To 501(c)(3) or Not to 501(c)(3): Is That the Question?

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In the 1980s, I was part of a group of staffers from youth and AIDS programs that met every month to discuss our concerns about the growing epidemic and what it meant for adolescents. We included youth workers and medical teams and funders and shelter workers and early AIDS service providers. What we all had in common was an understanding that young people were having unprotected sexual relationships, often with older partners, and we were scared. Each month, 20 to 30 people came to share information, develop educational programs, talk about raising awareness and listen to presentations on epidemiology and behavior. And then we decided to write a grant for funding, raising the question—should we become a 501(c)(3)?

How many of us have been in this position? We voluntarily come together to make something happen—address a crisis, take action on an issue, share some mutual interests—when someone pops the question: Do we want to found a formal organization? When we asked that question in our AIDS group, I am not sure we really thought about it too long. We felt that formalizing our work was a natural progression, a law of nature for how organizations in the nonprofit world develop.

Now that wisdom is being challenged. Not everyone is quick to believe that formal nonprofits are the right choice. More important, many are raising concerns that a 501(c)(3) status is the wrong choice for some groups. Two years ago, the Building Movement into the Nonprofit Sector project held meetings around the country with leaders of social change organizations. We were surprised to find that in each meeting there was a story (or two) about why groups might want to stop and consider whether they really want or need to become an independent incorporated organization.

Should volunteer-driven groups incorporate? Will they ruin their character and work once a legal structure has been imposed? We know that many groups choose to become 501(c)(3)s and go on to provide important and constructive contributions. These organizations take on many different characteristics—in style, form, function, issue area, involvement of citizens and volunteers and even in the type of incorporation status they choose to take. Yet it is still worth listening to what all the fuss is about, so that whether or not they decide to become incorporated, groups have thought through the pros and cons of their decision. Because of all the benefits attached to being a formal organization, many volunteer groups are still likely to incorporate. But organizations must first grapple with the tough question of whether a more formal structure fundamentally moves the work of the organization forward, and at what cost.

There are three concerns about incorporation: (1) the potential impact on the involvement and energy of the organization’s key people; (2) the risk that incorporation will shift the groups focus from its mission to organizational survival; and (3) the constraints implicit in forming a corporation, registering with the state and becoming accountable to the government.

In Denver, one person talked about the power and energy she felt in a volunteer organization where 150 women and men showed up each month to address the issue of violence. But when the group decided to become a nonprofit organization, everything changed. She explained, “The more structure that was placed on the group, the more people fell away because there was no place for them to engage in the direction or the meaning of the organization; no place for them to give of their talent and their passion.”

At the Atlanta meeting, a participant explained how her group had operated for years with outside funding: “We funded everything: attorney’s fees, copying, office, all of that stuff.” Receiving grants expanded the work of the organization but narrowed it in unexpected ways. She says, “It’s like being between a very big rock and a very hard place, because we can do the work a little easier because we’re not having to kill ourselves. But the level of work that we’re doing is not what it used to be because so much of our time goes into fundraising.” Several people worried that funding, whether a group was incorporated or not, can turn the group’s focus toward what funders want or expect and away from the original mission. Our Atlanta participant noted this impact as well, stating, “We have looked very hard at how the nature of our work has changed since we began to seek out side funding. A re we less aggressive now than we were when we financially controlled and supported our own agenda?…Are there things that [we] would have done before that we won’t do now, because viewed by the funding world it may be a little over the top?”

Has incorporation ruined the vitality and spirit of the nonprofit sector? Is it preventing groups from speaking up about the issues they care about or curtailing their action? Many of the people we talked with worked in incorporated nonprofit groups. But they wanted to raise the question of what it means to decide to formally join the nonprofit sector. In assessing their options, groups should ask themselves the following questions:

  • Why are we thinking about incorporating? What will it bring us and what are the costs?
  • Who is driving the decision to become a 501(c)(3)?
  • What impact will it have on those of us currently involved?
  • What impact will it have on our other constituents?
  • How will it advance our mission and vision?
  • Is incorporating tied to raising funds?
    • Do we have to incorporate to receive the funds we need?
    • Can we become a project of a group already incorporated, rather than obtaining our own 501(c)(3)?
    • How will funding affect our work?
  • What sort of voice do we have collectively, and how will 501(c)(3) status affect that voice?
    • Will we still speak out, once we are a formal organization?
    • Is becoming an organization supporting our current structure and operation?
    • How do we express ourselves now, and what will change?

 

Conclusion

Not every group has to become a 501(c)(3). At the same time, not every 501(c)(3) has to look and act the same. The passion to achieve the mission does not have to end with incorporation, but the organization may need to create new structures for channeling the fervor that initially brought people together. In our meetings, we heard from groups that had incorporated that found amazing and creative ways to address some of the concerns raised above. They took specific steps to nurture the continuing commitment and energy of the original volunteer activists. They asked themselves regularly if they were remaining true to their mission and created innovative strategies for staying on track.

Organizations that incorporate must consider how funding can enhance or limit the mission and achievement of their vision. Funding solves some problems and creates others, so a key challenge is for incorporated organizations to mitigate the negative effects of funding and remain conscious of choosing work based on connection to mission, not availability of resources.

Finally, one participant pointed out that the regulations that come with incorporation can cut both ways: They can inhibit groups but they can also ensure that groups are accountable to their mission and bylaws. Incorporation is also a vehicle to capture foundation and government funds and use them for purposes that neither the public sector nor the for-profit sector would normally support. Incorporated organizations have a status and legitimacy that those in other institutions of power recognize and reckon with.

The decision about whether to incorporate is fundamental. Rather than assuming that incorporation is necessary, groups—and those who advise them—face the challenge of making a thorough and conscious decision about incorporation while being attentive to maintaining the vitality of the vision and mission of the work. So, to 501(c)(3) or not to 501(c)(3), that is an important question.

  1. In this article, I use 501(c)(3) to talk about incorporation. It is important to note that groups can also decide to incorporate under one of many categories, each of which has specific benefits and limitations. For a more complete discussion of different categories of incorporation see Salamon, Lester 1999. America’s Nonprofit Sector: A Primer. New York: The Foundation Center, p. 8.
  2. Social movement theorists disagree among themselves about whether or not we need to build formal organizations for movements. For example, see Doug McAdams, Political Process and the Development of Black Insurgency: 1930-1960, for an argument for organizations; and Frances Fox Piven and Richard Cloward’s, Poor Peoples’ Movements, Why They Succeed, How They Fail, for the argument against.

 


 

Frances Kunreuther is the director of the Building Movement into the Nonprofit Sector Project, housed at Demos.

  • Linnea R. Michel

    While this article makes a valid point, I dislike its failure to distinguish between “incorporation” and “tax-exempt status”. These are extremely different concepts, and the article just continues the murkiness. This is a dud, NPQ!