Image via Creative Commons (Tobias Begemann)

How to Start a New 501(c)(3) Nonprofit

Jeremy Gregg fundraising, Philanthropy Leave a Comment

Image via Creative Commons (Tobias Begemann)

Image via Creative Commons (Tobias Begemann)

Countless times over the past decade or so, I have received the following basic email/phone call/LinkedIn message:

“I recently met someone who wants to start a nonprofit. They are incredibly passionate about their cause and would be great at it, but they need some help with raising money. Could you speak with them and tell them how to get started?”

I almost always accept the call, because there are few people I enjoy meeting more than social entrepreneurs (and yes, I know this is a heavily debated term, but I mean it here simply as someone who wants to start a business whose primary mission is social impact instead of financial return). These are people who care enough about others to pour their time, talent, and treasure into launching a venture dedicated to improving the world. They are, without a doubt, some of the best conversations I have ever had.

And yet, they are also some of the hardest. I have nicknamed myself “The Dream Crusher,” because I am honest with them about my opinions on their ideas. And I am shocked at how few of them have given any thought to the following ….

The most important question to ask:
Why does the world need another nonprofit?

According to the National Center for Charitable Statistics (NCCS), there are more than 1 million public charities in the U.S. alone! There are also another 368,000+ other types of nonprofits, such as chambers of commerce, fraternal organizations and civic leagues.

Whatever your idea is … there are probably hundreds, if not thousands, of other established organizations trying to do the same thing. That doesn’t mean that you don’t have an innovative idea that could do a better job. But, there are some alternate paths to explore before going through the pains (and expense) of launching a new 501(c)(3) nonprofit.

(But, if you are dead set on doing so, check out this informative article, “How do I start a nonprofit organization?,” via GrantSpace.)

So, you wanna start a nonprofit?

First of all, thank you for giving a damn. That’s the common thread amongst the many people with whom I have had the conversations above. They all want to make the world a better place. If we had more people like you … perhaps we wouldn’t need a million nonprofits to meet society’s challenges?

Second, understand that “starting a nonprofit” is NOT your goal. Delivering your mission is the goal (e.g. helping kids who are exiting the foster care system … or supporting veterans returning from war … or whatever it is that drives you to pursue this venture).

And there are many ways to deliver your mission WITHOUT starting a 501(c)(3).

Here are the questions I always ask people like you:

  1. Is there an existing organization with whom you can partner to simply expand their work into a geographic/programmatic area they do not currently address?

For example, you want to open an after-school program in your neighborhood. Could you instead partner with Boys and Girls Club, YMCA, Camp Fire, or another after-school provider to bring their programs to your area? Or maybe you have such programs in your area but they are not delivering the programs the way that you believe they should. Could you explore collaborating to help them improve their work, expand their offerings, etc.

Whether you want to serve kids, seniors, veterans, the homeless, or anyone else … there is almost certainly an established organization dedicated to doing the same thing. In the same way that franchising is often an exponentially easier to open a for-profit business, partnering with one of these providers to raise money to expand their work is a much more more efficient way to meet your mission. Starting a 501(c)(3) nonprofit involves significant expenses — like hiring a CPA to handle your annual tax filings and to conduct an annual independent financial audit; setting up an administrative office to handle payroll, accounting, etc.; launching brand new fundraising efforts that compete with those of existing organizations; etc. — all of which are avoidable by partnering with an existing organization.

NOTE: Almost every serious donor you would approach to fund your new venture will ask you this question. You need a better answer than, “Yeah, but I want to do it my own way.” The only way that I can interpret that response is that you care more about being the one helping people than actually ensuring that people get the help they need.

  1. If the answer to #1 is “no,” is there a way to incubate the new nonprofit as a program of an existing organization so that you can avoid all the administrativia cited above?

Doing so would also leverage some of the existing organization’s financial credibility in terms of administration, which is a major barrier to securing funding.

This doesn’t even have to be a related charity (though it helps). While it would be odd for a new pet shelter to be incubated as a program of a prep school, it would certainly be easier than setting it up as a stand-alone organization. There also are “umbrella” organizations whose broad missions could feasibly encompass the incubation of such ventures, like your local United Way.

It is more complex than scenario #1, because the incubating organization has to setup some internal controls and likely run separate financials for the program, but there are also some practical benefits to this scenario that you don’t receive in the ones below:

  • Administration is already setup and running smoothly — so you don’t need to worry about bookkeeeping, annual tax filings/audits, payroll, liability insurance, etc. This is the greatest advantage.
  • Employees would be a part of a larger workforce, which could result in better health benefits, access to more human resources options, and potentially a better work environment (even if they don’t work in the same office, they might be able to participate in activities organized by employees of the incubating organization).
  • The board for your venture would only need to be an advisory board, and not have to worry about being a governing board with legal and fiscal responsibility for the organization (which can make it easier to recruit high-power advisors, since many wealthy/well-connected people are hesitant to expose themselves to the liability of being a governing board member for a startup charity).

There can be some challenges with fundraising, particularly in the area of foundation grants (e.g. if your program is a strong fit for a grant from a foundation that already donates to your fiscal sponsor, that scenario has to be explained very clearly so that the two requests are not seen as coming from the same organization … which could result in neither getting funded). However, all of this can be cleared up with a simple MOU (“Memorandum of Understanding”), or similar document, that outlines the fiscal arrangement between the organizations.

(There is a really detailed article about fiscal sponsorship here that includes links to the Fiscal Sponsor Directory, “a tool created by the San Francisco Study Center to help connect community projects with fiscal sponsors.” One such foundation that does this is the Edward Charles Foundation.)

  1. If the answer to #2 is “no,” could you set it up as a fund of a community foundation to achieve similar objectives?

This is how I first established Executives In Action, which operated for years as a fund based out of the Communities Foundation of Texas. In North Texas, The Dallas Foundation also has a specific program for this outlined here.

  1. In any of these cases — including proceeding with launching your own 501(c)(3) — focus on collaborations whenever possible.

That helps to leverage the credibility of existing orgs — even if you just use their curriculum or consider them program advisors — to avoid the very valid criticism of, “why do we need another nonprofit?!”

  1. Please, for the love of God, follow Peter Drucker‘s advice: do one thing well. Demonstrate results, prove outcomes, then go to market to raise money based on that successful model.

Too many social entrepreneurs launch with a scattered vision of solving all of the world’s problems. I understand that your dream might be to operate a green homeless shelter that is entirely off the grid and that includes an organic farm in which the residents can secure living wage jobs producing vegan, gluten-free foods while also learning to speak English, manage their addictions, save 50% of their income, and launch their own tech startup.

But start with one of those. Offer an ESL program for the homeless in one of your community’s existing shelters. Prove that you can help them to learn English. Then, help them to use that skill to secure jobs and track how you can help them to improve their self-sufficiency. Then, you can consider adding the financial education component … and once it is successful, then expanding to include the other things … culminating in the grand opening of your great green dream.


Written by Jeremy Gregg, the Managing Director of Gregg Partners. 

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