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Starting and Understanding Your Nonprofit

Free Nonprofit Micro-eMBA Module #2: Starting and Understanding Your Nonprofit

© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.

Much of this program is based on materials adapted from the Nonprofit Capacity Building Toolkit(SM)
particularly the guidebook, Field Guide to Developing and Operating Your Nonprofit Board of Directors.

This learning module is in the nonprofit organization development program. However, this module can also be used by anyone as a self-study exercise to learn more about starting and understanding a nonprofit organization.

Sections of This Module Include the Following

INTRODUCTION

This module is useful to entrepreneurs who are thinking about starting a nonprofit, or have already started their nonprofit and what to understand more about what they’re really doing. The module also will be useful to practitioners/consultants who want a broader understanding about nonprofit organizations, including how they are started. This understanding for practitioners/consultants can help them provide more effective services to clients and establish stronger credibility with leaders and managers in the nonprofit workplace.

Starting a nonprofit organization requires careful thought and planning about your new organization. However, you can’t effectively manage an organization if you can’t effectively manage yourself. So in this module, you are first guided through some careful examination about yourself as an entrepreneur (and you are an entrepreneur if you are starting an organization). If you decide you still want to start a nonprofit, then you’ll consider various options to “jump start” your organization, including fiscal sponsorship and using an incubator service. Next, you are guided through a variety of checklists to help you legally register your nonprofit in the particular form you desire, for example, as a nonprofit corporation, as a nonprofit that is exempt from paying federal and other taxes, etc.

Maintaining a healthy nonprofit organization requires healthy practices in governance and management. This nonprofit organization development program is geared to develop those healthy practices in your nonprofit. To truly understand and be effective at these practices, it helps greatly if board members, executive directors and staff have some basic understanding of the overall organizational “system” of their nonprofit organization, including its common traits, dimensions, “personality” and life cycles. This is not just an academic exercise. Too often, people don’t really understand the overall structures in their nonprofit. When problems occur, they only see the specific events, and not the larger structures that cause the behaviors that cause the events. To effectively resolve problems, you have to change the structures — not just react to events.

The importance of this understanding of organizations is evident when you realize that many graduate business training programs start out with an overview of the organizational system, often in a course called, for example, “Organizational Theory“.

OUTCOMES

Learners who complete this module will achieve the following outcomes:

Starting Your Nonprofit:

  1. Clarify What You Mean by “Nonprofit”
  2. Decide if You Are an Entrepreneur
  3. Decide If There Really is a Need for New Nonprofit
  4. Decide If You Should Start with Fiscal Sponsorship
  5. Get Guidelines to Incorporation and Tax-Exemption

Understanding Your Nonprofit:

  1. Know How to Classify Your Nonprofit With the IRS
  2. Recognize Key Roles in Your Nonprofit
  3. Learn Basic Structures in Your Nonprofit
  4. Recognize the Life Cycle of Your Nonprofit
  5. Classify the Culture of Your Nonprofit
  6. Verify Your Nonprofit Meets Regulations

MATERIALS FOR REVIEW

The following materials will help you address each of the topics and learning activities in this module. If your time is very limited, then you can still benefit from scanning the resources and questions referenced from the following links.

Starting Your Nonprofit (optional to those in already established
nonprofits)

Considerations About You

Many people are so excited about starting a new venture, that they forget about one of the biggest challenges — getting themselves ready first. So before undertaking the steps to start a new business, they first should think about:

  • There are certain traits of successful entrepreneurs. Am I really an entrepreneur?
  • What are my true passions? How can I retain those in my new venture?
  • What is my stress level now? Can I take much more?
  • What are my personal strengths and weaknesses. How can I use my strengths to strengthen my weaknesses?
  • Are there alternatives that I could do right now?
  • Are my personal finances in shape before I go to investors?

The following article will help you to answer each of these very important questions.
Entrepreneurs — Are You Personally Ready to Start a New Venture?

Getting On to Starting Your Nonprofit

Understanding Your Nonprofit Organization

/organizations/nonprofits.htm#anchor247079

Basic Overview of Nonprofit Organizations

SUGGESTED TOPICS FOR REFLECTION AND DISCUSSION

  • Learners are strongly encouraged to discuss the following questions with peers, board members, management and staff, as appropriate.
  • If you are operating in an already established nonprofit, you can skip to the subsection titled “Understanding the Nonprofit Organization” included below.

Considerations About You

1. What are at least 3 characteristics of successful entrepreneurs? Are you an entrepreneur? How did you conclude that about yourself? (See Are You Really an Entrepreneur?)

2. Are your finances in shape to begin planning and starting a new organization? Are you sure? (See Are Your Personal Finances in Shape?)

3. How will you manage the stresses involved in planning and starting a new organization, product or service? (See How Will You Manage the Stresses Involved?)

Considerations About Your Idea

1. Is there really a need for your new organization, product
or service? How do you know? (See Is There Really a Need for the Product or Service
in Your Organization?)

2. What type of organization would you start, if it’s a new
organization? (See What Type of New Organization, Product or Service
Will You Be Starting?)

3. What are at least 3 of the risks involved for you? (See What Are the Risks Involved?)

4. What planning and financial skills do you have? Where might you need to improve? (This eMBA has upcoming modules about planning and finances.) (See What Planning and Financial Skills Do You Need?)

5. So what is a summary of your plans for your new organization, product or service? (See What Are Your Initial Plans?)

6. What expertise, or human resources, will you need? How might they be organized? (See What Human Resources Will Your New Organization, Product or Service Need?)

7. How much money might you need for startup? (See How Much Money Will You Need?)

8. Might you draft a first-draft of a basic strategic plan or business plan now? There can be business plans for a nonprofit. (This eMBA has upcoming modules about strategic planning and about product and service planning.) (See Write a Strategic Plan or Business Plan Document?)

Starting/Registering a New Nonprofit

1. What is a nonprofit organization? (See First Things First — What Do You Mean by “Starting a Nonprofit”? and What is a Nonprofit?)

2. What does the phrase “fiscal sponsorship” mean? In what situations might a fiscal sponsor be helpful? (See Consider Fiscal Sponsorship.)

3. What is a business incubator? (See Nonprofit Incubators.)

4. What are the benefits of incorporating a nonprofit? (See First Things First — What Do You Mean by “Starting a Nonprofit”?)

5. What does the phrase “tax-exempt” typically mean?
(See First Things First — What Do You Mean by “Starting a Nonprofit”?) How does a nonprofit obtain tax-exempt status? (See Table of Reminders for Registering Your New Nonprofit.)

6. Do the terms “tax-exempt” and “tax deductible” mean the same thing? (See First Things First — What Do You Mean by “Starting a Nonprofit”?)

7. What does the IRS classification “501(c)(3)” mean?
(See First Things First — What Do You Mean by “Starting a Nonprofit”?)

8. When is a lawyer often needed during the process of starting a nonprofit? (See Do You Need a Lawyer to Start Your Nonprofit?)

9. What are articles of incorporation? Bylaws? (See Table of Reminders for Registering Your New Nonprofit.)

10. To which do you file for incorporation — the IRS or your state? To which do you file for tax exemption — the IRS or your state? (See Table of Reminders for Registering Your New Nonprofit.)

Understanding the Nonprofit Organization

1. What is a basic definition of an organization? An organization gets ongoing direction primarily from mission, vision and values. That’s why it’s so important for boards, management and staff to understand these concepts and how they apply to their nonprofit. What is a mission? Vision? Values? (See Basic Definition of Organization (which includes some optional reading about systems thinking).)

2. It helps a great deal to think of organizations and programs as systems, for example, when planning programs and evaluations or managing major changes in your organization. What is a system? (HINT: Think about inputs, processes, outputs and outcomes.) How is a system different than a pile of sand? What are some common characteristics of systems. How is an organization like a system? (See Basic Definition of Organization (which includes some optional reading about systems thinking).)

3. What metaphor do you prefer to describe organizations? Machines? Organisms? Persons? Groups? Families? Others? (See Various Ways to Look at Organizations.)

4. Organizations have certain dimensions and concepts in common. When designing, organizing and/or re-organizing organizations, it helps to be aware of these dimensions and concepts. Name at least three of the dimensions of organizations. Name at least three key concepts to consider when designing organizations. (See Common Dimensions in Organizations and Key Concepts in the Design of an Organization.)

5. The concept of culture is VERY important. Each organization has its own unique culture, particularly in nonprofits. When managing a nonprofit, it’s important to acknowledge what values are really important to the organization, what behaviors typically occur and what behaviors are really treasured. Lack of understanding about culture is one of the major reasons that organizational change efforts fail. Describe the concept of organizational “culture”. (See Organizational Culture (the “personality” of the organization).)

6. People — like most other systems — go through life cycles. When trying to understand, manage or help a system, it’s very important to you know what life cycle the system is in. This is true for organizations as well. Organizations have life cycles. This is often forgotten when trying to work with organizations. Describe the concept of organizational life cycle. (See Life Cycles of Organizations.)

7. What is the “new paradigm”? What are several of the changes that might be expected in this new paradigm? What major, overall driving forces are causing this new paradigm? (See New Paradigm in Management.)

8. What are the seven key roles in a nonprofit (as listed in the materials for review)? (See Key Roles.)

9. What are the three major sections of nonprofit personnel (as listed in the materials for review) (See Three Aspects of Nonprofit Structure.)

10. What is devolution? (See Current Major Challenge: Devolution.)

11. How would you describe the typical nature of a small nonprofit organization? (See Unique Nature and Struggles of Traditional Small Nonprofits.)

ACTIVITIES TO BUILD SYSTEMS AND PRACTICES

  • Learners are strongly encouraged to complete the following activities, and share and discuss results with peers, board members, management and staff, as appropriate.
  • As you proceed through the following activities, be sure to note any incomplete actions in the Action Item Planning List.
  • If you are operating in an already established nonprofit, you can skip to the subsections titled “Understanding Your Organization …” below.
  • Note that the information in the subsections “Understanding Your Organization …” is enough to give you a basic sense of your organization, including its structure and basic parts, its current (or desired) personality, and feedback among the basic parts. You’ll soon learn a great deal more about your nonprofit as you progress through the remaining modules in this program.

Starting/Registering Your New Nonprofit

1. Write a five- to ten-sentence description of the charitable purpose of your nonprofit. This is the mission statement of your new nonprofit. What is the nature of your organization’s services, e.g., advocacy, arts, civic, cultural, health, education, human services, or other? (For assistance, see Writing/Updating a Mission Statement.)

2. Find out the minimum number of people required to be on a nonprofit, corporate board of directors in your state. You might call, for example, your Attorney General’s office, States Attorneys office, etc. Recruit at least this number of people to join your board. (For assistance, see Overview of Board Roles and Responsibilities, Joining a Board and Recruiting Board Members.)

3. Recruit expertise to help you get your nonprofit started. A great place to start is by getting references from other small nonprofits. Don’t forget about finding an insurance agent. You’ll probably soon need liability and property insurance. (For assistance, see Getting a Bank and Banker, Joining a Board, Hiring Consultants, Getting and Using a Lawyer, Getting and Using Accounting Services and Insurance for Nonprofits.)

4. If you plan to incorporate your nonprofit, draft a set of Articles of Incorporation (or whatever other type of legal charter is required, for example, a constitution, Articles of Association, etc.). (For assistance, see Articles of Incorporation.)

5. Draft a set of bylaws (bylaws specify how your board will govern the organization and how it will be configured, for example, with an executive director, etc.). (For assistance, see Corporate Bylaws.)

6. If you plan to file for exemption from federal taxes, contact the IRS to obtain the necessary forms. Begin completing the forms when they arrive. (For assistance, see Getting Tax-Exempt Status.)

7. Make a draft (probably a very rough draft at this point) of a plan that includes the top 5-8 goals for the nonprofit to accomplish over the next year. Think about what resources are needed to achieve these goals. (This is a very rough draft of a strategic plan.) Write down the costs for the resources and group them in major categories including: personnel, computers, office supplies, facilities (rent, utilities, etc.) and any other major groups of costs. This is a very rough draft of a yearly budget. You don’t have to go into great detail at this point. (For assistance, see Basic Guidelines for Successful Planning Process and Basic Description of Strategic Planning.)

8. Hold a meeting of your board of directors. In the meeting, members should review the drafts of the Articles, bylaws, application to the IRS for tax-exempt status, strategic plan and budget. Members should vote to approve the drafted items. Members should also vote to select officers. Your state may require that boards have certain officer roles, for example, Chair/President, Secretary and Treasurer. (For assistance, see Basic Sample Board of Directors Meeting Minutes.)

9. Make the necessary filings for incorporation (probably to your local Secretary of State) and tax-exempt status (to the Internal Revenue Service).

10. On the Action Item Planning List, make note to follow up on the following actions.
a) When you get notification from the IRS that you’ve obtained tax-exempt status, contact the appropriate state department to seek exemption from state taxes. (These exemptions vary across states.)
b) When you get notification from the IRS that you’ve obtained tax-exempt status, contact the local tax assessor to seek exemption from property taxes. (This exemption varies across states and localities, as well.)
c) Contact your local city hall to identify if you need permit or license to solicit in your city.
d) Contact your local post office to obtain a bulk mail permit.

e) It may be useful to obtain an employer identification number at this time, so you’re ready if and when you hire employees.
f) Start obtaining facilities in which to operate, whether in your home, an office, etc. The link Setting Up an Office may help you.
g) Begin looking into computer equipment you may need. The link Computers, Internet & Web may help you.

Understanding Your Nonprofit Organization — Its Logic Model

1. Diagram a logic model of your organization, including its inputs, processes, outputs (tangible results) and outcomes (impacts on clients). (Note that this systems view is sometimes called an “outcomes model”, which is very useful when designing outcomes-based evaluations or writing proposals in grant applications.) Fill in the table in the Guidelines and Framework for Designing Basic Logic Model

2. If possible, diagram a basic systems view of your programs, including inputs, processes, outputs (tangible results) and outcomes (impacts on clients). (Note that we’ll soon give more attention to programs, including their design and marketing, in an upcoming learning module.) Fill in the table in the Guidelines and Framework for Designing Basic Logic Model

Understanding Your Nonprofit Organization — Its “Personality”

1. Write a half-page description of the culture of your organization. Include what values your organizations holds dear and what values you see reflected by the behaviors in your nonprofit. Note that if your nonprofit is still fairly new, you can still benefit from this activity by describing what you’d like to see as the “personality” of your organization. This activity will be useful later on during strategic planning when writing values statements. (For assistance, see Organizational Culture (the “personality” of the organization) and Unique Nature and Struggles of Traditional Small Nonprofits.)

Understanding Your Nonprofit Organization — Its Life Cycle

1. Write a half-page description of the life cycle of your organization. Is it in Birth? Youth? Midlife? Maturity? Include what characteristics you observe that lead you to conclude that your organization is in that life cycle. Note what life cycle will be next for your organization. Include description of any challenges that you might expect when you go through the next life cycle change. (For assistance, see Life Cycles of Organizations.)

Understanding Your Nonprofit Organization — Its Communications

1. In the materials for review, you learned that organizations are systems and that for systems to thrive, their needs to be continued and effective feedback (communications) between its major parts. What can you do to ensure effective communications between the key roles in your nonprofit, including clients, board members, board committees, board chair, executive director, staff and volunteers? Effective communications requires more than good intentions. What specific structures can you use, for example, consider reports from the director, meeting minutes, staff meetings, etc. (For assistance, see Basics of Internal Communications, Communications (Writing) and General Recommendations to Improve Communications Skills.)

ASSESSMENTS

Assessments for New or Already-Established Nonprofits

Use any or all of the following assessments to evaluate the health of your new or already established nonprofit organization.

1. Answer the questions in the “Legal Indicators” in the Checklist of Nonprofit Indicators. Have you completed all of the necessary activities to conform to U.S. regulations (for example, to maintain tax exempt status)?

Additional Assessments for Already-Established Nonprofits

1. If you are just starting your nonprofit, the following assessments may be advanced at this point. However, if you are from an already-established nonprofit, then you might apply some or all of the following assessments:

TRACKING OPEN ACTION ITEMS

1. One of the first indicators that an organization or a person is struggling is that open action items are not tracked and reviewed. (Open action items are required actions that have not yet been completed.) Instead, people only see and react to the latest “fires” in their workplaces or their lives. Whether open action items are critical to address now or not, they should not entirely be forgotten. Therefore, update and regularly review a list of open action items (identified while proceeding through this program) that includes listing each open action item, who is responsible to complete it, when it should be completed and any associated comments. When updating the list, consider action items as identified during discussions, learning activities and assessments in this module. Share and regularly review this action item list with the appropriate peers, board, management and employees in your organization. You can use the following Action Item Planning List. (At that Web address, a box might open, asking you which software application to open the document.)

2. If you have questions, consider posing them in the national, free, online discussion group hr.com, which is attended by many human resource and organization development experts.

(Learners in the nonprofit organization development program can return to the nonprofit organization development program.)

For the Category of Capacity Building (Nonprofit):

To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.

Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.