educational,

scientific, literary, testing for public safety, fostering

national or international amateur sports competition,

or prevention of cruelty to children or animals.

Other types of status have different criteria. If you

intend to apply for tax-exempt status, you should

make sure that your mission statement meets the

eligibility requirements of the type of status you

plan to obtain.

Need details on IRS criteria? For detailed information on the criteria for each type of

tax-exempt status, see IRS Publication 557, Tax- Exempt Status for Your Organization.

3. Defining Your Mission

How you come up with your mission statement

will depend on the circumstances of your organi-

zation. A group of concerned citizens whose goal

is to prevent a huge mega-store from moving into

their neighborhood will probably not have to spend

much time developing the finer points of their mis-

sion—which is fairly well defined from the start. By

contrast, a nonprofit group designed to educate the

public on the relationship between the mass media

2 / 8 STARTING & BUILDING A NONPROFIT

and big business surely needs to define a tighter

focus. Its mission statement writing process will

be much more involved, and it may take weeks of

meetings, drafts, and revisions to arrive at a state-

ment that everyone can support.

Although there are no hard-and-fast rules for

writing mission statements, here are some tips that

will help make the process as effective and efficient

as possible.

a. Bring In Multiple Perspectives

Start the process by bringing in a diverse range

of voices. The more input you obtain from the

community you intend to serve, as well as from your

board, staff, and volunteers, the easier it will be to

create an organization that will enjoy a broad base

of support.

Depending on your organization’s location,

purpose, and scope, you might consult experts

in the field, representatives of potential funding

organizations, or members of the general public.

You could invite them to an informal meeting, talk

to them individually by phone, ask them to fill out a

survey, or use another method of gathering informa-

tion. Ask them what needs or concerns they have

regarding your general area of interest. Of course,

only your group’s decision makers will decide exactly

what the mission statement says in the end, but

you should make a real effort to obtain informed

input so that you don’t define your mission in a

vacuum—and, therefore, miss important opportuni-

ties to further your goals and better serve the issue

or community that your group hopes to address.

EXAMPLE: Before drafting their mission statement, the board members of Wild

Horizons created a brief survey that they

emailed to about 50 people selected from their

contact list. The survey recipients included

social workers who work with at-risk youth,

teachers and counselors from local schools,

nature guides from area parks and forests, and

outdoor education professionals. The survey

asked for input on what goals and activities

would best serve low-income urban kids and

what other related needs were not being met.

About half of the survey recipients filled

out and returned the survey, giving the Wild

Horizons’ board members valuable perspectives

and ideas. This input helped the board refine

the group’s mission and draft a statement that

reflected a balance between the group’s two

primary activities: outdoor activities and coun-

seling.

b. Allow Enough Time

Give yourselves enough time to consider various

options and perspectives, write an initial draft, allow

all key participants to review it, and incorporate any

necessary changes. As mentioned, some organizations

with a potentially broad mission or lots of people

to satisfy may need significant time and several re-

writes to arrive at a statement that really works. But

even if your organization is small and your goals

seem straightforward, be sure to set aside at least a

few days to come up with your final mission state-

ment.

c. Be Open to New Ideas

Everyone involved in defining the mission should

keep their minds open to new ideas, different

interpretations, and fresh perspectives. This is par-

ticularly true for the group’s founders. Sometimes

those who have invested the most time and energy

planning the organization have the hardest time

considering new or different possibilities. Some may

simply have tunnel vision; others may be blinded by

ego. But whatever the reason, if some participants

resist an open and creative writing process, the final

statement won’t be as thorough and as carefully

considered as it could be.

To head off any possible resistance at the pass,

urge everyone involved to agree at the outset that all

ideas will be encouraged and discussed. One way

to help set this tone is to set aside your first meeting

exclusively for brainstorming, with no hard-and-fast

decisions to be made until a later time. Asking one

person to lead the meeting and write down ideas on

a big board for the group to consider is a good way

to conduct a brainstorming session.

DEVELOPING YOUR STRATEGIC PLAN 2 / 9

Human Rights Campaign Our Mission Statement

As America’s largest gay and lesbian

organization, the Human Rights

Campaign provides a national voice on

gay and lesbian issues. The Human Rights

Campaign effectively lobbies Congress;

mobilizes grassroots action in diverse

communities; invests strategically to elect a

fair-minded Congress; and increases public

understanding through innovative education

and communication strategies.

HRC is a bipartisan organization that

works to advance equality based on sexual

orientation and gender expression and

identity, to ensure that gay, lesbian, bisexual

and transgender Americans can be open,

honest and safe at home, at work and in the

community.

Michael Reese Health Trust Mission

The Michael Reese Health Trust seeks to

improve the health of people in Chicago’s

metropolitan communities through effective

grantmaking in health care, health educa-

tion, and health research. The Trust will

focus a portion of its funding on Jewish

institutions and issues to fulfill the 110-year

legacy of Michael Reese Hospital, founded

and supported primarily by the Jewish

community. The Trust, in fulfilling its Jewish

responsibilities to participate in the arena of

general community needs and problem solv-

ing, will strive to serve the health care needs

of vulnerable and underserved Chicagoans

of all races and ethnic origins.

NativeWeb Mission Statement

NativeWeb is an international, nonprofit,

educational organization dedicated to using

telecommunications including computer

technology and the Internet to disseminate

information from and about indigenous

nations, peoples, and organizations around

the world; to foster communication between

native and non-native peoples; to conduct

research involving indigenous peoples’

usage of technology and the Internet; and to

provide resources, mentoring, and services

to facilitate indigenous peoples’ use of this

technology.

Progressive Technology Project Mission

The Progressive Technology Project (PTP)

seeks to raise the scope and scale of tech-

nology resources available to grassroots

community organizing groups working for

environmental, economic, and social justice.

PTP provides training, technical assistance

and grants to develop the capacity of grass-

roots organizing groups through the use of

information technology.

Sample Mission Statements

2 / 1 0 STARTING & BUILDING A NONPROFIT

Brainstorming helps generate good ideas— and eliminate bad ones. Turning the idea faucet on full strength at the beginning of any plan-

ning process is a great way to get good ideas to flow.

Just as important, it allows ideas that won’t work to

surface and be dismissed early in the process, so

your later meetings can be devoted exclusively to

refining your best proposals.

d. Write Only As Much As You Need

The best mission statements are short and state

the obvious. For example, the mission statement

of a medical clinic in a low-income area might be,

“To help the sick recover and to keep the healthy

well.” If the need that your nonprofit will serve will

be clear to funders, volunteers, and others—for

example, providing emergency health care for

homeless people—a sentence or two may be all

you need. If the purpose or role of your nonprofit

isn’t so readily apparent—for example, studying

migrating patterns of desert toads—you will

probably want to say more.

For example, you might want to explain how your

toad research nonprofit will attempt to fund studies

that will add to existing information about the toad’s

mating behavior, food sources, and natural enemies

so that a comprehensive habitat protection and

species restoration program can be designed. Your

mission statement’s length and detail will depend on

the circumstances of your nonprofit, but always try

to keep it as brief as possible, given the complexity

of your group’s purpose.

D. Outline Specific Goals, Objectives, and Activities

In addition to stating a well-defined mission, your

strategic plan should outline more specifically what

your nonprofit plans to do. In this section, you’ll

refine the broad, overarching goals contained in

your mission statement into more specific goals and

objectives, which should go a long way towards

defining your activities and program areas.

With only a broad, “big picture” mission statement

to guide you, your nonprofit wouldn’t have much of

a road map to follow and would almost surely get

sidetracked or lost on its way to accomplishing its

mission. Identifying more specific goals helps break

down your broad mission into individual elements,

which you can then pursue with even more specific

planning, as discussed below. For example, if your

broad mission is to create economic opportunities

for teenagers in a certain city or district, you might

have specific goals of publicizing job opportunities

for teens, mentoring teens in career development,

and nurturing teens’ leadership and entrepreneurial

skills.

Getting even more specific, you can identify

objectives, which are closely related and similar

to goals but more concrete and measurable. For

example, if the above nonprofit’s goal was to mentor

teens in career development, an objective might be

to implement a mentoring program in a certain city

or district, by a certain time. It’s often hard to judge

whether a nonprofit has successfully accomplished

a broad mission or even a narrow goal but much

easier to determine whether it has achieved a well-

defined, concrete objective.

Some nonprofits go a step further and outline

planned activities and programs separately from

objectives. This step may be unnecessary if you find

that your list of objectives offers a complete picture

of the activities you plan to undertake. If you decide

to list activities separately, they should flow fairly

naturally from your list of objectives.

Tailor your planning approach to best suit your needs and mindset. For example, some nonprofits use the goals, objectives, and

activities categories, while others use a different

breakdown—“strategic vision” or “program goals,”

for example. The purpose of this section is not to

force you into rigid planning categories, but to help

you understand how the planning process can break

down into useful components. If creating separate

subsections for goals, objectives, and activities

works for you, great. But if you prefer to merge

these categories or create your own divisions, that’s

fine, too.

DEVELOPING YOUR STRATEGIC PLAN 2 / 1 1

When describing objectives, activities, or program

areas, it can be tricky to figure out how much detail

to include. You want to be detailed enough to give

a full picture of the activity, but not so specific

that you get mired in logistical details. One good

approach is to describe the activity in your strategic

plan in as much depth as you would give to an

Mission Statement Goals Objectives/Activities/Programs

To create economic opportu-

nities for teenagers in Sparks,

Nevada.

To publicize job opportunities

for teens.

To mentor teens in career

development

To nurture select teens who

demonstrate leadership or

entrepreneurial skills.

Create and maintain an online jobs

database by July, 2006.

Establish a mentoring program with

local business owners and teens by

November, 2006.

Hold a Teen Leader weekend retreat

in July, 2007.

To provide veterinary care for

the pets of homeless people.

To provide annual, free

preventative vaccinations for

cats and dogs.

To offer free emergency

care for cats and dogs in life-

threatening situations.

To offer free spaying and

neutering for cats and dogs.

Hold quarterly vaccination clinics

beginning January 2006.

Finalize agreement with local

emergency veterinarian by January

2006.

Finalize agreement with local

veterinarian by January, 2006.

To help disabled people live

independently with the help

of robotic technology.

To research and develop new

robotic technologies to help

disabled people.

To provide free robots to low-

income disabled people.

Equip and open research and

development laboratory by August,

2006.

Launch the Robot Rescue program by

March, 2007.

interested outsider—for example, a prospective

funder or a newspaper reporter—but not as much

detail as you would provide to the staffers who will

be running the activities.

For examples of the distinctions between mission,

goals, and objectives (including activities and

programs), see the chart below.

2 / 1 2 STARTING & BUILDING A NONPROFIT

EXAMPLE: Wild Horizons outlines its list of goals, objectives, and activities for the next

year, as follows:

Goals Objectives Activities

• Encourage personal growth

of at-risk youth in selected

cities and neighborhoods

in Wisconsin through

outdoor education and

wilderness experiences.

• Organize and lead

wilderness trips for at-risk

youth.

• Provide resources for at-

risk youth to encourage

them to enjoy wilderness

experiences on their own.

• A total of five day trips to Nicolet

National Forest, each trip taking

45 students from one of five target

schools.

• Two overnight camping trips to

Nicolet National Forest, each trip

taking a mix of 30 students from all

five target schools. Camping trips

will include canoeing or a similar

activity.

• Publish a two-page map and guide

to national parks and forests in

Wisconsin, tailored to at-risk youth.

• Fundraising dinner and silent

auction.

Strategic planning can be circular. Because so many aspects of a strategic plan are

interrelated, you may have to go back and make

changes to earlier sections as you go through the

process. For example, you may find it necessary to

slightly broaden your mission statement once you

start outlining planned activities and realize that

a key program doesn’t quite fit within your initial

statement. Similarly, you may find it awkward to

develop a list of goals or activities without first

assessing your resources or drafting a budget. In

my opinion, it makes sense to start by focusing on

what you reasonably hope to do—to let your dreams and aspirations motivate you and inspire you to be

resourceful, to do more with less. Although you

may need to scale back your list of plans after you

assess your limited resources (discussed in the next

section) or draft your budget (discussed in the next

chapter), at least you’ll have these plans simmering

on the back burner, ready to go when you have the

means to achieve them.

E. Assess Your Resources

Now it’s time to take a look at the resources your

nonprofit has at its disposal to help get its activities

rolling. If you’re like most nonprofits, you won’t

have lots of cash on hand to pay for all of the great

things in your plan. But a fact that many new

nonprofits overlook in their worry about funds is

that money is only one of many types of resources

that will be essential to your enterprise—and it may

not even be the most important one. For example,

even if your nonprofit lacks cold, hard cash, it may

possess other key assets, such as volunteers com-

mitted to the cause, people with expertise in a

given field, a network of community relationships, a

positive reputation, or access to influential people.

In this section of your strategic plan, you should

include an assessment of all of your resources,

including money, people, expertise, skills, and other

intangibles, that are currently available to your non-

profit. Your goal here isn’t to detail your fundraising

DEVELOPING YOUR STRATEGIC PLAN 2 / 1 3

plan—no matter how much it may be on your

mind—but simply to develop a realistic understand-

ing of the assets you have in hand. Because it forces

you to look honestly at the resources available to

implement your planned activities, assessing your

current resources might feel like taking a cold show-

er. But doing so is essential so that you can evaluate

your nonprofit’s current position and identify strate-

gies for pursuing your goals, which are covered in

the next section.

When assessing resources, lots of folks mistakenly

think only in terms of money. As is true in other

areas of life, money can be a great help in getting

things done, but it’s also true that other assets—such

as skills and experience—can translate into getting

your mission accomplished. A troop of energetic,

committed volunteers can be just as valuable—

sometimes even more so—than cash in the bank

or an expensive computer system. A famous board

member may not only add luster to your group but

also play a key role in attracting funds by hosting

fundraisers or making other appearances. In short,

don’t underestimate the value of your group’s less-

tangible assets.

Below is a list of things you’ll want to consider

when assessing your nonprofit’s resources. The list is

divided into “hard” assets like cash and equipment

and people assets. You’ll find categories that are

often used in common nonprofit activities, but you

may not need to use all of them—what you have

on hand will obviously depend on your specific

situation.

• Cash & equipment resources

• Cash

• Office space

• Computer equipment & printers

• Paper & printer ink

• Office supplies

• Desks, file cabinets, and other office furniture

• Vehicles, especially trucks

• Chairs and tables (for seminars & events)

• Public address equipment: microphone,

microphone stand, amplifier, and so on

• Photo and video equipment

• Presentation equipment: slide projector, over-

head projector, video projector, and so on

• People resources

• Interested volunteers

• Skills or expertise of key people

• Miscellaneous contacts: bankers, government

regulators, business people, and so on

• Access to private or institutional funding

sources

• Contacts in the media for publicity

• Celebrity or famous supporters

• Volunteers with technical skills: graphic

design, website building, computer networking

skills, and so on

• Political allies: city council members, the

mayor, state representatives, officials at

government agencies, and so on

• Service sponsors: printers, caterers, transport

services, and so on

• Board members who are famous, experts

in their fields, or highly visible or otherwise

enjoy a good reputation

Of course, the above list merely suggests possibil-

ities to point you in the right direction when making

your own lists. Just remember to think broadly—you

probably already possess several resources that you

had never considered as such.

Budgeting is covered in Chapter 3, and fund- raising in Chapter 6. The budgeting chapter explains how to estimate income and expenses

for your planned activities. When you do your first

budget, you’ll likely see that your available resources

won’t be adequate to accomplish your planned

activities as outlined in your strategic plan. This is

where fundraising comes in, which is covered in

detail in Chapter 6.

F. Identify Strategies

With goals, objectives, and activities identified and

your current resources assessed, you’re ready to

do some true strategic thinking. In the realm of

strategic planning, “strategies” are practical ideas

about how to make the best use of your resources to

achieve your goals.

A common approach to strategic thinking is

called a “SWOT” analysis—an acronym for strengths,

weaknesses, opportunities, and threats.

2 / 1 4 STARTING & BUILDING A NONPROFIT

• Strengths are positive assets within your

organization. Examples might include a highly

respected board member, a talented group of

volunteers, or ownership of valuable intellec-

tual property such as a book or software.

• Weaknesses are negative aspects within your

organization. Examples might include a short-

age of volunteers or outdated technology.

• Opportunities are positive elements outside

your organization. Examples might include a

high demand for your services or availability

of a grant in your topic area.

• Threats are negative elements outside your

organization. Examples might include a

competing nonprofit or the demise of a major

funder.

The key to doing a SWOT analysis is to identify

these elements accurately, and then think about

ways to maximize the positive and minimize

the negative elements. Brainstorm about ways to

use your strengths to take advantage of existing

opportunities and to overcome threats you’ve iden-

tified. Also focus on how you will minimize your

weaknesses to make your group less vulnerable to

threats. This process of assessment and analysis is

the essence of strategic thinking and will help you

chart a realistic course for success.

A SWOT analysis is sometimes called other

things, such as a “situational assessment” or an

“environmental analysis,” but they all use the same

basic approach.

EXAMPLE: In doing a SWOT analysis, Wild Horizons outlines the following strengths,

weaknesses, opportunities, and threats:

Strengths • Experienced board members and staff

• Unique program in the state

• Close ties with administrators at target

schools

Weaknesses • Lack of reputation or recognition by the

public or target community

• Lack of fundraising experience

• Lack of computer experience or database

skills

Opportunities • Openness by school districts to try

innovative programs to help at-risk youth

• Large number of granting institutions

with at-risk youth as a funding priority

• Increased awareness and media coverage

of outdoor education and its benefits

Threats • Risk of personal injury claims

• Competition with other groups for fund-

ing

• Resistance from parents and families

Looking over its list, the board members

identify various strategies to best take

advantage of their strengths and opportunities

and to minimize the weaknesses and threats

faced by Wild Horizons. For example, the

board plans to leverage its close ties with

school administrators to remedy its lack of

recognition in the community. Similarly, it will

take advantage of the large number of funding

institutions with a focus on the issues of at-risk

youth to minimize its weakness in fundraising

experience.

G. Edit and Finalize Your Plan

Once you’ve drafted your mission statement; out-

lined your goals, objectives, and activities; assessed

your resources; and identified strategies; you’ve

completed all the essential elements of your initial

strategic plan. All that’s left to do is to put it together

into a final document.

Let your plan sit for a day or two before beginning

a final review. Putting it down for a couple days will

allow the planners to clear their brains and look at

it with fresh perspectives. It’s a good idea at this

point to establish a firm deadline for incorporating

any final edits, to keep everyone in “wrap-up” mode

and prevent endless rounds of tinkering with the

work you’ve already done. Of course, if people feel

strongly that major changes should be made, sub-

stantial rewriting may be unavoidable. By the time

you’ve reached this point, however, all the planners

should be more or less on the same page.

DEVELOPING YOUR STRATEGIC PLAN 2 / 1 5

Get community input. It’s not a bad idea to have someone you trust from your commu-

nity look over a near-final draft of your plan and

make edits or suggestions. It’s all too common for

the people working most closely in the planning

process to develop mild cases tunnel vision and

group-think, which sometimes results in the group

overlooking issues, opportunities, or flaws in the

strategic plan. Having an outsider look it over helps

avoid this risk—and helps forge ties with the com-

munity as well.

Once your final edits have been incorporated,

you may be finished. Or, if you plan to submit the

strategic plan to potential funders, you may want

to spiff it up and package it into a professional

document. Desktop publishing software is so

reasonably priced and easy to use that you shouldn’t

have any trouble creating an attractive document,

perhaps with photos, illustrations, graphs, and the

like. (You’ll find more on producing professional

fundraising materials in Chapter 6.) Package

the information as necessary for your intended

purposes—an internal working document can

be much less formal than a package you send to

potential major donors.

Checklist: Developing Your Strategic Plan

Decide who will participate in the strategic planning process—typically the founders

of an unincorporated group or the board of

directors of an incorporated nonprofit. Con-

sider others who might have valuable input,

including community activists or professionals

in your field.

Draft a concise and compelling mission state- ment describing your nonprofit’s overarching

goals.

Outline your nonprofit’s specific goals, objectives, planned activities, and program

areas.

Assess your nonprofit’s current and potential resources—including both tangible items,

such as cash and computer equipment, and

intangibles, such as expertise and community

support.

Identify strategies and practical ideas for how your nonprofit will best use its resources to

achieve its goals. Use a “SWOT” analysis, in

which you evaluate your nonprofit’s strengths,

weaknesses, opportunities, and threats.

Have someone you trust from your community look over your plan and make edits or sugges-

tions.

Edit your plan and assemble its various sections into a final document.

■

C H A P T E R

1 Chapter 3

Developing Your Initial Budget

A. .Set Up Your Budget ................................................................................................... 3/3

1. Distinguishing Programs From Administration .............................................. 3/3

2. Restricted Versus Unrestricted Income ........................................................... 3/3

3. Program Versus Administrative Expenses ........................................................ 3/4

B. Estimate Income .......................................................................................................... 3/4

C. Estimate Expenses ....................................................................................................... 3/5

1. Regular Expenses .................................................................................................. 3/5

2. Capital Expenses ................................................................................................... 3/7

3. Start-Up Costs ....................................................................................................... 3/7

D. Assemble Your Budget ............................................................................................... 3/8

3/ 2 STARTING & BUILDING A NONPROFIT

T he term “budget” strikes fear in the hearts of

many, evoking images of counting pennies,

tightening belts, and generating complicated

spreadsheets filled with endless columns of numbers.

But developing a budget doesn’t have to be scary—

and coming up with a reasonable estimate of your

expected expenses and anticipated funds will help

you start your nonprofit on stable financial ground.

Budgeting is the process of estimating how much

money you’ll need to pursue your goals and carry

out planned activities, and how much money you

expect to collect from fundraising, events, sales, and

so on. You’ll need to draft an initial budget early

in your start-up days to get a clear sense of what

specific activities will cost and to help you deter-

mine how much money you’ll need to keep your

group afloat.

At its most basic level, a budget is simply a list of:

• estimated income, including how much you

think you’ll reap in grants, contributions,

activity fees, sales, and so on, and

• estimated expenses, including what you

expect to spend on day-to-day expenses like

postage and office supplies; capital expenses

like computers and office furniture; and start-

up expenses.

Once you tally up your expected income and

expenses, you’ll be able to see whether your non-

profit will have enough money to cover all of your

future activities, or whether you’ll have to scale back

your plans and/or figure out a way to bring in more

money to make the numbers work.

It’s easiest to draft an initial budget after creating

your strategic plan. With a strategic plan in place

that outlines your activities in detail, making

estimates for components of those activities should

be pretty straightforward. If, like some nonprofits,

you are already engaged in activities and haven’t

yet created a strategic plan, you might want to

draft a budget right away, to keep you on track

financially until you do write a strategic plan. Once

your strategic plan is in place and your activities are

more carefully defined, you can amend your budget

accordingly.

You don’t need any special financial software to

draft a budget, although many accounting programs

offer budgeting features. If you plan to purchase

accounting software such as QuickBooks or MYOB

to manage your nonprofit’s finances down the road,

you might consider using it for your budgeting

process as well. Otherwise, you can draft a budget

using simple spreadsheet software such as Microsoft

Excel. All you need is the ability to create rows and

columns into which you can enter your figures.

This chapter explains how to draft a budget,

including the following components:

• estimated income, including both restricted

and unrestricted income (see Section A2,

below, for more on this distinction)

• estimated program and administrative

expenses, divided into categories that will

work for accounting and tax preparation

purposes

• estimated capital expenses, for long-term

assets like computers or vehicles, and

• estimated start-up costs.

For information on managing and tracking money once it comes into your nonprofit, see Chapter 11. That chapter discusses basic book- keeping and accounting principles, including how

to generate financial reports that will help you track

the financial health of your nonprofit.

Don’t put off preparing your first budget. Many fledgling nonprofits tend to procras- tinate when it comes to budgeting, often because

they are intimidated by the process or afraid of the

financial realities it will reveal. In fact, budgeting is

not difficult—it simply involves breaking down your

activities into individual components, then making

estimates of what each component will cost. Bud-

geting is an essential step in getting a handle on the

financial resources you’ll need to make your group

successful. Remember the saying, “Knowledge is

power.” Understanding exactly how the numbers

break down will allow you to make informed deci-

sions that will help you keep your core programs up

and running.

A blank budget is included. A blank budget is included as a form in Appendix F and, in

digital version, on the CD that accompanies this

book.

DEVELOPING YOUR INITIAL BUDGET 3/ 3

A. Set Up Your Budget

Your goals in budgeting are to ensure (1) that the

nonprofit is in the black overall, and (2) that each

individual program has adequate funding to keep

running. To achieve both goals in one budget, you

should set the budget up to track both overall funds

and funds for specific programs.

One good way to accomplish this is to create a

separate vertical column for each program, plus a

column that you call “Administration” to capture all

of the income and expenses that are not directly tied

to a specific program. Use the horizontal rows for

specific types of income and expenses, and enter the

amounts you expect to bring in or spend for each

program in that program’s column. At the bottom,

create a total row to record the overall expenses and

income for each program area. The sample budgets

throughout this chapter use this basic structure.

Before you can begin entering your figures,

however, you’ll need to know how to allocate your

income and expenses between programs and admin-

istration.

1. Distinguishing Programs From Administration

Your budget should tell you, at a glance, how much

of your income and expenses are attributable to each

of your programs—and how much is attributable to

general nonprofit administration. It’s important to

divide your budget this way for several reasons:

• You need to know what your individual pro-

grams will cost and how much of your overall

budget is dedicated to those programs. To

make informed decisions about funding, you

need to have a clear sense of how much each

of your activities and programs costs and how

much money it’s bringing in. Allocating your

income and expenses by program will let you

see how each program is doing financially—

and make any adjustments necessary to keep

important projects up and running.

• You won’t be able to make precise overall

estimates unless you look at each program and

activity separately. Instead of guessing how

many total dollars you expect to bring in and

spend, you should make separate estimates for

each of your planned program areas and for

general administration. Making separate esti-

mates will help you generate a more accurate

overall result.

• Many funders want to see a high proportion of

a nonprofit’s funds go towards programs—and

a low proportion towards administration.

Grant-giving organizations in particular want

to know that you will spend their money on

tangible good works, not on staples and rent.

Although this may seem a bit arbitrary (after

all, you can’t carry out your mission without

some basics like office supplies and a phone),

it is a fact of nonprofit life. You won’t know

how your funds and expenses divide between

programs and administration—and you won’t

be able to provide these funders with the

information they demand—unless you make

this distinction in your budget.

2. Restricted Versus Unrestricted Income

To decide whether income should be allocated to

programs or administration, you need to know

whether that income is restricted or unrestricted.

Restricted income is money that may be used only

for particular purposes specified by the donor.

For example, some funding groups and individual

donors make contributions on the condition that the

funds be used only for a specific program—this is

restricted income. If there are no conditions on how

you can use the funds, the money is unrestricted

and may be used for any legitimate expense of your

nonprofit.

Accounting rules for nonprofits require you to

track restricted income carefully, to make sure that

it was spent only on the project(s) specified by

the donor. Although this requirement applies only

to actual contributions (and not to the anticipated

contributions that you’ll be using to prepare your

budget), it’s still a good idea to note whether any

of your income is likely to be restricted. That way,

you’ll have a better sense of how much money will

be available to allocate as you wish—and how much

will have to remain attached to particular programs.

3/ 4 STARTING & BUILDING A NONPROFIT

When you draft your budget, list any restricted

income you expect to receive in the column for the

program for which it was earmarked. You should

also mark these funds in some way—with an

asterisk, for example—to remind everyone that they

are restricted.

Donations from individual contributors are usually

unrestricted. Even if your nonprofit has one high-

profile flagship program, do not automatically

consider regular contributions attached to that

program for accounting purposes. However, if you

solicit contributions for a particular purpose (for

example, to aid the victims of a particular disaster),

the resulting donations should be considered

restricted income.

3. Program Versus Administrative Expenses

Your budget must also distinguish between program

expenses and administrative expenses. Administra-

tive expenses (roughly equivalent to “fixed costs” or

“overhead” in the for-profit world) are costs associ-

ated with keeping your nonprofit running, such as

office rent or telephone service. Administrative costs

exist independently of any activities or programs

your nonprofit conducts. Small nonprofits that begin

in a supporter’s living room and are headquartered

in another volunteer’s garage may have very few

administrative costs. On the other hand, if you plan

to rent office space, hire a part-time coordinator,

have a separate phone line, or operate a dedicated

vehicle for your nonprofit, you will have fixed costs

to consider.

Program costs (much like “variable costs” in

the for-profit realm) are associated with specific

program activities, such as the price of textbooks

purchased for your literacy program or salaries for

the nurses who staff your homeless health clinic.

Program Cost or Administrative Cost?

Dividing expenses between programs and

administration is often more of an art than a

science. Sometimes, you’ll just need to use

your best judgment to decide how to attribute

an expense. For example, office rent is usually

attributed to general nonprofit administration,

but you could also spread the expense of office

rent across a nonprofit’s program areas. You

could divide the cost of rent evenly among all

of your programs or allocate rent costs based

on the overall percentage of the nonprofit’s

resources devoted to each program.

As you make these distinctions, remember

that the way you divide your expenses may

have important consequences when your

nonprofit applies for grants or institutional

funding. Some funders will provide funds only

for program budgets, not administration (or,

less commonly, vice versa). Other funders may

limit the types of program expenses that they’ll

fund—they’ll only fund educational activities,

for example. And many grantors keep a careful

eye on your ratio of program to administrative

costs. Grantors may turn down your funding

requests if your budgets show that you are

spending too much money to keep your non-

profit afloat—and not enough on worthwhile

programs.

B. Estimate Income

To begin, you’ll have to budget expected income:

how much money you plan to bring in from various

sources. As discussed in more detail in Chapter 6,

nonprofits typically earn income from membership

fees, individual contributions, grants, and special

events. Create rows in your budget for each type of

income you expect.

Here’s a simple approach to follow:

• Start by attributing all expected unrestricted

income to nonprofit administration, not to any

specific program.

DEVELOPING YOUR INITIAL BUDGET 3/ 5

• Then attribute any anticipated restricted in-

come to the specific program or programs as

specified by the donor. Put an asterisk by any

restricted income so you can easily identify it.

To illustrate this process, let’s look at a nonprofit

dedicated to supporting AIDS patients. The chart

shown below shows a nonprofit with two program

areas: a meals-on-wheels program and an AIDS

education program. The nonprofit expects restricted

income for these programs, so it enters those amounts

in the appropriate program column and puts an

asterisk by the income as an additional reminder that

the income will be restricted. Otherwise, it enters all

expected income in the “Administration” column.

For simplicity’s sake, many nonprofits assume that

all projected income reflected in their initial budgets

will be unrestricted unless they have good reason

to believe otherwise. Once you’ve been in operation

for a while, you’ll be better able to estimate how

much restricted income you’ll receive—and to in-

clude that information in your budgets. But for your

initial budget, you can decide for yourselves whether

to make this distinction.

EXAMPLE: Wild Horizons’ list of its income estimates for its first year is shown below. It

does not expect any restricted income, so all

estimates are entered into the “Administration”

column.

C. Estimate Expenses

Once you’ve estimated your income, you’ll have to

figure out how much your nonprofit plans to spend.

You’ll need to divide these expenses into basic

categories: regular (day-to-day) expenses, capital

expenses, and start-up expenses. These divisions

will help you prepare your tax returns and balance

your books, as explained in Chapter 11. In addition,

you’ll need to allocate each of your expenses either

to an individual program or to administration.

1. Regular Expenses

A nonprofit’s regular or day-to-day expenses include

costs for anything that you will use in a year or less,

such as salaries, rent, utilities, postage, and office

Nonprofit for Aids Patients Estimated Income

Meals-on-Wheels Program AIDS Education Administration Total INCOME

Individual contributions $8,000 $8,000

Institutional donations * $5,000 *$5,000 3,000 13,000

Foundation grants * 2,000 3,000 5,000

Special event revenues 3,500 3,500

Total income $7,000 $5,000 $17,500 $29,500

* Restricted funds.

Wild Horizons’ Estimated Income

Day Trips (5) Overnight Trips (2)

Publishing (Map & Guide)

Administration (Unrestricted) Total

INCOME Individual contributions $2,000 $2,000

Community sponsorships 2,500 2,500

Grants/Institutional donors 5,000 5,000

Special events revenues 2,500 2,500

Total income $0 $0 $0 $12,000 $12,000

3/ 6 STARTING & BUILDING A NONPROFIT

supplies. (In contrast, capital expenses like com-

puters last longer than a year; they are discussed

next.) Most nonprofits will spend a good part of the

budgeting process coming up with figures for these

regular expenditures.

List specific types of expenses in each row. To

make your budget as clear as possible, it’s a good

idea to organize your regular expenses into two

groups: one set of rows for program-related regular

costs, and another set of rows for regular costs spent

on administration (or fixed costs). In the program

costs group, create a row each for all the specific

things you’ll purchase for your programs. And in

the fixed costs group, create a row each for typical

fixed costs such as rent, salaries, office supplies, and

postage. Then enter your estimates for each type

of expense. Remember to enter the amounts in the

appropriate column; program costs go in a program

column, and fixed costs go in the “Administration”

column. It’s also a good idea to throw in a little

extra (10% or so) for administrative costs, to cover

miscellaneous expenses that you can’t predict.

EXAMPLE: A list of Wild Horizons’ estimated regular costs for its programs and administra-

tion is shown below

Your budget should track your strategic plan. The purpose of your budget is to cost out the specific programs you identified in your strategic

plan. If you haven’t already outlined your programs,

you should do so before starting the budgeting

process. See Chapter 2 for detailed information on

developing a strategic plan.

Wild Horizons’ Estimated Regular Costs

Day Trips (5)

Overnight Trips (2)

Publishing (Map & Guide)

Administration (Unrestricted) Total

REGULAR EXPENSES

Program costs

Food $1,125 $600 $1,725

Transportation—gas 250 100 350

Transportation—van rental 375 300 675

Insurance 125 150 275

Day use/campground fees 50 50 100

Equipment rental 0 200 200

Printing $500 500

Program Costs Subtotal $1,925 $1,400 $500 $0 $3,825

Fixed costs

Office rent $1,800 $1,800

Salaries 600 600

Utilities 600 600

Telephone service 600 600

Office supplies 600 600

Postage 300 300

Website hosting 120 120

Fundraising costs 600 600

Liability Insurance 1,200 1,200

Professional services (accountant, etc.) 600 600

Miscellaneous 600 600

Fixed Costs Subtotal $0 $0 $0 $7,620 $7,620

DEVELOPING YOUR INITIAL BUDGET 3/ 7

Keep fixed costs low. Like many small busi- nesses, too many nonprofits spend too much,

too soon. Rather than committing yourself to high

overhead, do everything you can to keep expenses

low, allowing increases only when your successful

fundraising justifies spending more. For example,

few nonprofits really need to rent office space in a

prominent building. Instead, operating from a low-

cost warehouse district, an older office building, or

even your garage may work just fine. Not only will

this help your bottom line, but it will also impress

funders, who like to see organizations operate

frugally and are more likely to give money to organi-

zations that stretch their dollars.

2. Capital Expenses

In financial terms, “capital assets” (sometimes

referred to simply as “assets”) are items that have

a useful life of more than one year. Common

examples include vehicles, computers, and furnish-

ings. The expenses associated with purchasing these

assets are called capital expenses and are subject

to different tax treatment than regular, day-to-day

expenses. Even if your nonprofit is tax-exempt, it

should conform to standard accounting rules and list

capital expenses separately.

Another reason to count capital expenses sepa-

rately is that they are typically large and often put

an otherwise balanced budget in the red. Including

these large, sporadic expenses in your fixed or pro-

gram costs might result in a somewhat misleading

picture of your regular costs in those categories. List-

ing capital expenses separately helps clearly identify

these large expenses and facilitates the process of

planning fundraising efforts. For more details on the

treatment of capital expenses, see Chapter 11.

EXAMPLE: A list of Wild Horizons’ estimates for capital expenses is shown below.

3. Start-Up Costs

Start-up costs include expenses for things you’ll

need to buy in order to get your nonprofit up and

running. Estimating them is simple: Just list them

and add them up. Include items like incorporation

fees, application fees for federal tax-exempt status,

initial office supplies, and anything else you’ll have

to pay for before your group can open its doors for

business.

Capital expenses may look like start-up costs. When doing your initial budgeting, you may find yourself wondering whether the computer or

furniture you need for your nonprofit’s launch really

belongs in the capital expense or the start-up cost

category. According to rules known as “generally

accepted accounting principles” (or GAAP), any

expenses for assets should be allocated to the

capital expenses category, even if they’re neces-

sary to start your nonprofit. (GAAP rules are further

discussed in Chapter 11.)

EXAMPLE: Wild Horizons makes a list of the start-up expenses they expect to pay before

they begin their first major fundraising drive.

The list is shown below.

Wild Horizons’ Estimates for Capital Expenses

Day Trips (5)

Overnight Trips (2)

Publishing (Map & Guide)

Administration (Unrestricted) Total

CAPITAL EXPENSES Camping equipment $750 $750

Computer equipment $500 500

Telephone/fax equipment 250 250

Office furniture 150 150

Capital Expense Subtotal $1,925 $1,400 $500 $0 $3,825

3/ 8 STARTING & BUILDING A NONPROFIT

D. Assemble Your Budget

Once you’ve estimated all of your income and costs,

your final task is to compile them into one master

budget. This budget will allow you to see whether

your nonprofit will be able to carry out all the

programs and activities you want to tackle. If your

budget shows that your expenses will exceed your

income, you’ll need either to scale back your plans

or to figure out how you’ll make up the shortfall.

If you decide you must make cuts, do so only

after giving careful thought to your priorities and

what you can reasonably put on the back burner.

For example, if you really need a part-time paid

staffer to coordinate volunteers but have no crucial

need for an office, it might make sense for everyone

to keep working from their homes (or set up shop

in someone’s garage) and cut your budget for office

space, freeing up some money to pay for the staffer.

In other words, think before you cut.

EXAMPLE: Wild Horizons puts together all their various estimates into an initial budget, as

shown on the next page.

Reviewing its initial budget, the board of

directors immediately sees that it faces a short-

fall of $1,755. While this is certainly a concern,

the board is relieved to see that the difference

is not so huge as to require radical cutbacks in

its planned activities. The board plans to re-

view its program and administrative budgets to

see where expenses can be cut back or covered

by noncash donations. For example, it hopes to

cut the cost of purchasing food for the trips by

finding food sponsors willing to donate food.

Wild Horizons’ List of Start-Up Expenses

Day Trips (5)

Overnight Trips (2)

Publishing (Map & Guide)

Administration (Unrestricted) Total

Start-up Costs Printing—brochures, etc. $300 $300

Website creation 250 250

Telephone set-up 75 75

State fees (incorporation, etc.) 35 35

Start-Up Costs Subtotal $0 $0 $0 $660 $660

If necessary, it will find ways to raise more

funds—however, the board starts by trying to

cut expenses, because it doesn’t want to raise

its income estimates without some solid basis

for expecting additional funds.

Be realistic when comparing resources to planned activities. If your estimated income won’t support your planned activities, don’t ignore

the problem. If you proceed without sufficient

resources, you run the risk that your nonprofit won’t

be able to follow through with its announced plans.

As you can imagine, this could very well result in a

loss of credibility and respect in the community—

and doom your nonprofit’s future. It’s much better

to scale back your activities and build a strong

reputation for success than to overextend your-

selves and fail.

Raising the additional money or other resources

you need to accomplish your plans is another

option. Of course, you’ll need to be realistic when

considering whether you can acquire more money

or resources. Rather than simply upping the income

estimates listed in your plan to match your needs,

raise your estimates only if you have some realistic

basis for doing so. And remember that bringing in

more resources often comes at a cost. For example,

if you decide to add an extra fundraiser to your

plans to bring in an extra $5,000, be sure you’ll

have enough resources to pull off that event. Even

if the venue, food, and drinks for the fundraiser are

donated, you shouldn’t overlook the commitment of

time that events always require.

DEVELOPING YOUR INITIAL BUDGET 3/ 9

Wild Horizons Initial Budget Day Trips

(5) Overnight Trips (2)

Publishing (Map & Guide)

Administration (Unrestricted) Total

INCOME Individual contributions $2,000 $2,000 Community sponsorships 2,500 2,500 Grants/Institutional donors 5,000 5,000 Special events revenues 2,500 2,500

TOTAL INCOME $0 $0 $0 $12,000 $12,000

REGULAR EXPENSES Program costs Food $1,125 $600 $1,725 Transportation—gas 250 100 350 Transportation—van rental 375 300 675 Insurance 125 150 275 Day use/campground fees 50 50 100 Equipment rental 0 200 200 Printing $500 500

Program Costs Subtotal $1,925 $1,400 $500 $0 $3,825

FIXED COSTS Office rent $1,800 $1,800 Salaries 600 600 Utilities 600 600 Telephone service 600 600 Office supplies 600 600 Postage 300 300 Website hosting 120 120 Fundraising costs 600 600 Liability Insurance 1,200 1,200 Professional services (accountant, etc.) 600 600 Miscellaneous 600 600

Fixed Costs Subtotal $0 $0 $0 $7,620 $7,620

CAPITAL EXPENSES Camping equipment $750 $750 Computer equipment $500 500 Telephone/fax equipment 250 250 Office furniture 150 150

Capital Expenses Subtotal $750 $0 $900 $1,650

START-UP COSTS Printing—brochures, etc. $300 $300 Website creation 250 250 Telephone set-up 75 75 State fees (incorporation, etc.) 35 35

Start-up Costs Subtotal $0 $0 $0 $660 $660

TOTAL EXPENSES $1,925 $2,150 $500 $9,180 $13,755

NET ANNUAL REVENUES ($1,755)

3/ 1 0 STARTING & BUILDING A NONPROFIT

Adjusting Program Budgets

Separating your program expenses from admin-

istrative expenses allows you to see whether

individual programs have enough funds to

survive and, if not, to make adjustments. Consider

the following example of a nonprofit to support

AIDS patients.

Meals-on-Wheels Program

AIDS Education Program Administration Total

INCOME

Individual contributions $8,000 $8,000

Institutional donations $5,000* $5,000* 3,000 13,000

Foundation grants 2,000* 3,000 5,000

Special event revenues 3,500 3,500

TOTAL INCOME $7,000 $5,000 $17,500 $29,500

REGULAR EXPENSES

Program costs

Food 3,000 3,000

Gas 1,000 1,000

Insurance 1,000 1,000

Fixed costs

Office rent 4,000 4,000

Office supplies 2,000 2,000

Postage 750 750

Printing 500 2,000 500 3,000

Salaries 2,000 2,300 1,750 6,050

Telephone service 2,000 2,000

Website hosting 1,500 1,500

CAPITAL EXPENSES

Computer equipment 750 750

Telephone/fax equipment 250 250

START-UP COSTS

Website creation/setup 1,000 1,500 2,500

Total Expenses $7,500 $6,300 $14,000 $27,800

NET REVENUES ($500) ($1,300) $3,500 $1,700

As you can see, the budget shows an overall

surplus of $1,700, but the program budgets are

short of funds. The good news is that there’s

enough unrestricted income in the administration

category to allocate to the programs to make up

the deficits. By reallocating $500 to the Meals-

on-Wheels program and $1,300 to the AIDS

Education program, those programs will break

even—and there will still be a $1,700 surplus,

allocated to the Administration category.

DEVELOPING YOUR INITIAL BUDGET 3/ 1 1

Stretch your existing resources. Instead of forging ahead and hoping you’ll be able to

raise the funds and corral the resources you’re lack-

ing, a less risky way to proceed is to figure out how

to stretch the resources you already have. In other

words, focus on making your existing resources go

farther rather than on expanding those resources.

The following checklist is included as a form

in Appendix F and, in digital version, on the

CD that accompanies this book.

Checklist: Developing Your Initial Budget

Tackle your initial budget early in the life of your nonprofit—ideally, right after you finish

your strategic plan.

Set up your budget to list expenses for indi- vidual programs and expenses for ongoing

administration in separate columns.

If you expect some income to be restricted to certain programs, track it in your budget.

Otherwise, put all income in your administra-

tion column.

List your estimated expenses in three cat- egories: (1) day-to-day expenses, (2) capital

expenses, and (3) start-up expenses.

If you need to buy assets to get your nonprofit started, such as a computer or office furniture,

list them as capital expenses, not as start-up

expenses.

If your budget shows that you’ll be short on funds, focus on stretching existing resources

rather than increasing estimates of income.

■

C H A P T E R

1 Chapter 4

Your Board of Directors

A. What Makes a Good Board ....................................................................................... 4/3

1. Passion and Commitment .................................................................................. 4/3

2. Willingness to Help Raise Money ..................................................................... 4/5

3. Connection to Many Communities .................................................................. 4/5

4. Diverse Viewpoints .............................................................................................. 4/6

B. The Board’s Duties and Tasks ................................................................................... 4/6

1. Board Members’ Legal Duties ............................................................................ 4/6

2. Board Roles Versus Staff Roles ........................................................................... 4/7

3. Typical Board Activities ........................................................................................ 4/8

4. Board Meetings ..................................................................................................... 4/8

5. Board Officers ....................................................................................................... 4/8

C. Board Policies and Procedures ................................................................................. 4/9

1. Number of Directors ............................................................................................ 4/9

2. Terms and Term Limits ....................................................................................... 4/10

3. Board Member Responsibilities ...................................................................... 4/11

4. Performance Practices and Removal Policies ................................................ 4/11

5. Creating a Board Guidebook ........................................................................... 4/12

D. Recruiting Board Members ..................................................................................... 4/13

1. Evaluate Your Needs .......................................................................................... 4/13

2. Make Sure Recruiters Understand Board Members’ Responsibilities ..... 4/14

3. Educate Prospects and Incoming Board Members ...................................... 4/14

4. Elect Officers ....................................................................................................... 4/16

4/ 2 STARTING & BUILDING A NONPROFIT

E. Holding Effective Board Meetings ......................................................................... 4/16

1. Meet Regularly .................................................................................................... 4/16

2. Invite Staff and Outsiders When Appropriate .............................................. 4/16

3. Give Notice of Meetings ................................................................................... 4/17

4. Draft a Solid Agenda .......................................................................................... 4/17

5. Start on Time ....................................................................................................... 4/19

6. Understand Decision-Making Methods ........................................................ 4/19

7. Deal With Problem Board Members .............................................................. 4/19

F. The Role of Committees ......................................................................................... 4/20

YOUR BOARD OF DIRECTORS 4/ 3

O ne of the fundamental tasks facing the

founders of any nonprofit is choosing a

board of directors to oversee the organiza-

tion. The board plays an essential legal and practical

role in any nonprofit, even if others (such as an

executive director, paid staff, and/or volunteers)

handle the organization’s everyday affairs.

Nonprofits receive favorable tax treatment and

other benefits precisely because they are created to

serve the public interest. And, as you’ll remember,

the nonprofit’s board must shoulder the legal duty to

keep the organization true to its public service mis-

sion, so that it continues to deserve its tax-favored

status. (This “public trust” role explains why non-

profit directors are sometimes called trustees.)

The board’s role of setting policies and maintain-

ing the nonprofit’s overall direction serves more

than just a legal function. By defining the mission

of the nonprofit, establishing priorities, crafting

strategies, and ensuring that plans and programs are

implemented, a good board serves an immensely

practical role as well. Without a committed board

to tackle these tasks, a nonprofit can all too quickly

run adrift, without clear goals or any specific plans

to achieve them. True, an executive director can

and should provide day-to-day management and

decision-making skills, but the board has the legal

duty and authority to set policy.

Another area in which board members are typi-

cally involved is fundraising efforts. You should be

able to count on your board members to spread the

word about your good work, use their connections

to gain access to potential donors, actively partici-

pate in fundraising campaigns, and—when financial-

ly feasible—make their own donations. As discussed

later in this chapter, there are many ways that board

members can participate in fundraising. Whether a

board member is more comfortable planning behind

the scenes or asking for money directly, there should

be a way for the whole board to get involved.

Nonprofit board members often go beyond the

traditional directorial tasks of setting policy and

defining a nonprofit’s goals. Especially in small

all-volunteer nonprofits (and even in those with a

small paid staff), board members often roll up their

sleeves and do much of the nonprofit’s actual work,

be it feeding the hungry, helping the unemployed,

or cleaning the forests. In other words, it’s not un-

common for board members to go beyond nonprofit

planning and steering and get involved in the actual

execution of the nonprofit’s objectives.

Think of your board as the heart of your non-

profit. At the legal level, your organization can’t live

without one, and, practically, your group’s mission,

key strategies, and policies all flow from the board’s

decisions and leadership. This chapter will help you

select and manage a board that will steer your non-

profit in the right direction. It covers:

• qualities to look for in your board members

(Section A)

• the board’s legal duties and activities (Section

B)

• how to create policies and develop procedures

for your board (Section C)

• how to recruit board members (Section D)

• how to hold effective board meetings (Section

E), and

• the role of board committees (Section F).

A. What Makes a Good Board

Most great boards share some common traits and

qualities that enable them to lead their groups

creatively and effectively. The members of an ideal

board of directors:

• share a passion for and commitment to the

nonprofit’s mission

• are willing to roll up their sleeves when

necessary to help with the practical work of

the nonprofit

• have strong ties to their communities

• are diverse—in age, gender, race, religion,

occupation, skills, and background, and

• are willing to support efforts to raise money.

The sections that follow look at these various

qualities in a bit more detail.

1. Passion and Commitment

The very best prospects for your nonprofit’s board

will be people who share a passion for, and com-

mitment to, the nonprofit’s mission. No matter what

name recognition or professional credentials particu-

lar people may have to offer, they will not be assets

4/ 4 STARTING & BUILDING A NONPROFIT

to your nonprofit’s board unless they care enough

about what you do to involve themselves actively in

helping you pursue your goals. If yours is a small

nonprofit that doesn’t have the resources to hire staff

or pay for outside services, it’s even more important

that board members be committed to the cause and

willing to contribute their time to get nonprofit tasks

done.

Unfortunately, the best prospects in terms of

professional achievement and influence in the

community are often the very people who have the

least amount of time to help. Finding people who

are both professionally accomplished and willing to

pull an oar isn’t easy. Here are some brief tips on the

types of people who might make good recruits. (For

strategies that will help you attract and approach

people to serve on your board, see Section D,

below.)

• Recently retired people. People who have recently retired often have fresh skills, good

contacts, and time. And, just as important,

they are often looking for ways to stay active

in the world beyond playing golf or mah jong.

• Businesspeople in related fields. For instance, if your nonprofit aims to feed the homeless,

you should consider not just community

leaders and social activists, but also restaurant

and grocery store owners. Similarly, a group

wanting to provide sports opportunities for

the disabled might contact owners of local

sports equipment stores or architects who

design recreational facilities for the physically

impaired.

• Local media people. Reporters, editors, and others from local media—newspapers, televi-

sion and radio stations, and others—are good

candidates because they’re typically both

well informed and well connected. Reporters

often cover certain beats that may make them

particularly well suited for your board—for

example, a local reporter who covers energy

markets might be a good addition to your

energy conservation nonprofit. (However,

keep in mind that in some cases the opposite

might be true—reporters might not want to

put their journalistic objectivity in question by

becoming involved in issues they routinely

cover, particularly in controversial fields.)

• Professors, scholars, and researchers. Anyone who studies issues in your nonprofit’s subject

area is a natural candidate for your board.

For a nonprofit dedicated to promoting urban

green space, for example, an urban planning

professor (or landscape architecture professor,

among others) would be a natural. College

professors also tend to have flexible schedules,

so they may be more likely to have time to

serve.

• New moms or dads. Working professionals who take a year or more off to raise a young

child may be looking for ways to stay involved

in the world. Sometimes, serving on a board

for a cause they care about is an ideal way to

stay active.

On the flip side, here’s a short list of tactics to

avoid when recruiting members to your board:

• Don’t appease busy prospects by downplay- ing a board member’s duties. It’s easy to see how this can come back to haunt you. Make

it clear up front that an active, engaged board

is vital to your organization and that board

members will be expected to participate.

• Don’t approach your “dream” prospects until your nonprofit is up and running. The folks you’d most like to have on board probably

won’t be swimming in extra time. Rather than

inviting the busiest prospects right away, focus

instead on building a small board of committed,

lower-profile members and achieving a success

or two to make you more attractive to other

potential board members. Once you move

a few hills with your initial board, it will be

easier to line up the types of heavier hitters

who can help you move mountains.

• Don’t invite a high-profile board member solely based on his or her name. All board members must have a sincere commitment to

your mission and be willing to actively partici-

pate in running the nonprofit. If a high-profile

board member doesn’t share that commitment

or willingness to work, you can count on

resentment and bitterness from the rest of your

board.

YOUR BOARD OF DIRECTORS 4/ 5

2. Willingness to Help Raise Money

The most successful nonprofits have boards that are

willing and able to help with fundraising efforts. Of

course, most board members are likely to be driven

by an interest in the nonprofit’s main cause—not

by an interest in raising money. But no matter what

your nonprofit’s core mission and priorities are, it

will have to generate some income in order to sur-

vive. As the leaders of the nonprofit, board members

are in a particularly strong position to promote it to

potential funders. It’s important to find people who

understand the importance of their fundraising role

and are willing to lend a hand.

There are lots of different ways for board mem-

bers to be involved in fundraising. Board members

who aren’t comfortable directly soliciting funds

can be involved in organizing events or developing

membership drives. Other board members might be

natural networkers or salespeople who would excel

at contacting potential donors and actively soliciting

contributions. And all board members should expect

to help generate ideas for raising money, identify

good donor prospects, and otherwise develop fund-

raising strategies.

In addition to helping raise funds from others,

board members should also be willing to support

your nonprofit financially. Some board members

might not be able to contribute more than $50 per

year; others might comfortably give $5,000. More

important than how much money board members

give is their willingness to demonstrate some level

of financial commitment to the organization. Out-

side funding sources will want to see this level of

faith and commitment from the board; its absence

will be taken as a sign that all is not well within the

organization. In addition, contributions from board

members are often a godsend in a nonprofit’s early

start-up days, when you will need cash up front for

incorporation fees, a phone line, or other expenses

before your fundraising machine is up and running.

Some nonprofits require board members to

donate a certain amount each year; others suggest a

contribution amount and leave it up to the individual

members to decide how much to give. Your

nonprofit will have to decide for itself what, if any,

contribution requirements you’ll impose on board

members. Keep in mind that there may be excellent

potential board members who don’t have a lot of

cash but more than make up for it with valuable

skills or connections in the community.

Don’t require contributions that your pro- spective board members can’t afford. Don’t make the mistake of overlooking or alienating

potential board members with more to offer in

expertise and connections than in cold, hard cash.

While some nonprofits require board members to

contribute financially, such a requirement might be

a turn-off to those with limited funds. Remember

that access to influential people, management

expertise, and cachet in your field or community

may be even more crucial than money in your early

start-up days—and will certainly lead to a broad

base of financial contributors down the road.

In short, a committed board member with a fat

Rolodex can be at least as valuable to your fledgling

nonprofit as one with a fat wallet.

No matter how your nonprofit chooses to handle

this issue, you must let prospective board members

know what, if any, financial commitment will be

expected of them before they agree to serve on the

board. (Section C, below, discusses how to define

and communicate board members’ responsibilities.)

For more information on fundraising, see

Chapter 6.

3. Connection to Many Communities

Many nonprofits are started by groups of people

who think a lot alike—they might even look a lot

alike in terms of skin color, age, class, or gender.

This isn’t a problem in itself; it’s often just the natu-

ral way that people come together to promote an

issue they care about. But when you choose your

board, you should consider who isn’t at the table

and whose voices aren’t included in your start-up

group. There may be people of other races, ages, or

communities who care deeply about your issue and

whose perspectives could greatly strengthen your

board—and, by extension, your organization.

4/ 6 STARTING & BUILDING A NONPROFIT

Going out of your way to build diversity in your

board is not just an exercise in political correctness.

Rather, by incorporating a range of viewpoints on

your board, your group will be more likely to truly

serve the public interest—not just a small slice of it.

The goal is not simply to have a diverse board, but

to translate the perspectives of your diverse board

into a nonprofit that offers services broadly.

In addition, having a diverse board will help you

forge ties to a wider range of the community and

broaden your base of support. When you build your

board inclusively, you increase the board’s natural

networking power.

EXAMPLE: Inga and Steven are the initial incorporators of Peace Through Understanding,

a nonprofit dedicated to promoting peace by

educating the American public about other

cultures worldwide. In putting together a list

of prospective board members, they have

included religious leaders from local churches,

synagogues, mosques, and other places of

worship. Also on their list are university pro-

fessors who teach about international issues

and activists from several local antiwar groups.

But then, thinking more broadly, Inga suggests

some activists from the sizable gay and lesbian

community in the area, who have been in the

forefront in the fight against hate crimes.

Besides diversity, it’s important that the people

you choose have strong ties to the communities

you’re trying to reach. Remember, it’s not enough to

have a diverse board—you ultimately want to reach

diverse communities through that board. To achieve

this, you should choose people who are connected

to—and influential in—their communities. Examples

include prominent businesspeople and others who

are successful in their fields, community activists,

politicians, religious leaders, and noted academics.

4. Diverse Viewpoints

In addition to having board members who are

connected to diverse communities, you want at least

some board members who represent different points

of view. While you obviously don’t want a board

member who is hostile to your overall mission, it

can be extremely advantageous to include people

who have independent or unusual perspectives.

For instance, a nonprofit dedicated to improving

opportunities for minorities in newspaper journalism

should try to include representatives from differ-

ent aspects of the newspaper industry on its board.

A diverse board would include not just newspaper

editors and reporters, but also photographers, copy

editors, circulation managers, and publishers, all of

whom will typically have different perspectives and

concerns than editors and reporters. Again, your

ultimate goal is always to serve the public, which is

usually best achieved with an open-minded board

that engages in healthy debate.

B. The Board’s Duties and Tasks

Clearly, the nonprofit’s board plays an important

legal, leadership, fundraising, and ideological role.

But how, exactly, does a board translate these broad

responsibilities into everyday actions and decisions?

How should a board function, day to day and

meeting to meeting? And what legal duties must

board members observe as they handle the non-

profit’s business? This section answers these impor-

tant questions by explaining the legal duties—and

practical tasks—board members must take on.

1. Board Members’ Legal Duties

New or prospective board members often are

concerned about what the law requires of them in

their board roles. Here’s the deal: Under state laws,

members of the board of directors have two main

duties to a nonprofit corporation: the duty of care

and the duty of loyalty.

Board members won’t be personally liable for mistakes. Don’t let directors lose sleep worrying about violating these duties and being

sued personally. As discussed in more detail in

Chapter 7, directors are rarely held personally liable

for errors committed in steering the nonprofit,

unless the acts (or failures to act) were fraudulent

or extremely careless. In addition, most states have

laws protecting directors from personal liability,

YOUR BOARD OF DIRECTORS 4/ 7

and a federal law protects volunteers as well. (See

Chapter 7 for more on liability issues.)

a. Duty of Care

The duty of care requires board members to act

with reasonable care in making decisions and taking

actions on the nonprofit’s behalf. Board members

can go a long way towards fulfilling this duty simply

by being informed. Board members should always

look into any relevant and important information

that’s available before making a decision or taking

action. Before voting to approve a new program

area, for example, board members should have a

clear understanding of important issues like what

the program will cost, whether there is money in

the budget to pay for it, and whether it involves any

activity that might expose the nonprofit to risk.

A common (if slightly legalistic) definition of

“reasonable care” is the level of care that an ordinarily

prudent person in the same circumstances would

reasonably believe is appropriate. A more basic

formulation is that directors will satisfy the duty of

care if they act rationally and in good faith.

b. Duty of Loyalty

The duty of loyalty—sometimes called a “fiduciary

duty”—requires board members to always put the

interests of the nonprofit ahead of their personal

interests. This duty is often expressed in other ways,

too: as a rule against self-dealing or against conflicts

of interest. With some subtle differences (explained

below), all of these rules require much the same

thing: Board members must always make decisions

that are in the best interests of the nonprofit.

Examples of self-dealing might include a

director voting for the nonprofit to rent an office

in a building that the director owns or to make a

purchase from a company owned by the director. In

both cases, the director stands to realize a personal

financial gain from the nonprofit transaction. A

conflict of interest might exist if a director sits on

the boards of two nonprofits that pursue the same

funding sources. Even though the director does

not stand to personally gain, the dual directorships

raise a potential violation of the director’s duty of

loyalty to each group. In cases such as these, state

laws generally require that the director disclose

all the relevant facts about the potential conflict

(including any personal interest the director has in

a transaction) and that only noninterested directors

participate in the vote. If these two requirements

are met, then the conflict will have been avoided (in

legalese, the conflict will have been “discharged”).

2. Board Roles Versus Staff Roles

Generally speaking, the board is not in charge of

the day-to-day affairs of the nonprofit. Taking care

of the many details involved in running the organi-

zation is the responsibility of the nonprofit’s staff,

including the executive director, paid workers, and

volunteers.

Of course, many nonprofits—especially new and

small ones—are run almost entirely by the board

and other volunteers. Plenty of micro-nonprofits

operate this way, which can make the distinction

between the board role and the staff role quite con-

fusing. The key is that the same person may some-

times play a board member’s role, and sometimes

an activist or volunteer staff role. Board members

should be clear on this: Although they may take

care of all the nonprofit’s day-to-day details, they are

not doing so in their capacity as board members.

For example, if a board member dons galoshes

to help with a Clean Up the Wetlands day, helps

stuff envelopes, picks up chairs for an event, or

teaches a seminar, the member is wearing a “staff

hat”—not a “board hat.” When a board member is

discussing whether certain programs fit into the

nonprofit’s overall mission, on the other hand, that

member is wearing a “board hat.” Keeping this

distinction in mind will help you understand the

board/staff relationship and the breakdown of roles

that is so important to a nonprofit’s effective func-

tioning. Clearly recognizing these different roles is

especially essential when a nonprofit has paid staff,

so that board members refrain from interfering in

day-to-day staff duties. Nothing irritates competent

nonprofit staffers more than having board members

meddle where they’re not wanted (or needed).

4/ 8 STARTING & BUILDING A NONPROFIT

3. Typical Board Activities

The types of activities that nonprofit boards typically

handle tend to break down into the following

categories:

• defining the organization’s mission and

ensuring that the nonprofit stays on course

• outlining the nonprofit’s main programs

designed to accomplish its mission, usually on

an annual basis

• establishing and managing financial systems

by developing budgets, monitoring finances,

and implementing accounting controls

• leading and helping with fundraising efforts

• dealing with internal board management, such

as electing officers and finding new board

members to replace outgoing ones

• establishing and overseeing committees to

handle special issues, such as membership,

special events, or fundraising

• hiring and managing an executive director (if

the nonprofit plans to have one), and

• helping promote the nonprofit and its

activities to the public.

Keep in mind that the tasks and scope of work

outlined above will change somewhat as the non-

profit grows and hires paid staff. Generally, the

more paid staff you have, the less board members

will be involved in day-to-day tasks.

Nonprofit boards typically create committees to

focus on specific areas or complicated issues. Once

the committee makes progress, these issues are

brought back to the board as a whole for approval

or other guidance. Sometimes a subgroup of the

board sits as an “executive committee,” which can

convene and act with the full authority of the board.

As with other types of committees, an executive

committee can be particularly useful when a non-

profit has a large board, making it logistically diffi-

cult to meet often. But executive committees should

be used judiciously, not as a regular substitute for

full board involvement. Committees are discussed

below in Section F.

4. Board Meetings

The main way the board functions is by meeting to

discuss issues and make decisions about how to get

things done. These decisions are passed on to the

nonprofit’s staff (if there is one). Boards generally

have regular meetings—monthly, bimonthly, or

quarterly—and call special meetings if issues arise

that need immediate attention.

Keeping board meetings efficient and focused is

an important issue for all nonprofits (and just about

every other type of business, for that matter). This

means that the board should develop a clear sense

of priorities, including what to cover at meetings and

what to leave for others to handle. While the board

has a legal duty to set policy and keep the nonprofit

on course, there’s little legal guidance about what

specific matters the board must address. As a practi-

cal matter, board meetings should not get mired in

the minutiae of nonprofit operations. (As discussed

in Section F, below, specific tasks are often managed

by committees, which often include nonboard

members, leaving the board to focus on higher-level

steering issues.)

Save valuable meeting time for important issues. Although day-to-day details may ultimately end up on board members’ plates, they

shouldn’t become a main topic at your board meet-

ings. If a board member will be in charge of buying

office supplies or designing letterhead, that doesn’t

make discussions of the pros and cons of various

types of paperclips or letterhead font sizes appro-

priate subjects for lengthy board discussion.

5. Board Officers

The people who head boards of directors are

referred to in the law as officers—typically

president, vice president, secretary, and treasurer.

Having leaders in place obviously helps the

board function more effectively by designating

responsibilities to specific people, which helps

ensure that things actually get done. In practice,

board officers often also serve as a principal point

of contact between the board and staff. For example,

in organizations with paid staff, the president

usually works closely with the executive director

and other key workers to make sure staff and board

are on the same page.

YOUR BOARD OF DIRECTORS 4/ 9

While board officers legally lead or govern the

board, which in turn governs the nonprofit, board

officers themselves do not run the nonprofit as a

whole. This is a subtle but crucial distinction. The

officers are in charge of keeping the board function-

ing smoothly so that it can consider issues and make

decisions, which are then passed to the staff to

execute. The executive director, who is hired by the

board, is in charge of running the nonprofit, which

typically includes hiring and firing other staff.

Officer duties are spelled out in the nonprofit’s

bylaws and generally are pretty similar from one

nonprofit to the next. Typical officer positions and

duties are:

• President. The president’s main duty is to preside over meetings, including drafting the

agenda beforehand. The president is usually

also in charge of appointing committees and

generally making sure that board projects

are proceeding as planned. Many nonprofits

also require the president to compose an

annual report to be presented at the nonprofit’s

yearly meeting, although the executive director

often handles this task in larger organizations.

In smaller nonprofits that rely entirely or

primarily on volunteers, the president usually

has the authority to sign contracts and checks

(a responsibility often shared with the

treasurer).

• Vice President. Of all the officer positions, the vice president generally has the fewest

specific formal responsibilities. By custom, the

vice president is expected to help the president

with various tasks, fill in for the president as

necessary, and generally put a shoulder to

the wheel when important work needs to be

done. Legally, if the president needs to vacate

office, the vice president assumes that role

until the next officer elections.

• Secretary. A nonprofit’s secretary keeps min- utes of board meetings and manages the

nonprofit’s records, such as articles of incor-

poration, bylaws, and other official documents

(these tasks may be delegated to staff in larger

groups). Under the terms of the nonprofit’s

bylaws, the secretary usually has the legal

duty to give notice of meetings and file any

state-required paperwork.

• Treasurer. The treasurer is generally responsi- ble for keeping track of the nonprofit’s funds,

including maintaining the books, handling

bank transactions, and preparing any financial

reports that may be necessary. The treasurer

often shares check-signing authority with the

president. In larger groups, the treasurer’s

duties may be delegated. (Bear in mind that

failing to pay required payroll and other taxes

may subject the treasurer to personal liability

—see Chapter 7 on liability issues for your

nonprofit and its board, staff, and volunteers.)

C. Board Policies and Procedures

Nonprofits have wide legal latitude to decide for

themselves how big their boards will be, how long

board members’ terms will last, and how often the

board will meet. Obviously, you should nail these

details down before recruiting people to serve.

Some of these issues should be addressed in your

bylaws, others in separate policies, and some in

both. This section explains what specifics you’ll

need to define and where they should be set forth.

1. Number of Directors

There’s no simple formula for calculating how many

members should be on a nonprofit’s board. Some

groups function well with as few as five members;

others with as many as 25. Generally, you need

enough members to ensure the nonprofit’s mission

is carried out, but not so many that members feel

superfluous. But in figuring out how to apply this

rule, all sorts of factors come into play. For example,

a nonprofit that has a small budget or operates in a

limited geographical area shouldn’t necessarily have

a small board. In fact, the opposite is often true—a

small nonprofit that can’t afford paid staff may have

to rely on committed board volunteers to carry out

its basic programs. There may also be political rea-

sons to have a slightly larger board. For example, if

your nonprofit is established to build a hiking and

biking trail that will run through a dozen communi-

ties in two counties, you might want your board to

4/ 1 0 STARTING & BUILDING A NONPROFIT

be large enough to accommodate a representative

from most of the affected neighborhoods.

Once the organization grows and brings in more

money, you may be able to bring in paid staff to

take over many of these duties, which will reduce

the need for board members to volunteer their

time and allow the board to function well with

fewer members. Of course, the more programs and

services a nonprofit offers, the more policy making,

budgeting, fundraising, staffing, and other issue-

wrangling the board will have to tackle.

In deciding how large your board should be, keep

in mind that most state laws establish a minimum

number of board members, usually one or three.

And, in practice, you should have an odd number of

members to avoid tie votes. It’s also best to establish

a size range rather than a firm number of members,

as directors tend to come and go. If you’re committed

to having five, nine, or 17 members, for instance, it

can seem like a never-ending task to keep the board

at full strength. A range of five to nine members

seems to work well for many smaller nonprofits;

slightly larger ones might use a range of nine to 15;

if you have a good reason for a bigger board, you

could adopt a range of 17 to 25.

State laws generally require you to list the num-

ber of directors in both the articles of incorporation

and the bylaws.

For detailed information on drafting articles

of incorporation and bylaws, be sure to

read Anthony Mancuso’s How to Form a Nonprofit Corporation (Nolo.)

2. Terms and Term Limits

Every board should adopt a set term for board

membership—two or three years is a common term

length—and should consider a limit on the number

of consecutive terms a member can serve. Putting a

time limit on board terms has several benefits. First,

it helps members focus on the need to get things

done in a certain time frame. Second, it creates an

incentive for the members to do their jobs conscien-

tiously, knowing that they’ll have to face an election

or appointment process to stay on the board once

their term is up. Third, it gives busy board members

who might otherwise be reluctant to serve—or

possibly be tempted to resign early—a clear under-

standing of the length of their commitment. Finally,

it offers a clean path to remove troublesome board

members eventually, without the unpleasantness

of purging them from office in the middle of their

term. Although midterm removal might still be

necessary in extreme circumstances, most board

member problems aren’t quite that severe. When a

board member is ineffective, inert, absent, or just

garden-variety difficult, it’s often easiest to simply

wait out his or her term and let the elections take

care of the problem.

You may also want to limit how many consecutive

terms board members can serve. Term limits

ensure that a board will periodically have new

members and fresh energy. They also allow you to

gently remove long-time members who have lost

effectiveness because of declining interest, health

problems, or other personal issues. But term limits

are a double-edged sword. Limiting consecutive

terms means that even your best board members

will have to step down at some point, which can

seriously impact the momentum of the board’s work.

If you do impose term limits and lose a valuable

board member, you can try to keep that person

involved by appointing him or her to one or more

committees that don’t require board membership.

And, like most nonprofits that impose consecutive

term limits, you can allow the member to run again

after having been off the board for at least one year.

But if you don’t want your most valuable board

members to be forced off the board by term limits,

then simply don’t use them. After all, in our busy

world, the real problem is finding and keeping good

board members, not getting rid of them.

Any term limits you adopt should be spelled out

in your bylaws. You may also want to summarize

this information and include it in your board guide-

book, described in Section C5, below.

Create staggered board terms. It’s a good idea to stagger your board terms so that

everyone’s term doesn’t expire at the same time.

This will help you ensure board member continuity

—and avoid having to round up an entire slate of

new members when elections roll around. To create

YOUR BOARD OF DIRECTORS 4/ 1 1

staggered terms, simply establish different term

lengths for your initial board. For example, for a

five-person board, you could appoint three mem-

bers for two-year terms, and two members for one-

year terms. All subsequent elections would be for

terms of two years, and every year some (but not all)

of your board’s seats would be up for election.

3. Board Member Responsibilities

Just as employers often use job descriptions to out-

line exactly what will be expected of an employee,

nonprofits should take care to define the tasks

and responsibilities of their board members. The

previous section outlined the general types of

activities that are common to most boards, including

defining policy, creating financial systems, and

managing the executive director or other staff.

But these broad responsibilities should be broken

down into more specific tasks that board members

will be expected to tackle. Outlining these tasks as

specifically as possible creates accountability and

lets everyone know what is expected of them—

thereby improving the chances that the board’s work

will actually get done.

It’s a good idea to put these job descriptions

into a written document and include them in a

board guidebook, discussed in Section C5, below.

4. Performance Practices and Removal Policies

Virtually every nonprofit has to deal with problem

board members from time to time, such as members

who regularly miss meetings or who simply aren’t

contributing sufficient time, energy, or, in some

cases, money to the organization. Having perfor-

mance expectations and removal policies in place

before these potential problems arise makes it a

whole lot easier to solve them.

Failing to attend meetings is one of the most

common problems that arise with board members;

thankfully, it’s also an easy one to measure and cor-

rect. All nonprofits should have a policy stating that

attendance at board meetings is mandatory (absent

a compelling reason to be absent). Some may decide

to implement tougher standards—for example, that

two unexcused absences per year constitutes resig-

nation from the board.

Other board-related performance issues are more

subjective and, therefore, trickier to measure and

enforce. For instance, what (if anything) should

you do about a board member who shows up at

every meeting but rarely participates in discussions

or other activities? The best answer is probably

nothing, beyond thinking about ways to help the

person become more engaged. If those efforts go

nowhere, the member should not be appointed or

recommended for election to another term.

Fortunately, in addition to formal policies and

penalties, there are informal ways to keep your

board members in line and, hopefully, steer way-

ward members back on track. Some ideas include:

• In a meeting agenda, include a discussion of

how everyone can be more effective. This is

a good way to focus on performance without

singling anyone out. It’s not a bad idea to do

this regularly—say, once a year.

• Organize a board retreat day. It can be hard

to get busy people together for a day or

weekend. But because events like this help

build morale, fight burnout, and reenergize

members, it’s worth the time and effort every

year or two.

• Ask experienced board members to mentor

new ones. When new members join the

board, assign an experienced and willing

board member to work with each one for a

couple months. Encourage the new member

to actively use the mentor as a resource. This

works well as a preemptive practice to help

avoid problems in the first place.

Performance and review policies are generally not

included in a nonprofit’s bylaws, which shouldn’t

contain such detailed, practical information. The

process for removing a director, on the other hand,

should be covered in your bylaws, to help avoid

further conflict and confusion during what is sure

to be a difficult time. The main issues you’ll need to

address are what type of vote will be required—for

instance, a majority, two-thirds, or unanimous vote

of other board members—and whether directors can

be removed without cause.

4/ 1 2 STARTING & BUILDING A NONPROFIT

Each state has legal rules for removing a non-

profit board member from office. Some states give

the nonprofit complete discretion to determine the

procedure for removing a director; others set certain

standards—for example, some states do not allow

nonprofits to remove a member without cause. Be

sure that the policy you adopt for removing board

members meets any requirements imposed by your

state. Laws governing nonprofits (including rules

for removing board members) are generally found

in the corporations code of your state’s statutes.

(Chapter 12 offers a brief overview of how to do

legal research online.)

For more information about legal research

both online and off, a thorough reference is

Nolo’s Legal Research: How to Find & Understand the Law, by Stephen R. Elias and Susan Levinkind. For specific citations to nonprofit codes in each

state, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).

In addition, you may want to summarize the

review and removal policy in a board guidebook

(see below).

5. Creating a Board Guidebook

It’s a great idea for every nonprofit to have a guide-

book that contains important reference information

for board members. A nonprofit board guidebook

might include:

• a legal basics section, including the articles of

incorporation and bylaws of the nonprofit

• a board affairs section, with concise informa-

tion about board member duties, review and

removal policies, and other rules for board

members

• a directory section, listing the names and

contact information of board members, staff,

and volunteers

• a committees section, with descriptions and

membership rosters of committees

• a programs section, with detailed information

about current programs (plus the current

strategic plan, if you have one), and

• a background section, providing basic

information about the organization’s mission

and history.

Besides giving you an opportunity to present

information in a more user-friendly way, a board

guidebook also allows you to cover information in

more detail than you would want to include in your

articles or bylaws.

Deciding Where to Record Your Rules

It can be tough to figure out whether certain

rules, policies, or other information should

be included in a board member’s guidebook

or in your nonprofit’s official bylaws. One

way to handle this question is to include your

bylaws in the handbook. But because even

conscientious people don’t always read the

often stilted language of legal documents, it

makes sense to repeat important information

and rules in plain English. For example, rules

regarding term limits definitely belong in

the bylaws, because they’re essential to the

nonprofit’s legal operation. But they should

also be included in the “Board Affairs” section

of your board guidebook; that section’s

purpose is to inform directors about key issues,

including election rules.

As a general rule, you should put detailed

housekeeping-type information in a board

handbook, not your bylaws. There’s a practical

reason for this—any changes you want to make

to your bylaws must be done by formal board

vote at a meeting for which proper notice is

given and a quorum achieved. By contrast,

rules that aren’t included in the bylaws can

be adopted and changed much less formally.

Information about the length or locations of

meetings, committee lists, job descriptions,

or personnel policies are best kept out of the

bylaws. The time and expense of amending by-

laws isn’t prohibitive, but there’s no reason to

make extra work for your board.

YOUR BOARD OF DIRECTORS 4/ 1 3

D. Recruiting Board Members

You will probably have to appoint your nonprofit’s

very first board members as part of the process of

incorporating in your state. Nonprofit corporations

(and for-profit ones, too) are created at the state

level, most commonly by filing papers known as

articles of incorporation with the secretary of state’s

office. Those articles generally ask for the names of

the nonprofit’s initial board of directors. If your state

requires a minimum number of directors (many do

and three is a common minimum), you’ll need to

name at least that many in your articles. (For in-

depth information about drafting and filing articles

and bylaws, consult Anthony Mancuso’s How to

Form a Nonprofit Corporation, published by Nolo.)

In practice, fledgling nonprofits often consist

of a few people who have come together over a

particular cause or issue. Once the group is ready to

incorporate, part or all of this core group may opt

to be named in the articles of incorporation as the

initial board. Often, the group will dispense with

formalities such as nominating candidates or voting;

those willing to volunteer for a board position are

appointed to serve. Sometimes, only some of the

core group will choose to be on the board. This

might be the case if the core group is large, or if the

group simply (and sensibly) wants to think carefully

about the board’s composition and size once they’re

up and running.

In established nonprofits, appointing board mem-

bers is generally a more formal process. Often, a

nominating committee of existing board members

evaluates the current board situation and its needs,

gathers names of prospective new members, and

recommends candidates to the full board, which

then votes on whether to elect the new member(s).

(In nonprofits that give members the legal right to

elect directors, the members vote, rather than the

board. See Chapter 1, Section D, for more on this

issue.)

While the board-building process you use will

depend on your nonprofit’s situation, all nonprofits

need to know how to recruit excellent board

members. If your nonprofit is young and has just

one or a small number of committed people, you

obviously aren’t in a position to use a nomination

committee or a highly structured process to

recruit new members to your board. However, you

shouldn’t let this prevent you from taking a careful

and methodical approach to the board-building

process—your efforts will pay off in the long run.

Whether new board members are chosen by a

formal five-person nominating committee or by two

newbie incorporators meeting at a coffee shop, the

following guidelines will help you focus on your

ultimate goal: building an effective board.

1. Evaluate Your Needs

The board’s function is to serve the nonprofit, not

the other way around. That’s why it doesn’t make

sense to recruit a slew of interesting, inspiring,

or well-connected people to your board unless

your nonprofit needs what they have to offer. For

instance, if you already have one or two board

members with good accounting skills, it probably

doesn’t make sense to appoint another board

member with similar talents, even if you know

an excellent candidate who would agree to serve.

Better to inventory the other expertise you’ll need,

such as media relations or fundraising experience,

and look for board members who can help with

these needs.

Besides seeking board members with specific

skills, it’s also important to find members who

are well known, respected, or influential in your

core communities. Having successful activists,

professionals, or other reputable people on your

board will lend credibility to your group—which is

particularly essential in your early days, before your

group has made a name for itself. If you can re-

cruit influential people who also have helpful skills,

you’ve hit the jackpot.

With this advice in mind, start your board-

building not with a list of prospects, but with an

evaluation of your current situation and needs.

Focus on any skills or strengths that prospective or

current board members lack. Once you’ve outlined

the missing pieces that would be valuable to your

group, then you can focus on generating a list of

prospects that would fill those gaps.

4/ 1 4 STARTING & BUILDING A NONPROFIT

Useful Skills for Board Members

While the specific skills your board will need

depend on your nonprofit’s purpose, there are

some skills that are valuable to just about every

nonprofit. These include:

• Fundraising and grant writing. No surprise here; people who know how to

raise money are major assets for non-

profits.

• Accounting and bookkeeping. You’ll want to look for a few board members

who have some financial expertise; if a

board member has experience manag-

ing nonprofit finances, so much the

better.

• Employee and volunteer management. Keeping a staff motivated and efficient

doesn’t happen by itself—skilled

managers are key.

• Public speaking. Having an effective speaker on your board will open up

opportunities to promote your group

and its work.

• Media relations. A board member who knows how to get coverage in news-

papers, radio, television, and other

media will help enormously in building

recognition and credibility for your

group.

• Graphic design and production. Putting together media kits, brochures, and

other materials will help your nonprofit

get the word out about its work.

2. Make Sure Recruiters Understand Board Members’ Responsibilities

Everyone involved in the recruitment process must

understand exactly what board members will be

expected to do. For example, is a board member

expected to attend a half-dozen meetings a year to

help with policy and fundraising, or do you want

worker bees who will take on much of the day-to-

day work of your organization? It’s important to nail

down these expectations early in the process, before

any board prospects are considered. It goes with-

out saying that if the recruiters don’t have a clear

understanding of what new members will actually

be doing on the board, they won’t be in a good

position to choose people with the right skills and

experience. Not only is this likely to waste time, but

it also risks signing up people who can’t meet your

real expectations.

As described in Section B, above, most nonprofit

boards have fairly similar realms of responsibility,

including defining policy, managing finances, and

working with an executive director. While these

categories are common, each nonprofit will also

have its own unique list of board responsibilities.

Make sure that everyone on your recruiting team

knows—and can communicate—what you expect

from your board members.

Don’t alienate your prospects. Before a recruiter approaches a prospective board

member, make sure that your current board or core

group approves of the choice. Even if you’re only

planning a preliminary discussion, it’s much better

to wait and make sure that everyone agrees on the

prospect than to jump right in and extend offers you

might later have to rescind.

3. Educate Prospects and Incoming Board Members

Once someone has expressed a willingness to

consider joining the board, the recruiter(s) should

make sure the prospect knows everything he or

she needs to know to make an informed decision.

This includes not only basic information about the

nonprofit and its activities, but also what will be

expected of board members. For example, if you

expect each board member to make a significant

financial contribution, it’s best to make this clear up

front. Otherwise, board members might quit in a

huff when they learn how much you expect them to

fork over.

YOUR BOARD OF DIRECTORS 4/ 1 5

Create a Board Candidate FAQ

One way to tell prospective board members what

you expect is to create a “board candidate FAQ”

that communicates all of the important facts in a

simple, one-page, question-and-answer format.

Here is an example of the types of questions

that might be included in an FAQ for prospective

board members for a homeless assistance non-

profit.

What is Welcome Home? Welcome Home is a 501(c)(3) nonprofit dedicated

to serving the needs of the homeless in the

greater Oakland area. We offer meals and shelter

to those in need and educate the public on the

social issues related to homelessness.

As a board member of Welcome Home, what will I be responsible for? As a member of the Welcome Home board of

directors, you will help define policy and guide

the nonprofit so that it stays true to its mission

and achieves its goals effectively. You will be

expected to attend and participate in monthly

board meetings. You may have additional

responsibilities if you join committees or

become active in certain areas.

It is expected, though not required, that you

will occasionally participate in events as a vol-

unteer. In addition, it is expected, though not

required, that you will contribute financially to

the nonprofit in an amount that is comfortable

for you.

How long will I serve on the board? Board members serve a two-year term.

As a board member of Welcome Home, are there any legal issues I need to worry about? Under state law, board members are expected

to use reasonable care when making decisions

or taking actions (called a “duty of care”). In

addition, state law establishes a duty of loyalty on

board members, which means that you must al-

ways act in the best interests of Welcome Home.

In general, board members are not personally

liable for their work on the board. You won’t face

personal liability unless you act fraudulently or

with gross negligence.

You should give incoming board members copies

of your articles of incorporation and bylaws, as well

as any other materials you have developed to guide

the board. (See Section C, above.) You may also

want to assign an experienced board member to

mentor the new member.

In addition, new board members should go

through some sort of orientation process that pro-

vides information about the organization’s policies

and procedures. The length, complexity, and format

of the orientation will vary from one nonprofit to

the next, depending on the organization’s size,

activities, history, and other factors. A simple orien-

tation—say, an hour or so of presentations by the

nonprofit’s founders, current board members (if you

have them), president, executive director, committee

chairs, or some combination of these folks—will

work fine for most new nonprofits. If your non-

profit is larger and more complex, you may want

to divide your orientation sessions into a series of

presentations, perhaps over a couple days.

Common topics to cover in an orientation include:

• the nonprofit’s mission and goals

• the organization’s history

• financial assessment and overview

• current and planned programs

• responsibilities of board members

• responsibilities of the executive director and

staff, and

• committee assignments.

Besides offering an orientation program, you

might also want to hold some type of informal get-

4/ 1 6 STARTING & BUILDING A NONPROFIT

together, to allow new board members to get to

know each other in a more relaxed social environ-

ment. For example, the entire board could go out

for lunch as a group, attend an event related to the

nonprofit’s mission, or have a potluck at a board

member’s home.

4. Elect Officers

When you establish your initial board, you’ll need

to elect officers. Most nonprofits choose a president,

vice president, secretary, and treasurer (as described

in Section B5, above). Officers are chosen and voted

in by board members. Often, this is the first item of

business at the first board meeting, with the founder

temporarily taking the lead and asking for nomina-

tions for president. Once elected, the new president

takes over the rest of the meeting and asks for

nominations for the other officer positions, which

are then voted on in turn.

Particularly in new nonprofits, the officer “election”

process may be less formal. For example, someone

may suggest that the nonprofit founder should serve

as president, and a quick show of hands confirms

the decision. In some cases, there may not be any-

one who is eager to serve as president, and some-

one will have to be drafted by the rest of the board.

Elections may be a more competitive affair,

with two or more board members fighting for the

presidency. This isn’t common with new nonprofits.

If it does occur, however, it’s important to conduct

a fair election process. After board members are

nominated, you should conduct a vote with written

ballots and have several board members count the

votes.

E. Holding Effective Board Meetings

Meetings that are unproductive, disorganized, bor-

ing, contentious, or poorly attended will seriously

undermine the effectiveness of your board—and,

by extension, the nonprofit as a whole. Despite this

obvious fact, thousands of truly awful board meet-

ings are held every day, leaving tens of thousands

of board members shifting in their seats and wonder-

ing, “How did I get stuck with this job?” There’s no

better way to drain the energy from a nonprofit than

to let this go on. While it may not be possible to

make your board meetings as entertaining as a good

Broadway show, you certainly can maximize their

effectiveness by following some simple rules.

1. Meet Regularly

Adopting a regular meeting schedule is a good

way to build momentum for the board’s activities.

If meetings are held at random or infrequently, it

will be hard for members to stay focused on what’s

going on and push business forward. Depending

on your agenda, it’s often best to meet monthly, or

at least quarterly. If issues come up between board

meetings that require immediate attention, you

can call a “special” meeting, which simply means a

meeting in addition to the board’s regular meeting

schedule. (Procedures for special meetings should

be included in your bylaws.)

Keep meetings short. Your board will need to decide for itself how often and how long

to meet, in order to maximize the board’s efficiency

and productivity. Very generally speaking, meetings

of about two hours are optimum; no meeting should

last longer than three hours. As long as agendas are

planned carefully and time limits are set in advance

for each item, the president should be able to keep

the meeting on schedule.

2. Invite Staff and Outsiders When Appropriate

It’s perfectly appropriate, and often a good idea, to

invite people other than board members to attend

meetings. If, for example, you plan to evaluate the

progress of a certain program, then you may want to

invite the staffer who runs that program to speak at

your board meeting. Similarly, it often makes sense

to invite the executive director, who is usually in-

volved in many aspects of the nonprofit’s operations.

Some nonprofits invite the executive director as a

YOUR BOARD OF DIRECTORS 4/ 1 7

matter of course, whether or not a specific agenda

item requires his or her input.

You should also feel free to invite guests from

outside the organization to attend board meet-

ings from time to time. This is a great way to forge

connections to your community and bring new

perspectives to the board. For example, your non-

profit dedicated to keeping an urban river clean

could invite a prominent local architect who is in-

volved in eco-friendly loft developments along the

river. Opening your board meetings to guests in

this way lets the board and your guests learn about

each other, stay on top of developments in areas of

mutual interest, and figure out how to support each

other’s work.

3. Give Notice of Meetings

If you want members (or others) to attend board

meetings, you’ll have to tell them when and where

the meetings will be held. For regular meetings,

it’s best to do this well in advance—for example,

you might want to set all the meeting dates for the

following year at the annual meeting. For special

meetings (those that are held in between regular

meetings), most nonprofit bylaws require seven or

10 days’ notice (although this can be shortened or

waived altogether if all board members consent).

The secretary is usually responsible for giving

notice of meetings, although the vice president or

a designated staff member sometimes takes on the

job. Phone calls are the most common way to give

notice of special or changed meetings, but many

organizations use email. Although a voice message

doesn’t meet the written notice requirements set out

in many nonprofit bylaws, it should work out fine as

long as no one objects. But when a special meeting

is called to discuss and vote on a contentious issue,

you’ll want to closely follow the rules set out in your

bylaws.

In today’s busy world, even if your board meet-

ing has been set well in advance, it’s a good idea to

make a follow-up call or send a reminder email a

week or a few days before the meeting. You should

also send board members a copy of your agenda

(discussed next), if possible.

Give board members the previous minutes a week before the meeting. Because most meetings begin by approving the minutes of the

previous meeting, giving board members a chance

to review the minutes in advance is a good way to

save time at the meeting. Providing the previous

minutes ahead of time also reminds board members

of any tasks they promised to do before the next

meeting. Assuming the minutes have a section out-

lining action items (they should), this reminder will

give board members a chance to take care of any-

thing they may have forgotten about.

4. Draft a Solid Agenda

If there’s one key to a successful board meeting, it’s

the meeting agenda. Typically, the president drafts

the agenda (and makes sure members stick to it

during the meeting). A meeting agenda outlines the

topics to be covered at the meeting and sets time

limits for the discussion of each. Without an agenda,

it’s all too easy for a meeting to devolve into unpro-

ductive chit-chat—or to be commandeered by one

person who’s eager to take advantage of a captive

audience.

When drafting a meeting agenda, it may be a

good idea to ask other board members if they have

any items they’d like to add. If your board is email-

friendly, you can do this via email a week before the

meeting. Another approach is to ask for additional

agenda items at the beginning of the meeting, but

this can backfire. If too many people want to add

agenda items, or if the suggested items are just ill

considered, it can be awkward to nix them in front

of the assembled board. A better approach is to

make clear that items must be added in advance

absent some urgent reason to consider an issue right

away.

4/ 1 8 STARTING & BUILDING A NONPROFIT

Rules of Order for Meetings

The first time you participate in a board meet-

ing with rules of order, you might feel a little

awkward, perhaps even silly. But as arcane

as they may seem, rules of order (sometimes

called “parliamentary procedures”) serve an

important purpose: They provide procedures

for raising issues to be discussed and making

decisions about them. Rules cover how to

make motions, second motions, refer motions

to committee, call for votes, and so on.

While there are a few different systems out

there, the Cadillac version is Robert’s Rules

of Order. Believe it or not, these rules—for

“smooth, orderly and fairly conducted meet-

ings”—were first written in the late 1800s by

General Henry M. Robert and continue to be

used today by boards of all types, for-profit

and nonprofit alike. With sections like “Sec-

ondary Motions as an Underlying Concept,”

“Conditions That May Impede Renewal at a

Later Session,” and “Taking Up Business Out

of Its Proper Order,” it’s clear that General

Roberts had more than a passing interest in all

things orderly.

While rules of order can be fairly technical,

the good news is that most nonprofits don’t

follow them to the letter. Board members

should at least be familiar with the rules so that

they understand what is going on at any given

point in a board’s proceedings. A quick search

of Amazon will yield several titles besides

the official Robert’s Rules; some are “plain-

English” versions that may offer a livelier read.

Most agendas include some or all of these items:

• Welcome and introductions. The president calls the meeting to order and introduces any

guests. If you will allow any last-minute ad-

ditions to the agenda, now is the time to ask

whether anyone has agenda items to add. If

they do, set a time limit for each item, with

any further discussion postponed to a subse-

quent meeting. The opening of the meeting is

also a good time to remind everyone that the

president will enforce the time limits.

• Guest speakers. If any guests will make pre- sentations, it’s a good idea—though certainly

not a hard-and-fast rule—to schedule them

near the beginning of the meeting, as a cour-

tesy to the speaker.

• Approval of previous meeting minutes. Members typically vote to formally approve

the minutes from the previous meeting, which

then become part of the corporate records. If

any board member has corrections or additions

to the minutes, they’ll be added before

approval. The secretary should distribute the

minutes a week or so before the meeting, so

members have time to review them and note

any changes.

Limit corrections to the minutes. Most board members never read the minutes of previous

meetings. But a few do so obsessively and insist on

raising a laundry list of inconsequential suggestions

that waste everyone else’s time. If this becomes a

recurring problem, the president could announce

that the minutes should be corrected only if they

contain obvious errors or omissions. To take this a

step further, the president could explain this rule

to the offending member one on one, emphasizing

that meeting time is valuable and that corrections

should therefore be limited to truly important

issues.

• Committee reports. If your board has active committees that have met since the last board

meeting, each committee will typically sum-

marize any progress made on their projects.

(If routine, these reports are often best sub-

mitted in a short written memo.) If any com-

mittee is involved in a major or controversial

project, you may want to schedule a special

slot for that report. Otherwise, reports should

be quick and efficient summaries of commit-

tee work. If these reports threaten to take up

too much time, schedule them towards the

end of the meeting, when people want to

leave and are likely to be less chatty.

YOUR BOARD OF DIRECTORS 4/ 1 9

• Budget/finance committee report. You may want to address this item separately because

budget and money issues are so important for

many nonprofits. Depending on your board’s

size and committee structure, you may want

to have a detailed discussion of finances with

the whole board, or a budget/finance com-

mittee may present a report to the group. You

don’t have to schedule this separately from the

other committees, but it is an option.

• New business. The president introduces any new business and gives the floor to whoever

will speak in detail about it. Once new busi-

ness items are discussed, a specific person or

committee is often put in charge of following up

and reporting on progress at the next meeting.

• Review new action items. It’s good practice to do a quick recap of action items that board

or key staff have committed to during the

course of the meeting. Board members should

recount which (if any) tasks they’ve agreed

to do, such as phone calls to make, letters to

write, and so on. The secretary should outline

these commitments in the minutes, preferably

in a separate section called “Action Items.”

• Adjourn meeting. If you haven’t already scheduled all of your meetings for the year,

you should set the time and place for the next

meeting before calling the meeting to a close.

5. Start on Time

All board members should understand that meetings

will start on time, every time. Waiting for latecomers

only reinforces their behavior and wastes the time

of those who arrive on schedule. If certain board

members habitually show up after the meeting has

begun, the president may want to privately but

explicitly ask them to be more punctual.

6. Understand Decision-Making Methods

The most common way that boards make decisions

is by taking a vote. Most nonprofits use majority rule

for most matters, although some require a two-thirds

majority or even a higher plurality for certain unusu-

al issues, such as amending the articles or removing

a board member. Your voting rules should be in-

cluded in your bylaws. (Anthony Mancuso’s How to

Form a Nonprofit Corporation (Nolo) offers in-depth

information about voting, quorums, and other rules

that you should spell out in the bylaws.)

Because close, contentious votes often produce

lingering resentment, it can be a mistake for the

president and other leaders to allow a vote on

an important item if there is strong disagreement

among board members, or between board mem-

bers and senior staff. When this is the case, other

decision-making methods can often help break the

impasse. Techniques that are often used to avoid a

divisive vote include:

• Refer an issue to a committee. This way, the committee can grapple with the vexing

issues and look for ways to find compromise.

The committee can then present the issue at

the next board meeting, perhaps with a new

recommendation.

• Schedule a discussion and straw vote. A straw vote is a nonbinding vote, taken to

gauge the support on both sides of an issue.

When debating controversial issues, the presi-

dent may call a straw vote just so everyone

can see who is on each side. Knowing where

things stand can help leaders steer the dis-

cussion towards compromise and resolution

before a final vote is taken.

• Build consensus. Sometimes, it’s best for a board to discuss an issue until consensus is

reached. Purely applied, this model requires

everyone to be in agreement for a decision to

be made. Making decisions by consensus can

be quite time-consuming; it’s often wise to

follow this approach only when the issue real-

ly is divisive, and you need the entire board’s

support for the resolution.

7. Deal With Problem Board Members

Troublesome people come in all shapes and sizes,

and some of them may, despite your best efforts,

find their way on to your board. Common types

of problem board members include those who are

argumentative, bullying, rude, or just prone to talk-

ing too much. Sometimes a board member who

has worked collegially and productively in the past

4/ 2 0 STARTING & BUILDING A NONPROFIT

suddenly encounters a personal problem (such as

a crumbling marriage or substance abuse) that im-

pairs his or her ability to contribute to the board’s

activities.

Whatever the underlying reason, it’s important

not to ignore a problem board member. Difficult as

it may be (and it usually is), you must confront the

issue quickly in order to save the rest of the board

from foundering. Again, there’s no one-size-fits-all

solution. Gentle coaxing might work best for some,

while a “candor without guilt” type of confrontation

may be the only way to get through to others.

Depending on how serious the problem is—and,

sometimes, on how important the individual is to

the organization—the president should try to fig-

ure out what approach seems most likely to resolve

the situation. If diplomatic suggestions or stronger

admonishments don’t work, the person should be

dropped from the board as soon as possible. If the

next election is too far away, and the board member

is seriously impeding the nonprofit’s work, removal

may be in order. (See Section C4, above, on board

member removal procedures.)

F. The Role of Committees

Especially for larger boards, an effective way to

break down the board’s governance duties is to

subdivide board members into committees. Some

may be permanent (sometimes called “standing”)

committees to handle ongoing issues such as

finance, program development, membership, or

the like. Other issues that come up can be handled

by creating a special (sometimes called “ad hoc”)

committee. Don’t worry about what they’re called;

just keep in mind that nonprofits typically use both

kinds of committees to handle regular needs and

new issues as they arise.

Committees help maximize the board’s productiv-

ity in several ways:

• They make it easier for boards to handle complex issues. The smaller committee can research and break down complex issues and

present its findings to the board, which can

then move forward to making decisions.

• They match board members with particular expertise to appropriate areas. Forming a

committee is a great way to assign specific

responsibilities to the people best able to

handle them.

• They can engage with an issue more deeply and consistently than the board as a whole could. The finance committee, for instance, can and should maintain thorough and ongo-

ing management of the nonprofit’s finances

between meetings, so that the whole board

can deal with this key concern (based on the

reports of the finance committee) at board

meetings.

• They help divide the board’s workload. Having separate committees is a simple way

to distribute responsibility for the many tasks

boards typically need to tackle.

• They can attract and involve newcomers. In some nonprofits, specialized committees often

include people who aren’t on the board of

directors. For example, a nonprofit that pro-

motes physical fitness for diabetic children

might have a doctor on one of its program

committees to help design fitness activities.

That doctor might be happy to be involved in

this way but not interested in taking on the

additional responsibilities and time commit-

ments required to serve on the board.

• They serve as a training ground for new board officers. Chairing or just being involved in a committee is a good way for inexperienced

board members to increase their involvement,

develop confidence, and learn leadership

skills. These people often move on to board

leadership or officer roles.

Don’t set up unnecessary committees. Before you establish a committee, ask what

the committee will do that the board can’t do just as

well. If you have a good answer, set up a committee

and get the ball rolling. If not, don’t bother setting

up a committee that will have to meet and generate

projects simply to justify its existence.

The following checklist is included as a form

in Appendix F and, in digital version, on the

CD that accompanies this book.

YOUR BOARD OF DIRECTORS 4/ 2 1

Checklist: Your Board of Directors

Aim to build a board of directors made up of individuals who are committed to your

mission and connected to a wide range of

communities.

Understand the legal duties of care and loyalty that board members owe to the nonprofit.

If board members will also help with the day- to-day tasks of the nonprofit, as either paid

staff or unpaid volunteers, make sure every-

one understands the distinction between

their “board” roles and their “staff/volunteer”

roles.

Define board specifics in your bylaws, includ- ing the number of board members you will

have, any term lengths and/or term limits

applicable, and the responsibilities of the

board members and officers.

Establish performance expectations and removal policies for board members. In-

clude these in a board guidebook. Deal with

problem board members when necessary.

Educate board prospects and incoming board members about board responsibilities as well

as your organization’s mission and activities.

Hold regular, efficient, focused board meet- ings. Draft solid meeting agendas and stick to

them. Give advance notice of meetings, and

start meetings on time.

Create board committees to focus on specific tasks and activities when necessary. These

committees may contain both board members

and other, nonboard, members who are part

of your nonprofit (for example, staff or volun-

teers).

■

A. Developing a Management Strategy ....................................................................... 5/2

1. The More Activities, the More Staff and Structure You Need ..................... 5/3

2. Provide Clear Direction ....................................................................................... 5/5

3. Issues With Founders .......................................................................................... 5/5

B. Hiring an Executive Director .................................................................................... 5/7

1. Are You Ready for an Executive Director? ....................................................... 5/7

2. The Executive Director’s Role ............................................................................. 5/8

3. Hiring Criteria ...................................................................................................... 5/8

4. Developing a Review Procedure ....................................................................... 5/9

C. Hiring and Managing Staff and Volunteers ......................................................... 5/10

1. Determine What Tasks Need to Be Done ...................................................... 5/10

2. Create Positions and Job Descriptions ........................................................... 5/10

3. Develop Staff Hierarchies ................................................................................. 5/13

4. Create Review Procedures ................................................................................ 5/13

5. Create a Staff/Volunteer Handbook ................................................................ 5/13

6. Orient New Workers .......................................................................................... 5/14

D. Employees and Independent Contractors ........................................................... 5/14

1. Laws and Taxes ................................................................................................... 5/14

2. IRS Criteria ........................................................................................................... 5/15

E. Required Paperwork, Filings, and Taxes ............................................................... 5/17

1. Rules for Employers .......................................................................................... 5/17

2. Rules When Hiring ICs ...................................................................................... 5/18

C H A P T E R

1 Chapter 5

Your Workforce: Staff and Volunteers

5/ 2 STARTING & BUILDING A NONPROFIT

T his chapter will help you understand how to

hire and manage your nonprofit’s workers,

including paid staff and volunteers. As dis-

cussed in Chapter 4, the board of directors has the

legal and institutional responsibility to implement

the nonprofit’s policies and make sure that it is

working towards its mission. However, the board

should not be responsible for the day-to-day opera-

tions of the organization—those duties should fall to

the nonprofit’s staff and volunteers.

In nonprofits with a paid staff, the bridge between

the board and the staff/volunteers is traditionally the

executive director, a senior-level staff member who

is hired by the board to oversee the staff’s work. In

small, all-volunteer nonprofits, the board president

often plays this role. The executive director (or who-

ever is filling that role) is responsible for evaluating

the nonprofit’s needs; creating a management struc-

ture; and recruiting and managing staff, volunteers,

and contractors—all with an eye to efficiently car-

rying out the mission and policies set by the board.

The executive director sits at the top of the manage-

ment hierarchy, with authority over all managers and

staff, whether paid or volunteer.

In real life, however, many nonprofits operate

with far less formality. Lots of small nonprofits

have no staff other than the board members, who

don “staff” hats and take care of the nonprofit’s

day-to-day affairs themselves. Even if there are a

few volunteers or part-time staffers, many young

nonprofits don’t bother with the position of executive

director or a rigid management hierarchy. Typically,

an executive director position is created when

the paid staff grows to about three to five people,

necessitating the imposition of at least some degree

of managerial structure.

This chapter explains how to hire and manage

the people who work for your nonprofit, whether

you’re a small, grassroots collective or a larger, staff-

run operation. Here, you’ll find information on:

• developing a management strategy (Section A)

• hiring an executive director (Section B)

• hiring and managing staff and volunteers

(Section C)

• deciding whether to hire employees or

independent contractors (Section D), and

• complying with paperwork and tax require-

ments for employers (Section E).

A. Developing a Management Strategy

“Management” is a fairly vague word, and one that

is used to describe a vast array of decisions and

actions. When I use the term “management” in this

book, I’m referring to the practice of assessing,

organizing, and leveraging your nonprofit’s avail-

able resources in the most efficient and useful way

to reach your goals. It follows that a good manager

is one who gets the most out of staff, money, and

other assets—without overtaxing the nonprofit’s

resources or stretching them too thin.

The key to coming up with a good management

plan is to use an approach that will work for your

situation right now, not where you hope to be some

time in the future. Perhaps you dream of someday

having a well-funded nonprofit with 150 employees.

It’s fine to think big, but you should start by manag-

ing your existing staff well. If you currently rely on

a handful of dedicated volunteers and one half-time

employee, you won’t need the formal hierarchy

of departments and lines of authority that a larger

group might require. Your tiny nonprofit can prob-

ably operate just fine if one or two board members

are responsible for giving day-to-day direction to

the volunteers and paid assistant—and the rest of

the board stays out of the way. Of course, if your

organization already has several paid workers and a

large cadre of volunteers, you’ll need a more formal

management structure right from the start.

This section explains some issues to consider

when deciding what type of management strategy

will work best for your nonprofit.

Randolph Belle—Director of Information, East Bay Nonprofit Center, Oakland, California

I like to impress the value of team building. If you

get one person on your team you can get ten. Ten

carefully selected people can accomplish a great

deal in the way of the diverse, specialized skills

critical to running a nonprofit. I also suggest col-

laboration for brand-new groups. If incorporation

isn’t a “must,” working with or under the umbrel-

la of another established nonprofit will allow you

to test the waters without the full burden of run-

ning your own incorporated organization.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 3

1. The More Activities, the More Staff and Structure You Need

The main difference between managing a large op-

eration and managing a small one is in the level of

formal structure imposed on staff and volunteers.

The more activities a nonprofit undertakes, the more

staff (both paid and volunteer) it will need and the

more structure will be necessary to keep the staff

working efficiently. In other words, the type and

number of programs and services you plan to pro-

vide will largely determine how much staff you’ll

need, which in turn will suggest an appropriate

management structure and strategy.

For example, if your nonprofit’s main activity

consists of running one prestigious conference each

year on landscaping and water conservation, your

staff needs would be far smaller than a group that

runs a walk-in health clinic for homeless people.

Providing health care on a daily basis would surely

require full-time staff (say, ten or more volunteers

and paid workers), which would also necessitate a

fairly formal management structure, with clear lines

of reporting and responsibility. The water conserva-

tion group, on the other hand, might require only a

part-time office helper and a few volunteers (except

during conference week) and, therefore, might not

need much of a management hierarchy.

As Chapter 2 explains, outlining programs and

services is part of drafting your nonprofit’s strategic

plan. If you’ve already tackled the strategic planning

process, you should have a pretty good idea of how

extensive your year’s activities will be—and how

many people it will take to get them done. (Hiring

paid staff and volunteers is covered in more detail in

Section C, below.)

Main Street Reborn: A Small Nonprofit Run by Its Board

Main Street Reborn is a (fictional) nonprofit dedi- cated to preserving historical main street districts in Florida’s small towns. Main Street Reborn was founded by two people, Melissa and Vincent, who were concerned about decaying town centers throughout Florida. Melissa and Vincent soon found three other interested people— Spencer, Jill, and Damon—and incorporated as a nonprofit, with all five sitting on the initial board.

After a couple of strategic planning meetings, the board decided to pursue the following activi- ties: 1) compiling historical information about chosen main street districts; 2) educating the public through published materials and media relations efforts; and 3) helping building owners get their properties listed on the state historical property registry and research available rehabili- tation grants.

The board discussed how to structure things in order to accomplish their list of tasks. They de- cided that the board could handle their activities for the time being, making paid staff unnecessary. Each board member took on certain tasks: Jill was in charge of doing historical research; Vincent created brochures and fact sheets based on the research; Melissa wrote press releases and

letters to the editor to get media exposure; Spencer and Damon focused on the state his- torical property registration process and grant research. They each expected to contribute approximately ten hours of work per month.

Because each board member would essen- tially be self-managing, the group decided to have monthly meetings to report on their prog- ress and revisit their priorities and goals. They also decided to look for a part-time volunteer with an interest in historical preservation to help with administrative tasks. They agreed that if the workload exceeded their expectations, they’d either curtail some activities or look into raising enough money to hire a part-time staff person.

After a year of operations, the workload more or less matched the expectations of all the board members. Except for a few times when Spencer and Damon had more than one historical property registration application to work on at the same time, none of the tasks were too burdensome for the board members to handle. The board decided to look for an additional volunteer or two to help with the historical property registration applica- tions but to keep its overall minimal management structure for the next year.

5/ 4 STARTING & BUILDING A NONPROFIT

Domestic Comfort Foundation: A Medium-to-Large Nonprofit Run by an Executive Director

Domestic Comfort Foundation is a (fictional)

nonprofit dedicated to providing financial

support to families of military personnel away

on active duty. The nonprofit started as a group

of military families who met on an informal basis

for a couple years, then decided to organize a

nonprofit foundation to raise money for military

families in need. When the group incorporated,

seven people sat on Domestic Comfort’s first

board, and it fell to them to figure out how to

manage the nonprofit’s work.

The initial board saw that their Aid to Families

program would involve several components:

developing program criteria and procedures,

publicizing the program, soliciting applications,

reviewing applications, accepting or rejecting the

applications, and fulfillment (generating checks

and sending them to the families). The board

also decided that the program should include

sending care packages to the military personnel

of families whose applications are accepted. This

would involve purchasing and packaging the

items for the care packages and shipping them.

Finally, they knew that fundraising would be a

major ongoing activity.

The initial board decided that board members

should focus primarily on fundraising efforts,

while a few volunteers and paid staffers handled

the tasks involved in the Aid to Families program.

The board figured that three paid, part-time staff

and five regular volunteers would be sufficient.

Because board members would be engaged in

fundraising efforts, they decided to hire an exec-

utive director to manage the staff and volunteers.

After a few months of fundraising, Domestic

Comfort had enough funds to hire staff. The

group started by hiring an executive director,

Sara, who in turn hired three part-time paid

employees and recruited five volunteers.

In Domestic Comfort’s first year of operation,

Sara directly managed all of the staff and volun-

teers in running the Aid to Families program. At

board meetings, Sara reported to the board on

every aspect of the program’s operation.

In its second year, Domestic Comfort was

deluged with applications to the Aid to Families

program. The board decided that it was time for

the nonprofit to grow, hire more staff, and raise

more money in order to meet the needs of the

community it wanted to serve. They approved

a new budget and charged Sara with recruiting

enough staff to increase the number of accepted

applications by 30%. Sara promoted the three

current part-time employees to full-time staffers,

hired five additional part-time paid staff, and

recruited eight more volunteers.

To handle this many staff and volunteers,

Sara created a more complex management

structure: She divided the workers into a market-

ing division, an application processing division,

a fulfillment division, a care packages division,

and a fundraising division, each with one per-

son in charge. With this new structure in place,

Sara interacted with the division heads instead

of managing all workers directly. Division heads

were sometimes invited to board meetings to

report more detailed information than Sara could

readily provide. Creating an additional manage-

ment layer added a bit more complexity, but it

also allowed the nonprofit to run much more

efficiently.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 5

2. Provide Clear Direction

Nonprofits typically owe their existence to the

passion and commitment of a small number of

people. Sometimes—especially when the people

running the nonprofit don’t have much experience

in managing others—the founders fail to appreciate

that the volunteers and paid staff they bring on

board may not share the founders’ sense of mission.

Although your nonprofit will tend to attract staff

and volunteers who are genuinely interested in

your goals, this does not necessarily mean that they

will be as self-motivated (or, in some instances, as

maniacally committed) as the people who got the

nonprofit started.

What this means, practically speaking, is that you

may have to find two (or three) volunteer staffers to

do the same work that one super-committed, mis-

sion-consumed founder might accomplish. Because

newcomers probably won’t be as far along on the

learning curve, you also will need to provide appro-

priate training and guidance to staff and volunteers

alike. In other words, directors will have to actually

direct. As enthusiastic and energetic as new staff or

volunteers may be, they shouldn’t have to figure out

what their jobs are or what you expect them to do.

On the flip side, don’t create an environment

where you don’t make good use of the inspiration

and initiative of those who do want to get more

involved. If you sense that someone wants an active

role in the organization, be open to it. Make sure

everyone knows that ideas, insights, and sugges-

tions about the way things are or should work are

welcome. The last thing you want to do is shut out

those who can be the most valuable to your orga-

nization: motivated, creative people who want to

take an active role in building your organization and

working towards its mission.

3. Issues With Founders

A big issue that commonly plagues newer nonprofits

is the close relationship between the nonprofit

and its founders. In an extreme case, a nonprofit

becomes so closely identified with its founders

that it might not be able to exist without them. In

a nonprofit’s earliest start-up days, this may be un-

avoidable and shouldn’t cause too much concern.

But before long, the nonprofit must begin to develop

an independent identity. Certainly this separation

process must begin before the nonprofit loses key

founders and risks a loss of momentum—or outright

failure.

One practical way to cope with over-reliance on

a founder is to distribute management duties so that

others are clearly responsible for important opera-

tions. Founders tend to be on the nonprofit’s board,

so part of the solution is to make sure that the board

is diverse, balanced, and regularly infused with new

blood. (Building your board is covered in Chapter

4.) Especially if the nonprofit relies primarily on its

board members to manage the group, make sure

that the founders don’t monopolize too many key

responsibilities. If the nonprofit has an executive

director or other nonboard managers, don’t require

them to report exclusively to nonprofit founders. Do

your best to evenly disperse management power

across the board and make sure everyone—including

the founders—honors this division of power.

Erika Harding—Core Group member, erda Gardens and Learning Center, Inc., in Albuquerque, New Mexico

Marie Nord founded erda Gardens as a commu-

nity organization and a functioning farm. While

a small group of people were involved with the

farm along with Marie, it was pretty much a one-

woman show—Marie was not only the founder

but also the farmer. After her sudden death we

were left without any structure, any man- or

woman-power, and without much hope. We held

a half-memorial, half-business meeting and a

“core group” of volunteers emerged. This group

was made up of people who had been with the

farm for years but who played only minor roles or

no role at all while Marie was alive.

The group has evolved, and we have all

shouldered tremendous responsibilities. Now we

remain an all-volunteer organization, with the

exception of our farmer and a few apprentices.

We have created a much stronger structure and

5/ 6 STARTING & BUILDING A NONPROFIT

identity as an organization and have developed

ties with many members of the community. People

used to know Marie, now they know the farm. We

document everything, and we are slowly building

an organization in which none of us is essential.

I think Marie would be very proud.

Another potential problem arises when a founder

insists on trying to control everything, even when

the nonprofit has adequate staff or volunteers. Some-

times dubbed “founderitis,” this condition can be

difficult to treat, because staff and even other board

members tend to feel deferential to the founder and

are reluctant to criticize a founder’s management

style. But it’s important for a nonprofit’s staff—

particularly if an executive director is on board—to

be able to do their jobs without the founder’s

constant meddling.

Painful as it may be, a founderitis problem must

be confronted, usually by other board members.

The best way to address a problem founder will

depend on the founder’s personality—some might

need gentle handling while others will need a kick

in the pants. In most cases, you’ll want to start by

having a rational conversation with the founder,

pointing out the problem behavior and explaining

the importance of distributing power and responsi-

bilities throughout the organization. It always helps

to recognize the founder’s good intentions and to

avoid an accusatory tone.

Tips for Founders: Diagnosing and Curing Your Founderitis

All you founders out there, listen up. Take a good

look at the way you interact with your nonprofit,

including the other board members and any

staff and volunteers. Do you have a clear sense

of where your job ends and another position

begins? Do you feel that the nonprofit could run

okay without you for a month or two? Do you

give staff or volunteers space to do their jobs

without interference? If you answer “no” to any

of the above questions, you may have a touch (or

maybe even a raging case) of founderitis.

If you find yourself afflicted, here are some

tips for clearing it up:

• Educate yourself on your proper role. Reading books like this one is a good way

to learn the distinctions between different

roles at a nonprofit. Knowing the bound-

aries between roles is a first step toward

observing them.

• Let others do their jobs without inter- ference. While you undoubtedly have a wealth of good ideas, don’t drown the

staff and volunteers in your brainstorms

instead of letting them work independently.

If you have a management position over

certain workers, constantly peppering

them with your ideas about how they

could do their jobs better is sure to be

an annoyance. Unless an issue is truly

pressing or glaring, save your critiques

for official performance reviews. If you

don’t have a management role, then keep

your ideas to yourself or pass them to

the person who does have management

authority—and let that manager decide

what to do with your suggestion. • Embrace situations in which you aren’t

the boss. For example, if you’re helping as a volunteer during an event—say, a Clean

Up the Beach Day—be sure to let the

person who’s running the event actually

be in charge. By making it clear to the

event coordinator that you’re willing and

eager to take direction, you’ll help build

trust and respect between you and staff,

and in turn help nurture a healthy and

efficient staff hierarchy.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 7

Seek Sustainability

Mona Lisa Wallace, Esq. is a California attorney who has played a key role in several success- ful nonprofit and socially responsible startups. She is the executive director of the East Bay Nonprofit Center, providing management support for Bay Area nonprofits. She offers the following advice on how to maintain balance during your start-up days.

Nonprofit leaders are driven by a focus on their mission. Often profoundly more person- ally committed than for-profit entrepreneurs, many nonprofit founders make exceptional sacrifices financially, temporally, and spiritually. Of course, saving the planet, sheltering the needy, and empowering the disenfranchised are noble justifications for working long hours, skipping workouts, and missing meals. But burnout, family conflict, substance abuse, and social isolation are real risks that can creep up unnoticed during periods of intense work. It’s essential to protect your nonprofit’s sustain- ability by protecting its key resource: you.

Learning to prioritize and compartmentalize can help you retain balance in your work and personal life. I suggest starting by making four lists:

1. Important now: For example, finish pro- posal by tomorrow’s deadline.

2. Important later: For example, relocate to a larger office.

3. Less important now: For example, repair the copier.

4. Less important later: For example, pay parking tickets (just kidding).

Also, practice putting your work away peri- odically. One helpful visualization is to picture empty cubbyholes where you can stash the incomplete brochure, the proposal deadline, or whatever else is foremost on your four lists. With your tasks cleared off your mental plate, you can take off your manager hat and just be yourself for a while. Take mental and physical time for yourself, your family, and loved ones so you can continue your good work long into the future.

B. Hiring an Executive Director

One of the board’s primary tasks is to hire and

manage the organization’s chief executive, common-

ly called the executive director. While the board’s

role is to establish and guide the organization’s over-

all direction, the executive director is in charge of

carrying out the programs and other plans outlined

by the board.

1. Are You Ready for an Executive Director?

In a nonprofit’s early days, the president or another

board member often fills the role of an executive

director. Many new nonprofits don’t have the cash

to pay an executive director’s salary; others simply

aren’t ready for the responsibility of hiring and man-

aging an executive director. And many fear—often

justifiably—that hiring senior staff may disempower

the president or other volunteer leaders. Even when

nonprofits can afford paid staff, they may be better

served by hiring an office manager rather than an

executive director.

David Kaseman—Cofounder, Santa Fe Alliance, a New Mexico 501(c)(3) nonprofit dedicated to promoting independent business and community

The Santa Fe Alliance has grown dramatically in

the first 18 months of its existence, due primarily

to dedicated volunteers and a very clear mission/

vision statement. It is our belief that as soon

as you hire an executive director, you take the

chance of losing some—or maybe even a lot—of

your momentum. In most nonprofits I have been

associated with, everyone looks to the executive

director for everything. Unless you have a very

experienced person in this role who can keep vol-

unteer momentum going, your nonprofit becomes

very vulnerable. You take the chance of losing

the efforts of many dedicated volunteers working

feverishly towards your vision, for the efforts of

one.

So take your time developing your core group

of volunteers to make sure they’ll stay involved

when you do add an executive director. Also,

make sure the new executive director has strong

5/ 8 STARTING & BUILDING A NONPROFIT

abilities and experience in the areas of leader-

ship. Do not expect a miracle from any executive

director. Any executive director is just one person

with the ability to do only a certain amount of

work. Your executive director should focus on

being a leader and stay out of the trenches.

Good luck, now go change the world!

A good rule of thumb is that if you have no paid

staff, you don’t need an executive director. Even if

you have one or two office workers or volunteers,

bringing in an executive director to manage them

may be excessive; a board member may be able to

do the job just fine. But as the number of paid staff-

ers increases—say, to three or more—it is probably

time to consider hiring an executive director. This

is especially true if the staffers are involved in tasks

beyond office management, such as executing the

nonprofit’s programs and services.

Hiring an executive director can be traumatic. When an executive director is hired, the president and any other board members who had

been managing staff and calling the shots day to

day will have to pull back from daily management

and restrict themselves to their board roles. This

can sometimes be a touchy and territorial issue, but

it’s important to resolve it right away. Having the

president or other board members stepping on the

executive director’s toes is a very common source of

friction and conflict. Savvy nonprofiteurs will take

steps, in advance, to avoid it.

2. The Executive Director’s Role

Before hiring an executive director, you need to

understand what this position is all about. Chapter

4 discusses the role of the board—specifically, that

once senior staff is on board, it’s not the board’s job

to oversee the day-to-day affairs of the nonprofit.

Instead, this is the domain of the executive director.

Once the board has established plans and policies

for the nonprofit, it’s the executive director’s job to

implement them—to put the “execute” in “executive

director.”

The specifics of an executive director’s job will

vary quite a bit from one nonprofit to the next. In

a large, complex nonprofit, the executive director

may manage several departments with dozens of

people on staff; in a fledgling nonprofit, the director

might be in charge of overseeing a simple program

or two without any permanent employees. And in

a nonprofit’s early days, it might not even have an

executive director at all.

While there’s enormous diversity in what non-

profit executive directors do, their work generally

falls into the following categories:

• implementing the board’s plans and policies

• managing programs, activities, and general

operations

• hiring and supervising staff

• monitoring and managing finances and ac-

counting

• reporting information about the organization’s

activities to the board

• advising the board on policy and program

issues

• assisting committees with program and fiscal

policy development

• serving as a liaison between staff and the

board, and

• communicating with the nonprofit’s constitu-

ency.

3. Hiring Criteria

Whether your nonprofit is large or small, the execu-

tive director’s job is extremely important. This person

generally plays a high-profile role in the inner

workings of your organization and often becomes

its public face as well. And, because the executive

director is in charge of hiring staff, he or she will

have an enormous impact on the overall character

and quality of the organization. With this in mind,

the board should be careful to choose an executive

director who not only is qualified for the job, but

also reflects its shared values and goals. Because

most young nonprofits can’t offer a salary that’s

anywhere near what a similar job in a for-profit

organization would command, finding a skilled and

dedicated executive director can be a real challenge.

Board members (often, a hiring committee)

should begin the process of looking for an executive

director by drafting a job description that outlines

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 9

what they expect from their chief executive. While

some of the director’s responsibilities will likely be

broad, the job description shouldn’t speak entirely

in generalities. Important tasks should be defined

in detail, so applicants will know exactly what the

job requires. For instance, if the board expects the

executive director to attend all public hearings held

by a city planning agency and issue press releases

on the agency’s decisions, say so in the job descrip-

tion—don’t just list “public relations activities.”

Besides outlining basic job responsibilities, the

board should also make a list of any specific skills,

experience, or qualifications they want to see in

an executive director. For instance, an educational

nonprofit might want its executive director to have

teaching experience. A nonprofit dedicated to pro-

moting green space in urban centers might want

someone who has a degree in urban planning and

at least three years’ experience in the field.

The board should also at least discuss the more

subjective traits that they desire in their executive

director. Do you want an out-front cheerleader or

a more thoughtful, policy type? Although these

“softer” qualifications may be harder to define or

to agree upon, it’s a good idea to get them on the

table for discussion before interviewing candidates.

The more groundwork the board lays before seeking

prospects, the easier the evaluation process will be.

4. Developing a Review Procedure

Every nonprofit should have some type of process

in place to review the performance of the executive

director, generally on an annual basis. The incom-

ing executive director should be informed about

the evaluation process upon taking office—what it

involves, when it will occur, and who will do it—

which means that the board should come up with a

process ahead of time.

Because the executive director reports to the

board as a whole, all members of the board are

typically involved in the process of evaluation.

Often, a personnel committee will spearhead

the process. A common system is for each board

member to fill out a survey evaluating the executive

director’s performance. An evaluation committee or

one board member then compiles the surveys and

goes over the results in a review meeting with the

executive director. The outcome of the review will

typically depend on the substance of the evaluation.

For example, a salary raise might be in order if you

can afford it and the executive director is going

well beyond the call of duty. On the other hand, an

executive director who is having trouble with his or

her job might benefit from a list of areas that need

improvement and a detailed discussion of what it

will take to get back on track.

Should the Executive Director Sit on the Board?

It is generally not considered a good idea for an

executive director to be a voting member of the

board of directors. Perhaps the primary reason for

this is that the board is responsible for managing

and evaluating the executive director, so having

the executive director on the board creates a

conflict of interest. In addition, you risk serious

tension if the executive director votes against

other board members. Particularly if the board

votes on a tightly divided, contentious issue, an

executive director with board voting power faces

a lose-lose situation no matter how he or she

votes and is likely to strain relations with the other

board members who voted differently.

In addition, some state laws limit how

many staffers may sit on a nonprofit board.

In California, for example, at least half of a

nonprofit’s board must be made up of people

who are neither paid staff (including the

executive director, which is a staff position)

nor family members of paid staff. (California

Corporations Code § 5227.)

Some nonprofits allow the executive director

to attend all board meetings as if he or she were

a board member but do not give the executive

director voting rights. This is sometimes called

serving on the board ex officio—legal speak for

“nonvoting.”

5/ 1 0 STARTING & BUILDING A NONPROFIT

Don’t make promises you’re not prepared to keep. When you develop your review process, try to leave your options open. Don’t guarantee

that a good review will lead to a raise or promotion,

unless you are ready, willing, and able to follow

through. If your director gets a great performance

evaluation and asks for that promised raise, you’ll

have to give it—even if your nonprofit is struggling

financially—or risk a lawsuit for breach of contract.

The better course of action is to simply state that

you will review the director’s performance annually,

without going into detail about what rewards might

follow.

C. Hiring and Managing Staff and Volunteers

Whether the people who work for your non-

profit are paid staffers or volunteers, the executive

director (or whoever else fills this supervisory role)

must hire and manage them with care. Obviously,

it’s important to hire only those people who can

achieve the goals set for them. (Again, this pre-

sumes that goals have been set for workers before

you start the hiring process—as discussed in more

detail below.) These workers will also need ongoing

management to make sure they’re doing a good job

and dealing with any obstacles along the way.

Many nonprofits start off with all-volunteer help,

including board members. Dedicated volunteers

who are willing to carry out tedious but essential

tasks are often critical to a nonprofit’s survival in its

early days, when budgets don’t allow for paid staff.

When a young nonprofit is able to afford paid staff,

it’s undoubtedly an exciting day—even if just a few

part-timers are brought on board to stuff envelopes

or help with office work.

This section outlines a simple, systematic approach

to recruiting people to work for your nonprofit. The

focus of this approach is on creating clearly defined

positions and organizing them into an efficient struc-

ture. Remember, once pay comes into the picture,

the board usually hires an executive director or top

manager, who in turn hires staff, sometimes with the

advice and consent of a few key board members.

1. Determine What Tasks Need to Be Done

The first step in recruiting volunteers or hiring staff

is to clearly define what needs to be done. Do you

need help answering phones? Keeping databases

current? Organizing events? Planning the year’s work

schedule? Raising funds? The clearer the executive

director or other manager is about what needs to be

done, the easier it will be for workers to meet these

expectations.

When outlining tasks, focus on those that really

help accomplish the goals and objectives outlined

by the board. The task list should be realistic and

achievable based on the resources available, not

a massive laundry list that includes every activity

ever contemplated by the nonprofit. If the executive

director feels that the board is asking for too much,

too soon, or for some other reason finds the list get-

ting out of control, he or she may need to consult

the board and explain that its plans are unrealistic

based on the resources at hand.

2. Create Positions and Job Descriptions

With a solid and realistic task list in hand, the

next step is to group tasks together for each staff

or volunteer position. Certain activities will fall to-

gether naturally. For instance, the tasks of answering

phones, updating membership databases, managing

office supplies, and doing very basic bookkeep-

ing might combine well into one position. Hiring

and managing volunteers might similarly fall into

a distinct task set. Handling event details—such

as setting up and breaking down events and sign-

ing in event participants—is another set of tasks

commonly handled by the same person or people.

Once tasks are grouped together, you can create

job positions to handle those areas. The office tasks

mentioned above, for instance, could go to an office

manager. Tasks such as hiring and managing volun-

teers might well be headed by a volunteer coordina-

tor. Event assistance (set-up, break-down, participant

sign-in, and so on) might not warrant a permanent,

specific position, but could be handled by one or

more “event specialist” volunteers. Obviously, how

you define specific positions for your group will

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 1 1

depend on many different factors, including budget-

ing considerations.

It’s also a great idea to write out a formal job

description for each permanent position. Creating a

job description for each position not only will help

in the hiring process but will also be valuable when

it’s time to review the worker’s performance. Fortu-

nately, writing job descriptions should be easy if you

have created the position from a task-based to-do

list; the job description can simply restate the list in

slightly more polished form.

Another good reason to have formal, written

job descriptions relates to liability issues. If a staff

member or volunteer accidentally injures someone

or otherwise causes damage, it can sometimes be

unclear whether the accident happened while the

worker was doing nonprofit business. A formal job

description will indicate which activities are, in fact,

part of the worker’s duties. If the accident occurred

outside the scope of the worker’s job, then the

nonprofit generally won’t be liable for the accident.

(Chapter 7 covers liability issues in detail.)

Hire and Manage Your Volunteers Carefully

For many nonprofits, building a staff starts with recruiting volunteers. Thankfully for organi- zations all over the country, Americans are a charitable bunch. According to a U.S. Depart- ment of Labor survey, 63.8 million people—or 28.8 percent of the population—spent a median of 52 hours doing volunteer work between September 2002 and September 2003. (“Volun- teering in the United States, 2003,” U.S. Bureau of Labor Statistics, December 2003.)

Don’t make the mistake of thinking that you can be cavalier about recruiting and managing volunteers just because you’re not paying them any wages. All staff—paid or not—have the potential to expose the nonprofit to liability, so it’s essential that you hire only competent, responsible people. Liability issues aside, some volunteers may represent your organization to the public, putting your nonprofit’s reputation at stake. You’ll certainly want to recruit only those volunteers who demonstrate good judgment and people skills to be your public face.

For your day-to-day success, you’ll want to recruit capable, hardworking volunteers to get

the work done. Although it’s not realistic to

demand as much time or expertise from an un-

paid volunteer as you would from a paid staffer,

they certainly must be competent to do the

work. It may be difficult to turn away eager but

inappropriate volunteers, but you should just

say no if they don’t offer the skills or experience

you need. Remember, volunteers never really

come free; the costs of managing them—and

fixing their mistakes, if necessary—can really add

up. Getting rid of a troublesome volunteer will

almost surely take more time and cause more

headaches than never hiring him or her in the

first place. The good news is that developing even a small

volunteer workforce offers nonprofits a great opportunity to develop effective management habits. Especially if the board members of a new nonprofit have little or no management experi- ence, this is a good way to learn basic skills such as creating clear job descriptions, interviewing prospects, and monitoring performance. When it’s time to hire paid staffers, this experience will be invaluable.

5/ 1 2 STARTING & BUILDING A NONPROFIT

Personal Issues ... er, I Mean Personnel Issues in a Small Nonprofit

Giovanna Rossi is the Executive Director of

NARAL Pro-Choice New Mexico (www.pro-

choicenewmexico.org) and knows first-hand the

challenges of hiring staffers for a small nonprofit.

She offers the following perspective and advice

on how to rise to the challenge.

If you’ve mastered the art of dating, you’re

well on your way to understanding the personnel

puzzle. Finding and hiring qualified staffers that

fit well with your organization is surprisingly

similar to the dating game: You identify your needs

and then attempt to find someone qualified and

able to meet them. Of course, neither hiring staff

nor dating is easy. Here are my answers for the

questions that will likely haunt you at night as

you tackle the staffing game.

When is it right for me to enter into a relation- ship with someone?

You’ll know you’re ready when you can’t

imagine spending another 14 hours alone in

that office. However, you should never rush

into something just because you’re desperate

(that’s so unattractive). A good interview process

should include a minimum of two meetings and

a written exercise—not just a writing sample, but

an exercise directly related to the position you’re

filling and your organization’s work.

Why is it so difficult to find someone who fits what I’m looking for?

By the very nature of being a small organization,

staff must be multitalented (able to write a

research report and set up their own email

account), flexible (as in, “Yes, I know we said

we’d do that today, but one of our big donors just

called and wants to have lunch”), and have

compatible personalities (you don’t want five

introverts in the same office together).

Now that the timing is right, how do I know if he/she is “the one”?

Trial and error is the best policy; put her/him

on a three-month probation period, with clear

measurable goals and a weekly reporting system

so you can evaluate as you go.

What if it doesn’t work out? While it’s disappointing and can throw you

off track for a little while, don’t be too rattled.

Minimize the negative impact and get right back

into the game by hiring a temp or going through

the file of resumes that made it to the second

interview but did not get picked the first time.

When it’s a good fit, how do we develop a last- ing relationship?

If you demonstrate your willingness to

commit by offering positive feedback, more

responsibility, and leadership opportunities, you

will find she/he will rise to the challenge. And

be sure to complete the six-month and one-year

evaluations on time—do not put this off.

Why not avoid the pain and go it alone? Well, that would just be plain stupid.

Carefully selecting a staff person, and cultivating

and managing that relationship so that it’s mutu-

ally beneficial, is perhaps the most challenging

part of running a small nonprofit organization.

But the payoff is huge: Having quality staffers is

a major asset to your organization. Remember,

love at first sight is very rare; it can take several

attempts to find what you’re looking for.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 1 3

3. Develop Staff Hierarchies

Progressive-minded folks sometimes look at staff

hierarchies as undemocratic or somehow oppressive.

Without getting into a treatise on the virtues or evils

of various types of power structures, suffice it to

say that a little structure goes a long way towards

ensuring the efficient operation of any organization.

That’s not to say that it’s necessary to create a multi-

layered, command-and-control reporting system. If

your nonprofit will have five or more regular staffers

(either paid or volunteer), however, it’s important

to take the time to designate clear lines of authority

and accountability. In small groups, this often means

that everyone reports to the executive director (or

the board president, in all-volunteer groups). As

the organization grows, you’ll probably want to add

a second layer of managerial accountability—for

example, to require the volunteers who run your

Canoes in the Creek program to report to the pro-

gram director, not directly to the executive director.

4. Create Review Procedures

As discussed in Section B, above, your nonprofit

should have an evaluation procedure in place before

hiring anyone. That way, new employees and key

volunteers know what to expect from the very first

day. The review procedure needn’t be complex; it

might simply identify who will participate in re-

views, when they will occur, and the criteria by

which staff and volunteers will be measured.

5. Create a Staff/Volunteer Handbook

Like the board guidebook discussed in Chapter 4,

a handbook for staff and volunteers serves a vital

role. A handbook gives everyone ready access to

important information about their jobs. Even more

important, creating a staff and volunteer handbook

is a powerful way to minimize the risks posed by

any paid or volunteer staffer that works for your

nonprofit. As discussed in more detail in Chapter 7,

a nonprofit’s potential risk of a liability or contract

lawsuit go way up as soon as you hire even one

employee or volunteer. Not only can that worker

potentially harm someone and expose the nonprofit

to a lawsuit, but he or she also could sue the non-

profit for a host of discrimination, wrongful termina-

tion, or other claims.

Creating a guidebook that outlines clear policies

for employees and volunteers will go a long way

towards minimizing these risks. To create a hand-

book, the executive director or top manager will

have to spend some time coming up with a set of

rules for workers to follow and procedures the non-

profit will use in dealing with workers. Facing and

answering these questions will help ensure that your

employment practices are sound. And compiling

these policies in a guidebook promotes positive staff

relations by demonstrating your nonprofit’s com-

mitment to fair treatment for all workers, according

to the same set of rules. By offering clearly stated

expectations and procedures for treating workers

consistently, a handbook provides a powerful deter-

rent to future workplace trouble.

A staff/volunteer handbook might start with the

nonprofit’s mission and history, then outline the

policies and procedures that apply to the staff and

volunteers. Your handbook can be much like the

ones typically used in for-profit companies, except

that yours will also specifically address volunteers.

Employee handbooks typically include information

on:

• hiring

• hours and flex time

• sick and vacation leave

• parental leave

• employee benefits

• performance review procedures

• workplace behavior

• health and safety

• employee privacy

• conflicts of interest

• discrimination and harassment

• grievance procedures, and

• termination.

Resources for creating your staff/volunteer handbook. While the details of creating a staff/volunteer handbook are beyond the scope of

this book, all nonprofits with any paid or volunteer

workers would be wise to take this task seriously. An

5/ 1 4 STARTING & BUILDING A NONPROFIT

excellent guide is Nolo’s Create Your Own Employee Handbook, by Lisa Guerin and Amy DelPo. This book walks you step by step through creating an

employee handbook, explaining the issues and

offering sample language you can modify to fit your

workplace. Creating Your Employee Handbook, by Leyna Bernstein (Jossey-Bass), is a do-it-yourself

guide designed especially for nonprofits.

Lots of new nonprofits find the prospect of creat-

ing a staff/volunteer handbook too overwhelming

in their harried early days. While this is under-

standable, it’s a good idea to tackle the task earlier

than later. Of course, it will be easier to create a

handbook before the staff grows large and complex.

Also, remember that while the articles of incorpo-

ration and bylaws cover basic personnel issues for

the board of directors, they typically don’t address

detailed staff management issues. It’s simply unwise

to have more than a few workers without a written

policy manual.

6. Orient New Workers

When staffers or volunteers come on board, it’s

important to take some time to introduce them to

your world. For efficiency’s sake, it’s a great idea

to create a standard orientation process—it could

be a video shown in a conference room, a short

meeting at a local café, a walk-through of the non-

profit’s office, or a get-together at a board member’s

house—to explain the ins and outs of working for

the nonprofit. If and when you have several workers

coming on board at once, you can save time by

orienting them as a group.

While all new workers should receive basic infor-

mation about the nonprofit’s mission and activities,

you’ll want to provide a more extensive orientation

for higher-level positions. For example, the board

may want to spend a significant amount of time with

the executive director—say, a series of meetings

over a few days—to make sure he or she really

understands what the nonprofit is about and how

the board wants it to be run. This might include

discussing the nonprofit’s history and any past prob-

lems that the board does not want to see repeated.

For regular staffers or volunteers, on the other hand,

this much information would be overkill. The point

here is to keep those whom you are orienting in

mind when deciding what information to include in

your orientation sessions.

A good starting point is to provide each new

worker with a copy of your staff/volunteer hand-

book. Beyond that, the type of orientation may well

depend on how many staffers or volunteers are

involved. If you’re starting out with just a handful

of staff or volunteers, perhaps a couple hours of

orientation followed by lunch might work. (Keep in

mind that it generally makes sense to have separate

orientation sessions for paid staff and volunteers.)

As your staff grows, you may want to have new

workers attend presentations by the executive direc-

tor and possibly others. Pairing new staffers with

experienced ones for a mentorship period is also a

good way to bring newcomers into the group.

D. Employees and Independent Contractors

There are two different types of paid workers: em-

ployees and independent contractors (ICs). Different

legal and tax rules apply to each, so it’s essential

that you understand the difference between the two.

If your workers fit the description of employees,

you’ll be subject to a number of state and federal

laws that must be strictly observed and taxes that

must be paid. If, on the other hand, your workers

can be characterized as ICs, you’ll be spared

many—but not all—of these requirements.

1. Laws and Taxes

The law puts all paid workers, whether at for-profit

or nonprofit firms, into one of two categories:

employees or independent contractors. (Unpaid

workers fall into another category, “volunteers,”

whose status is less firmly established in law. See

“Rules for Volunteers,” below, for an overview.) In

some situations, you may have some flexibility to

place paid workers in one category or the other. For

the most part, however, the law decides for you.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 1 5

Rules for Volunteers

In the eyes of the law, volunteers are neither

fish nor fowl—they’re not employees or inde-

pendent contractors. This murky legal status

can be treacherous—if a worker is determined

to be an employee and not actually a volunteer,

a whole host of workplace laws (minimum

wage laws, overtime laws, and workers’ com-

pensation coverage, for example) and various

taxes may apply to that worker.

Courts that have considered whether a worker

is truly a volunteer have used an “economic

reality” test. This test considers factors such

as to what degree the worker is dependent on

the employer, and whether the worker had any

reasonable expectation of being compensated

for their work, either at the time they began

working or in the future.

While volunteers can be reimbursed for

out-of-pocket expenses and can even receive

“nominal” benefits, they cannot retain their

status as volunteers if they depend on this

compensation as a basic necessity. If a court

finds that a worker is dependent on food,

lodging, reimbursements for miscellaneous

expenses, or other compensation, a court may

determine that the worker is not truly a volun-

teer but rather an employee. This is definitely

a situation you want to avoid, at the risk of

having to pay back wages, taxes, and penalties.

Workers that qualify as true volunteers will

not be subject to many laws and taxes that

apply to employees. However, volunteers may

be protected by some laws, such as federal

or state workplace safety regulations. Some

states extend federal Occupational Safety and

Health Administration (OSHA) regulations to

volunteers, and others protect volunteers with

their own safety laws. In addition, some states

protect volunteers from workplace discrimi-

nation and/or impose other requirements on

those who employ volunteers. To find out your

state’s requirements, contact your state labor

department.

In a nutshell, an employee is someone who works

for you, on your site, with your tools and equipment,

and according to your rules and procedures. ICs,

on the other hand, are in business for themselves;

they work on their own time with their own tools

and often perform services for a number of different

clients.

This distinction is very important because anyone

who hires an employee (again, whether you’re a

nonprofit or for-profit company) is subject to a num-

ber of taxes, such as payroll tax and unemployment

tax, plus many state and federal legal requirements

governing pay, hours worked, time off, and so on.

By contrast, when you hire an IC, you have fewer

rules to follow and taxes to pay. If you treat a work-

er that the law clearly regards as an employee as an

independent contractor, you risk subjecting yourself

to a huge back-tax bill, plus interest and other state

and federal penalties.

2. IRS Criteria

To stay out of trouble with the IRS, you should

understand how it decides whether a worker is an

employee or an IC. Keep in mind, however, that

your state may have its own rules about classifying

workers, which might be stricter than or otherwise

different from the IRS rules. Because state penalties

can be at least as harsh as those imposed by the

IRS, make sure you also understand the rules in

your state. An experienced accountant should be

able to help you with this. Or contact your state’s

agency in charge of worker status rules—generally

your state’s labor (or unemployment) agency or tax

department.

The IRS has some guidelines it uses to decide

whether a particular worker should be treated as an

employee or an IC. As a general rule, the IRS says

a worker is an employee if you have the right to

control how the work gets done. The IRS considers

a worker to be an employee when he or she:

• works only for you and not for any other non-

profit or business

• works on your premises

• uses your tools and equipment

• follows work hours set by you

5/ 1 6 STARTING & BUILDING A NONPROFIT

• follows your instructions on how to complete

a job

• receives reimbursement for expenses incurred

in doing a job

• can be fired at any time, with or without good

cause

• supervises any of your other workers, or

• receives any employee benefits, such as holi-

day pay, vacation time, or health insurance.

On the flip side, the IRS says your worker should

probably be considered an independent contractor

if you “have the right to control or direct only the

result of the work done … and not the means and

methods of accomplishing the result.” (IRS Publica-

tion 15-A, Employer’s Supplemental Tax Guide.) The

IRS considers workers to be independent contractors

when they:

• work for a number of different nonprofits,

businesses, or clients

• are incorporated as an independent business

• have their own office, studio, garage, or other

permanent place to work

• use their own equipment and tools

• set their own hours

• use their own judgment as to how best to

complete a job

• don’t get reimbursed for expenses incurred in

doing a job, and

• advertise their services to the public.

If a worker you hire displays some characteristics

of both categories, it can hard to figure out how that

worker should be classified. Ultimately, you’ll need

to consider the factors outlined above, weigh them

against each other, and possibly get expert advice to

decide whether a worker should be classified as an

employee or as an independent contractor.

EXAMPLE: Debbie does a lot of freelance writing and editing for a nonprofit health care

foundation, The Health Trust. She works quite

a bit for The Health Trust, editing about six

big projects per year, but also does four or five

jobs per year for other nonprofits and for-profit

businesses. Debbie always works at home,

receives minimal instructions as to how to do

her work, and does her writing and editing

according to her own schedule. Debbie can

probably be categorized as an independent

contractor.

Another worker, Sascha, holds the title of

Editorial Writer at The Health Trust. He works

pretty much exclusively for the nonprofit,

though occasionally he takes on an outside

project, such as writing an article for a health

care magazine. Sascha works from home a

couple of days per week but has a desk and

computer at The Health Trust’s office. He works

closely with the editorial staff at The Health

Trust and has some management responsibility

over a couple of editorial assistants. The gov-

ernment is likely to see Sascha as an employee.

It would be risky to try to treat him as an inde-

pendent contractor.

In borderline situations, it’s safer to treat a worker

as an employee than to risk the penalties that may

result if the IRS or your state decides you’ve misclas-

sified an employee as an IC. The IRS and most states

tend to disfavor independent contractor status—

they’d much rather see borderline workers treated as

employees, so that the employer can withhold taxes

from their paychecks, than as ICs who are respon-

sible for reporting and paying their own taxes.

The IRS offers more information online and in

printed guides about how to distinguish employees

from independent contractors. Publication 15-A,

Employer’s Supplemental Tax Guide, offers more

specific information on classifying workers as

employees or ICs. IRS Publication 1779, Independent

Contractor or Employee, is a short fact sheet with

useful tips. Another source of information is the IRS

internal training manual, “Independent Contractor or

Employee?” While this guide is not legally binding,

it’s a useful window into how auditors determine

worker status. All these guides can be downloaded

from the IRS website at www.irs.gov (look in the

Small Business/Self-Employed section).

If you still can’t decide how one of your workers

should be classified, there are a few ways you can pro-

ceed. One is to consult a lawyer or an accountant

who understands business tax laws. Another option

is to go straight to the horse’s mouth and ask the

IRS or your state agency to tell you how it would

classify a certain worker. The IRS will classify your

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 1 7

worker for you if you file Form SS-8, “Determination

of Employee Work Status,” to request a formal ruling

on a worker’s status. You can get this form from

an IRS office or from its website, at www.irs.gov.

(Don’t be surprised if the IRS says your worker is an

employee!)

For a state determination, contact your state

employment or other agency that governs worker

classification and find out what procedure it uses.

Like the IRS, it’s common for state agencies to classify

workers as employees rather than independent con-

tractors. You’ll have to decide for yourself whether

to leave the determination up to these agencies or

decide how to classify your workers on your own.

E. Required Paperwork, Filings, and Taxes

When hiring any workers—employees or independent

contractors—you’ll need to deal with some bureau-

cratic tasks. As described below, you’ll have more

work to do when hiring employees than ICs, but

hiring independent contractors does trigger a require-

ment or two as well. This section outlines some tasks

to anticipate when hiring either type of worker.

1. Rules for Employers

A raft of legal and tax requirements kick in when

you hire your first employee. Most of these apply to

all employers, whether nonprofit or for-profit. Not

only will you have to pay a number of employment

taxes, but you’ll also need to register with several

government agencies, buy certain types of required

insurance, and comply with various federal and state

laws, such as those requiring you to keep a smoke-

free workplace and to post certain notices at your

nonprofit’s premises.

While the details of the many laws that apply to

employers are beyond the scope of this book, the

major requirements are listed below. If your needs

can’t be met by hiring an independent contractor

and you must hire an employee, you’ll need to

consult additional resources to make sure you com-

ply with the many state and federal laws governing

employers. (Some excellent sources of information

are listed below.)

In general, nonprofits with one or more employ-

ees are required to do the following:

• Comply with state and federal wage and hours

laws. The federal Fair Labor Standards Act

establishes a federal minimum wage (currently

$5.15 per hour) and rules for paying over-

time. Many states also have their own wage

and hour laws, and some impose a higher

minimum wage (or more generous overtime

rules) than the federal government.

• Obtain workers’ compensation insurance and

follow rules on notifying employees of their

right to workers’ compensation benefits. You

may typically purchase this insurance from a

state fund or from a private workers’ compen-

sation insurance company.

• Comply with state and federal job safety laws,

administered by the federal Occupational

Safety & Health Administration (OSHA) and

the agency in your state that governs work-

place safety. Among other things, these laws

require you to file an illness and injury pre-

vention plan, report work-related injuries and

illnesses that result in lost work time, and

keep a log of all work-related injuries and ill-

nesses. For more information about OSHA

regulations, visit the OSHA website at www.

osha.gov, or contact OSHA at U.S. Depart-

ment of Labor, Occupational Safety & Health

Administration, Office of Public Affairs, Room

N3647, 200 Constitution Avenue, Washington,

DC 20210, 202-693-1999.

• Withhold federal income taxes and FICA taxes

(Social Security and Medicare taxes) from

employees’ paychecks and periodically report

and send these withheld taxes to the IRS.

• Report wages and withholding to each

employee and to the IRS with Form W-2.

• Pay the employer’s portion of Social Security

and Medicare tax for each employee, based

on the employee’s wages.

• Withhold state income taxes from employees’

paychecks and periodically deposit them with

your state income tax agency.

• Pay federal unemployment taxes. It’s the

sole responsibility of the employer to pay

the Federal Unemployment Tax (FUTA)

5/ 1 8 STARTING & BUILDING A NONPROFIT

directly to the IRS; you may not deduct it

from employees’ paychecks. You must report

FUTA taxes paid annually on IRS Form 940,

Employer’s Annual Federal Unemployment

Tax Return.

• Pay state unemployment taxes (not in all

states). Most states require employers to pay

unemployment taxes, which go into a state

unemployment insurance fund. Generally,

you can take a credit against your FUTA tax

for amounts you paid into state unemploy-

ment funds. A list of state unemployment tax

agencies is available in IRS Publication 926,

Household Employer’s Tax Guide, available

from the IRS’s website at www.irs.gov.

If you’re overwhelmed by this list, you may want

to consider whether you can meet your needs with

a combination of paid independent contractors and

volunteers. At the very least, you shouldn’t jump into

hiring employees without having a very good reason

to do so.

Additional resources on hiring employees. Nolo publishes several books and other re-

sources on hiring employees. Everyday Employment Law, by Lisa Guerin and Amy DelPo, is an excellent introduction to the rules employers need to know,

including rules on overtime, workplace policies, and

antidiscrimination laws. For in-depth information

on laws affecting employers, see The Employer’s Legal Handbook, by Fred Steingold. For a guide to steering clear of legal problems with your employees,

check out Dealing With Problem Employees, by Amy DelPo and Lisa Guerin.

2. Rules When Hiring ICs

While hiring independent contractors is generally

much simpler than hiring employees (and avoids

several taxes), it does trigger some legal require-

ments. One of the main rules is that if you pay any

independent contractor more than $600 in a year,

you need to report those payments on Form 1099,

which you must send to the worker and the IRS.

If the IC is doing business as a corporation, you

don’t have to file a 1099 (unless the IC has formed a

medical corporation).

When hiring an IC, be sure to get basic informa-

tion for your records, both for reporting purposes

and to have as documentation in case of an audit.

At a minimum, make sure you get the IC’s business

name, address, and federal taxpayer ID number.

The easiest way to obtain this is to have the IC fill

out and sign IRS form W-9, Request for Taxpayer

Identification Number. You’ll keep this form in

your files; you don’t have to submit it to the IRS.

ICs that operate as sole proprietorships without any

employees may simply use their Social Security

number as their taxpayer ID. Other ICs will have

obtained an employer identification number (EIN)

from the IRS for their business. Either one is fine.

If you can’t or don’t obtain the IC’s taxpayer ID

number, you may need to withhold payments from

the IC and deposit them to the IRS. Called “backup

withholding,” this is required if you do not have

the IC’s taxpayer ID number and you pay the IC

$600 or more during the year. For more information

on backup withholding, see the instructions for

IRS Form 945, Annual Return of Withheld Federal

Income Tax.

Put your IC agreements in writing. While it may not be legally required, it’s always a

good idea to use a written contract when you hire

an IC. Besides helping to avert garden-variety con-

flicts over the terms of the job, having a contract

in place will also help you prove that the worker is

an independent contractor, not an employee. By

stating in your agreement that the worker is an inde-

pendent contractor, you are establishing an intent

to create an independent contractor relationship.

This may turn out to be helpful evidence in the case

of an audit. If all other evidence demonstrates that

the worker is an employee, however, that’s how

the IRS and your state will probably classify him

or her. Remember, the only true test of a worker’s

status is how the worker is actually treated. If you

treat workers as employees—require them to work

on site, define their hours, closely supervise their

work, and so on—merely calling them independent

contractors in your contracts won’t magically change

their status.

YOUR WORKFORCE: STAFF AND VOLUNTEERS 5/ 1 9

More resources on independent contractors. For detailed information about hiring inde-

pendent contractors and sample IC contracts, see

Working With Independent Contractors, by Stephen

Checklist: Your Workforce: Staff and Volunteers

Decide what type of management strategy will work best for your nonprofit. In general,

the more activities and workers you have, the

more structure you’ll need to manage them.

Outline the tasks that need to be done, group them into logical sets, and create staff posi-

tions.

Write out a job description for each position.

Outline a hierarchy of positions within the organization, indicating who reports to

whom.

Create policies for performance reviews.

Create a user-friendly handbook for your staff and volunteers containing information about

the nonprofit and all important workplace

policies.

Orient new workers soon after hiring them.

Familiarize yourself with the legal differences between employees and independent con-

tractors. Don’t avoid the obligations of having

employees by misclassifying your workers as

independent contractors.

Make sure you’re ready to take care of all the legal, bureaucratic, and tax requirements that

apply to employers before you hire your first employee.

■

Fishman (Nolo). Also check out Nolo’s website

at www.nolo.com for free information and other

resources on hiring independent contractors.

C H A P T E R

1 Chapter 6

Fundraising

A. The Golden Rules of Successful Fundraising ....................................................... 6/3

1. Relationships Are Everything ............................................................................ 6/3

2. Target the Best Potential Donors ....................................................................... 6/3

3. Build a Compelling and Detailed Case ............................................................ 6/4

4. Put Your Board of Directors to Work ................................................................ 6/4

5. Focus on the Big Picture ...................................................................................... 6/5

B. Your Fundraising Plan ................................................................................................ 6/5

C. Define Your Fundraising Targets and Budget ........................................................ 6/6

1. Fundraising Targets .............................................................................................. 6/6

2. Fundraising Budget .............................................................................................. 6/7

D. Find Prospective Donors ........................................................................................... 6/8

1. Start With Your Closest Contacts ...................................................................... 6/8

2. Use Networking Techniques .............................................................................. 6/9

3. Keep Your Lists Organized and Updated ....................................................... 6/10

E. Define Your Fundraising Campaign ...................................................................... 6/11

1. Membership Drives ............................................................................................ 6/12

2. Fund Drives .......................................................................................................... 6/13

3. Capital Campaigns ............................................................................................. 6/14

4. Planned Giving .................................................................................................... 6/14

F. Fundraising Tools ...................................................................................................... 6/14

1. Asking for a Gift by Phone, by Email, or in Person ....................................... 6/15

2. Direct Mail ........................................................................................................... 6/19

3. Special Events ...................................................................................................... 6/22

4. Sell Products or Services ................................................................................... 6/22

6/ 2 STARTING & BUILDING A NONPROFIT

G. Funding From Grants ................................................................................................ 6/25

1. Researching Available Grants ........................................................................... 6/25

2. Writing Grant Proposals .................................................................................... 6/26

3. Corporate Sponsorships ................................................................................... 6/27

H. The Law of Fundraising ............................................................................................ 6/28

1. Disclosures to Donors ....................................................................................... 6/28

2. Charitable Solicitation Registration and Reporting ..................................... 6/29

I. Working With Professional Fundraisers ............................................................... 6/30

FUNDRAISING 6/ 3

O nce you’ve developed your strategic plan

and initial budget, and brought in some

people to get your organization up and

running (with the help of the previous chapters),

it’s time to figure out how to raise the funds you

will need to reach your goals. This chapter will help

even the least-experienced fundraiser understand

how to approach the fundraising process, from

overall strategies to specific methods for bringing in

money. Even if you’ve already thought about how

and where your organization will get funding—or,

better yet, you’ve already lined up donors who are

willing to provide the necessary start-up money—

this chapter will help you turn your preliminary

ideas into a solid fundraising plan for your organiza-

tion.

Want detailed information on fundraising strategies? This chapter provides the basic information you’ll need to know about fundraising

as you get your nonprofit off the ground. Once

you’re ready to kick your fundraising machine into

gear, however, you will want more detailed informa-

tion on fundraising strategies, methods, budgeting,

planning, and more. You’ll find everything you need

in Effective Fundraising for Nonprofits: Real-World Strategies That Work, by Ilona Bray (Nolo).

A. The Golden Rules of Successful Fundraising

Before you can begin drafting a fundraising plan,

you’ll need to know some fundamental fundraising

rules. Whether you’re trying to raise a few hundred

dollars or a few hundred thousand, following these

five tried-and-true strategies will help you stay

focused on your best prospects and improve your

chances of success.

1. Relationships Are Everything

Any professional fundraiser will tell you that the

most successful fundraising efforts are built upon

ongoing relationships with donors. Just as repeat

customers are crucial to the success of most small

businesses, committed supporters are essential to a

nonprofit’s success. The average American is asked

for money dozens, if not hundreds, of times per

year, to which he or she will almost always respond

“No.” As you well know, converting this “No” to a

“Yes” is not an easy task; even the most persuasive

canvasser or telemarketer probably won’t be able to

change your mind if you’re just not willing or ready

to donate. But once you donate to an organization

for the first time, your mindset has changed. All of

us are much more inclined to support an organiza-

tion we have come to know and trust.

Because these ongoing relationships are so impor-

tant, you should make every effort to build strong

connections with your first-time donors so they con-

tinue to support your organization in the future. A

prompt thank-you note is an obvious starting point

for building this relationship; other methods of rec-

ognizing and encouraging supporters will vary from

one organization to the next. But your fundamental

goal is always the same: to nurture a strong, posi-

tive relationship with your supporters, so they find

it a pleasure to support your group. If your support-

ers feel appreciated and believe the organization is

doing good work, they gain something, too—pride

and goodwill from contributing to your nonprofit’s

efforts (and perhaps a tax write-off as well).

Contributors can provide more than just money. Besides the valuable funding they provide, long-term contributors may offer many

other means of support for your organization,

including positive word of mouth, willingness to

volunteer, and networking opportunities with their

own contacts.

2. Target the Best Potential Donors

It’s important to focus your fundraising efforts on

your most likely supporters, not on the whole wide

world of people and groups who might possibly

contribute to your organization. Few nonprofits

have the resources to send out hundreds of direct

mail appeals or blanket the television or radio air-

waves with requests for support. Asking the right

people—and using the right appeal for the people

you approach—is key to cost-effective fundraising.

The best fundraising uses an “inside out” approach,

focusing on those closest to the organization first

6/ 4 STARTING & BUILDING A NONPROFIT

and then widening the scope to target additional

prospects. The board of directors and their close

contacts, for example, should be the first people you

solicit for funds, not the last. There may be great

prospects “out there,” some of whom might turn out

to be deeply committed and generous supporters,

but it makes more sense to begin spending your

limited fundraising resources on the contacts closest

to home.

Once you identify your targets, it’s also important

to spend some time figuring out what type of appeal

is most likely to resonate with them before you ask

them to donate. The better you understand the inter-

ests and motivations of your prospective donors—in-

dividuals, corporations, and foundations alike—the

better you’ll be able to tailor your fundraising ap-

peals to reach your target audience. (Finding pros-

pects is discussed in greater detail in Section D,

below.)

3. Build a Compelling and Detailed Case

When you ask potential donors for money, you

must have an absolutely compelling reason for why

they should support your organization. Why should

donors reach into their pockets and give your group

money they could spend on themselves or give to

thousands of other good causes? As countless failing

nonprofits have learned, just stating that your orga-

nization works for a worthwhile cause is unlikely

to result in a pledge of support. To get people to

donate now, it’s best to convey a pressing need, a

sense of urgency, and a specific program or project

for which their donations are needed.

EXAMPLE: FoodAid, a nonprofit dedicated to sending food to drought-stricken developing

countries, is creating a fundraising brochure.

The office manager drafts the following text:

“FoodAid’s mission is to provide food to

starving people in underdeveloped areas

stricken by drought. To carry out its mission,

FoodAid needs your support. Please consider a

tax-deductible donation of $50 to help us feed

the hungry.”

One board member (who happens to be

a marketing copywriter) suggests that the

brochure would be much more powerful if it

conveyed a sense of urgency and provided spe-

cifics. He rewrites the draft to read as follows:

“FoodAid is committed to providing food

shipments to starving people in underdeveloped

areas stricken by drought. Without our food

shipments, hundreds of children and adults will

starve to death each year. We are currently in

need of funds for a Spring 2005 food shipment

to Brazil’s drought-plagued Nordeste region,

which is home to one-third of Brazil’s popula-

tion. Your tax-deductible donation of $50 will

help us get the next shipment of food to those

who desperately need it.”

Many nonprofits have a variety of fundraising

drives in any given year, some tailored to meet

specific needs and some more general in nature.

No matter what type of campaign you’re planning,

it’s important to convey more than just your overall

mission to potential donors—they want to know

why you need money. By conveying a sense of

urgency in your appeal, you are more likely to

engage potential supporters and convince them to

help.

Randolph Belle—Director of Information, East Bay Nonprofit Center, Oakland, California

Fledgling nonprofits should test the merits and

effectiveness of their program early on—aim to

create a success story. It’s much easier to raise

money when you can point to specific things that

you’ve done and successes you’ve achieved, rather

than merely talking about what you have a mind

to do.

4. Put Your Board of Directors to Work

A nonprofit’s directors should be crucial players

in the fundraising process. By agreeing to join the

board, each member has made a commitment to

keep the organization on track, which includes

maintaining sound finances. At a minimum, board

members should help locate and contact prospective

donors in your community. This is especially

important for fledgling nonprofits that haven’t had

FUNDRAISING 6/ 5

the chance to develop relationships through their

accomplishments. When a nonprofit has a short

or nonexistent track record, its fundraising efforts

depend largely on its board members’ relationships

in the community. All board members must under-

stand this important role before they join the board

so they will be active in forging relationships with

key fundraising targets.

Board members can take different fundraising roles. While some board members will be better rainmakers than others, all should be

involved in some aspect of the fundraising process.

If a board member is very uncomfortable asking

people for money, he or she could focus on creating

fundraising materials or planning an event. No

matter how they choose to participate, all board

members should play a part in fundraising, whether

behind the scenes or leading the charge.

Board members also typically help with fund-

raising by donating their own money to the organi-

zation. While you never want to exclude talented

people from your board simply because they can’t

donate at a high level, board members should be

among the first to contribute their own money to

the nonprofit, in an amount they can afford. This

not only provides crucial start-up money in a non-

profit’s early days, but it also demonstrates to other

potential donors that the board members are strong-

ly committed to the organization.

In fact, foundations, government agencies, and

other institutional donors commonly ask how much

money the board contributes to the organization.

Ideally, all members of the board should contribute

at a level higher than your standard suggested con-

tribution. Of course, this may not always be possible,

but the closer you can get to this ideal, the better.

5. Focus on the Big Picture

Always develop your fundraising goals with the big

picture in mind, not just to meet your group’s imme-

diate needs. Fundraising is an ongoing process, not

a one-time event. The most effective fundraising plan

will consider factors beyond immediate expenses; it

will anticipate upcoming events or expected accom-

plishments and plan appropriate fundraising activities

to support and capitalize on those events. Your

fundraising efforts and your strategic plan should

dovetail neatly so that you raise enough donations

to fund your activities, and your activities, in turn,

create opportunities for future fundraising.

Also keep in mind that it’s easier to raise money

with an impressive success story under your belt.

For example, a fledgling nonprofit with minimal

funds might plan to accomplish some meaningful

(yet inexpensive) tasks early on so that it can point

to those accomplishments when embarking on its

first large-scale fundraising activity.

B. Your Fundraising Plan

Because successful fundraising involves a swarm

of large and small details (from deciding on

fundraising tools to determining who will design the

brochure and update the mailing list), it’s crucial to

establish a solid and clear fundraising plan: a priori-

tized list of tasks you’ll need to accomplish to fund

your activities successfully. The list below outlines

some basic steps you’ll have to take to develop a

fundraising plan. Of course, each organization is

different and your approach may differ somewhat,

but most nonprofits will need to tackle the following

tasks in one way or another:

1. Determine your needs and your fundraising budget. Before you can decide how to raise funds, you’ll need to decide how much you

must raise and how much you are willing and

able to spend to execute your fundraising

efforts.

2. Compile a detailed list of prospects. You’ll need to identify who should be at the center

of your fundraising efforts and who should

be lower-priority targets. Most nonprofits seek

funds from individuals, businesses (big and

small), foundations, government agencies

(local, state, and federal), and any other entities

that may be interested in funding their efforts.

3. Define your overall campaign. Decide how many and what type of fundraising “pushes”

you’ll hold each year. For instance, a nonprofit

may develop a plan to hold one membership

6/ 6 STARTING & BUILDING A NONPROFIT

drive, apply for three grants, and hold one

fundraising event, supplemented by two issue-

oriented special appeals each year.

4. Choose your fundraising tactics. Decide how you’ll reach your potential contributors—for

example, through direct mail, email, street

fairs, or door-to-door canvassing.

5. Research corporate and government funders and learn their applications processes. If you plan to apply for grants, you’ll need to learn

about the funding priorities of the grant-givers

and their rules and deadlines for applying for

funds.

6. Assign duties. Once your plan is well defined, you’ll need to delegate the various tasks to

your staff and volunteers.

7. Raise those funds! Planning only takes you so far—at some point, it’s time to roll up your

sleeves and get to work.

The rest of this chapter looks at each of these

tasks in greater detail.

Michael D. Hohner—Fundraising consultant and President of Hohner & Company, LLC in Oak Creek, Wisconsin

I have worked in the nonprofit field for more

than 30 years—the last ten as a fundraising

consultant—so I have worked with dozens and

dozens of nonprofits in education, health care,

social services, and the arts. To be successful in

fundraising, it’s important to start with a good

plan and to involve talented and connected

people in executing it.

Fundraising works best when it is mission-

driven. Make certain your staff, volunteers, and

donors all know and believe in your organiza-

tion’s mission. Then, you can’t fail.

C. Define Your Fundraising Targets and Budget

Start your fundraising plan by figuring out how

much money you need to raise and how much you

can spend on your fundraising efforts. The amount

of money you need will greatly influence the

strategies you use to raise it. Raising $5,000 to feed

the pets of homeless people will require a vastly

different approach from raising $5 million to build a

center to care for homeless people themselves.

Remember that you won’t pocket every penny

you raise—you’ll need a reasonable budget to carry

out your fundraising campaign. Printing costs, post-

age for mailings, and rental fees for special events

are a few typical fundraising costs you may face.

Unfortunately, you will probably have to pay at

least a portion of these costs up front, before you’ve

brought in your first dime of donations.

Randolph Belle—Director of Information, East Bay Nonprofit Center, Oakland, California

Remember to create a sound model for success.

Don’t base your initial budgeting and planning

on giving everything away for free. Draft a

budget by accounting for all anticipated expenses

and possible revenue; the difference is your

fundraising goal.

1. Fundraising Targets

Start your planning with the most basic question:

How much money are you trying to raise? Chapter 3

explained how to draft an initial budget, which should

give you a pretty good idea of how much money

you need to raise. If your budget includes an expect-

ed $5,000 in membership revenues, $10,000 in grants,

and $2,500 in special events, then a portion or all of

these amounts may be your fundraising target. How

much you’ll seek in any given fundraising campaign

will depend on how many and what types of cam-

paigns you plan to have each year.

For example, say your nonprofit has budgeted

an expected $3,500 in membership fees and $7,500

in sponsorships. If you plan to have two mem-

bership drives per year, you might set a target of

$2,000 for your first drive—more than half of the

total budget in order to jump-start the membership

income—and $1,500 for the second. Similarly, if you

plan four sponsorship solicitations per year, you

could set equal targets of $1,875 for each. If your

first fundraising campaign of the year included a

membership drive and a sponsorship solicitation, the

overall target for the campaign would be $3,875.

FUNDRAISING 6/ 7

How to define and execute your fundraising

campaigns is discussed later in this chapter.

The goal here is simply to come up with your

fundraising targets, which will depend largely on

your overall budget. Your budgeted income esti-

mates will be the foundation for your fundraising

targets.

Sometimes a nonprofit suddenly needs to raise

money for something specific that wasn’t included

in the budget, such as the cost of defending a law-

suit or the cost of a new computer to replace one

that was stolen. In this case, your fundraising goal is

defined for you: You’ll have to raise enough money

to cover your pressing financial need.

2. Fundraising Budget

Once you’ve estimated how much money you’ll need

for your start-up costs, programs, overhead, and

capital expenses, you’ll need to figure out another

piece of your budget puzzle: how much money you

can and should spend on your fundraising plan.

While creative planning can keep fundraising costs

low, most nonprofits will need to spend at least

some money in order to make money. This section

will help you assess your resources and come up

with an efficient and realistic fundraising budget.

a. Evaluate Your Resources

Most fledgling nonprofits don’t have the luxury of

simply deciding how much to spend on fundraising.

Rather, their fundraising budgets will be defined by

the cold, hard reality of their limited resources. For

example, if your nonprofit needs to raise $1,000 for

its 501(c)(3) application fee and a computer, you’re

in no position to launch a direct mail campaign that

could cost thousands of dollars to implement.

One way to keep costs down when developing

a fundraising budget is to recognize and use non-

monetary resources. When you have limited cash,

focus on the other resources available to you,

including nonmonetary resources and “in-kind”

donations such as a volunteer who can attract other

volunteers, a personal connection to a journalist, or

a supporter who owns a printing business and will

donate the production of your first brochure. Ideally,

this grassroots style of fundraising will allow you to

achieve some noteworthy results, attract more funds,

and put you in a better position to launch a bigger,

more expensive fundraising campaign the next time

around.

EXAMPLE: The Citizens for a Green Down- town (CGD) is a new nonprofit that needs

money to buy computers and printers for their

offices. The board of directors puts together

a fundraising plan and budget centered on a

direct mail campaign. No matter how conserva-

tive the board is with its estimates, the costs

of producing the direct mailing—including

graphic design, printing, postage, and fees for

mailing lists—are discouragingly high.

The board decides to change course and

puts together a list of resources they have or

are confident they could get to offset the cost

of the direct mailing. One board member knows

basic graphic design, so he volunteers to create

a simple brochure to use when approaching

prospective donors. Another board member,

who has a high-quality color photocopier at her

business, offers to copy and fold 100 brochures.

Several board members have close connec-

tions with the director of a downtown farmer’s

market, who might let them use a booth for

free for one month to promote the nonprofit

and solicit funds from shoppers. This would

allow CGD to reach the public without having

to send a mailing. One board member offers

to organize volunteers to staff the booth dur-

ing the market. While such exposure would

normally be cost-prohibitive, the group can pull

this one off without laying out any cash.

b. The Cost of Fundraising

You should do everything you can to keep your

fundraising costs low. It’s important for your budget,

and for public perception, that your fundraising

costs don’t eat up a huge chunk of the total amount

of money you raise. Although there is no legal rule,

your fundraising costs should be no more than

about 25% of your funds raised. This is especially

true if you plan to approach foundations, govern-

6/ 8 STARTING & BUILDING A NONPROFIT

ments, or other sophisticated major donors, who will

want to see that most of the money you raise goes

towards your nonprofit’s mission and not towards

more fundraising.

The cost-effectiveness of fundraising methods

varies greatly. Holding a special event is an expen-