August 12, 2019; Entrepreneur
An article in Entrepreneur that tries to give some hardheaded advice to those who want to start their very own nonprofit almost entirely misses the point by citing what the author sees as the core differentiators of nonprofits as potential obstacles and getting many of its facts starkly wrong.
Consider the following, in which the author gets just about everything wrong.
A 501c3 nonprofit is limited in many ways.
The 501c3 is what most of us think of when we say “nonprofit.” It’s an entity named after the special section of the tax code that governs it, and it’s limited in how it raises and spends funds by both heavy IRS oversight and prevailing economic realities. Generally, a 501c3 is required to minimize operating expenses in order to maintain a good reputation. Nonprofits that spend a smaller percentage on advancing their mission than on operational expenses are not well-regarded in philanthropic circles.
It sounds like the author may have spent too much time reading the Dan Pallottas of this world without understanding any of the basics. But he doesn’t end there.
As a result, 501c3s look for ways to cut spending across the board. That translates into relying heavily on volunteers and ensuring their activities don’t run afoul of IRS regulations.
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He warns that “any entity seeking nonprofit status from the IRS may have to wait years, with lengthy review and lead times often contributing to the wait.” This, of course, has not been true in some time—at least since the IRS instituted the 1023-EZ form. (You can look here for more on this topic.)
Then, he presents problems with funding with the same kind of confusion of semi-facts, ending with an ironic bemoaning of competition that might dampen one’s entrepreneurial enthusiasm: “Even in your local area, nonprofits may exist devoted to the same cause you care about. The net effect is chilling. Every nonprofit is competing against every other nonprofit for an ever-shrinking pot of money.”
That ever-shrinking pot of money line, of course, is questionable, but it gets written often enough that one might easily believe it.
He brings all of this home by identifying transparency as a challenge, saying, “Running a business means that, to some extent, you get to decide what stays confidential and what gets released to the public. In nonprofits, however, secrets make it very difficult to raise funds and stay viable. The public expects reputable nonprofits to be completely transparent about where funds come from and where they go.”
Right; that’s a requirement of the privilege of tax exemption.
But one of our biggest problems with this article is its misunderstanding—or at least its tacit dismissal—of the basic foundational principles of the nonprofit form. Each nonprofit is supposed to be a collective endeavor, organized in the public good. This requires that honest nonprofit founders spend the time they need in developing at least a small community of people who see the same needs and are willing to invest their time and energy in the mission of the nonprofit. This is what the IRS is supposed to look for and what many funders look for.
“Nonprofit” is not just an alternative shell for what an individual entrepreneur wants to do, in other words. It is a commitment to a very small-d “democratic” process that produces its weight in value, and therefore has to be approached entirely differently.—Ruth McCambridge