Nonprofit is a Tax Status Not a Business Model

by | Oct 21, 2020 | Strategic Planning

Have you thought about starting a nonprofit?

Are you a nonprofit founder?

Do you work in a nonprofit currently, or have you in the past?

Lots of folks ponder starting a nonprofit at some point.

Many of these well-intentioned folks even think that running a nonprofit will be easy. Easier than a ‘real business’. So easy in fact that they can secure all the money they need to pay their salaries and do the work they want to do from grants and fundraising events. Nonprofit is a tax status, not a business model.

I’m sure no one reading this has ever heard of such nonsense [insert chuckle], but believe me, it exists.

For those of you who have worked in or currently work in a nonprofit, or consult with nonprofits, you know how wrong these misconceptions are.

In fact, it might surprise you to know that many folks who want to start a nonprofit have NO business knowledge whatsoever.

Nonprofit is tax status, NOT a business model. Nonprofits ARE businesses. Lets’ all take a moment and say that again: Nonprofits ARE businesses.

Not having any knowledge or understanding of how to run a business successfully is one HUGE hurdle many potential startup nonprofits encounter. In all reality, it is also an issue with many nonprofits that already exist. They forget or don’t realize that Nonprofit is a tax status only.

Nonprofits use the term ‘strategic plan’, which in the world of for-profits is a business plan. Either way, it is a plan that illustrates what you are going to do, how you are going to do it, identifies measurable goals and objectives, AND includes a budget (revenue and expenses). It’s a roadmap telling you (and your board of directors) where you’re going and how you’re going to get there.

When I am asked to consult with someone who ‘has a great idea for a nonprofit’, this is where I start:

  • What is your idea?
  • If it is a viable business idea, I then ask, “Why would you want this to be a nonprofit?”
  • This is typically where the conversation breaks down and I have to help them along by saying, “Does it have anything to do with the fact that you can fundraise and/or write grants?”
  • If the answer is ‘yes’, or seems like it is but they don’t want to admit it, I quickly sum up the rest of the conversation by saying, “The ability to fundraise or write grants is the WORST reason to start a nonprofit.”
  • Then I ask if a business plan exists for this ‘idea’. The answer is never ‘yes’.

Additional questions I like to address with folks considering establishing a nonprofit are:

  • Are you planning on being a staff or a board member? (Both is a conflict of interest)
  • If you plan to be the ED/CEO, do you know the Board of Directors is your boss and can fire you?
  • Do you know you are establishing a community organization and you don’t ‘own’ it?
  • If you decide to serve on the Board of Directors, do you understand that there are/should be term limits and you will not be on there for life? All-in-all, if you start a nonprofit, you are not wanting a business that ‘you’ control and is yours forever.

(for more on this topic: Are You Really Ready to Start a Nonprofit)

If no business plan exists for this great idea, I read that as ‘needing a bit more foundation/structure before moving forward.’ Consider working on a budget, a business plan, some ideas of how you will bring in revenue and then research those for validity.

Running a business is a LOT of work as any successful founder or entrepreneur will be happy to tell you.

If you don’t want the hassle of administrative work, the bother of scheduling meetings, the trouble of managing other people’s time and the burden of constantly figuring out how you will pay the bills, then do NOT start a business of any kind.

I have several previous clients and friends who, after starting a nonprofit of their own, have said, “I just want to do this, teach that, offer this, etc. I don’t want to do all the admin stuff. It’s SO much work!”

Yes, yes it is!

If you don’t want to do that kind of work, don’t start a business, much less a nonprofit. Go work for someone else or volunteer. There are tons of amazing, well-established nonprofits already in existence who need amazing volunteers.

There is no easy money to be had by starting a nonprofit. In fact, many might argue it is MORE work.

You don’t just have one boss, you have an entire board to manage. You don’t just have staff,  but you have volunteers too. You don’t just manage your finances, but you have to be transparent to the community, report on your impact (which means you have to be tracking it). This list goes on and on.

Yes, as a nonprofit you have some tax benefits, you can write grants and fundraise, and you could theoretically share that workload with a board and volunteers. But more than likely, you are going to do a majority of the work yourself, be frustrated at all the hoops you have to jump through, realize that fundraising is an amazing amount of work and that there is no such thing as free money. You might also realize for-profits, governmental agencies, and individuals qualify for some grants too and anyone can raise money through crowdfunding!

Keep in mind that many foundations have guidelines for who they will fund with grants. Some of the guidelines are not possible upon inception, so you still need a good budget and realistic income streams to be viable in your first few years. Some common themes are with foundation requirement are:

  • We want an organization to have been established a minimum of 2+ years
  • You must show a history of success
  • We don’t want to fund general operating costs
  • What measurable impact do you have
  • Having an operating budget of a certain amount
  • Having an audit completed

I say all this to highlight a few key points:

  1. To encourage you to consider the motives of anyone wanting to start a nonprofit. There are some good ideas and organizations that need to be established in the nonprofit sector, and that is another blog. But  the majority of people could collaborate with another group to avoid a duplication of services to enhance services in their area
  2. To discourage anyone from thinking grant dollars are a reason to start an organization or that grants should be the funding stream through which to fully fund any general operating budget.
  3. To motivate you to educate yourself and your board of how any business should be run and start building your capacity and your operating dollars. No business model that I have seen ends every year with a balanced budget. This concept is ludicrous. If you are not making money and ending your year in the black, why are you in business? If you want to do everything, all the time for free, perhaps you don’t need a business model, but a group of good Samaritan’s who get together to help in a particular capacity. Remember, Nonprofit is a Tax Status, not a Business Model.

It costs money to run organizations. Create budgets that allow the business to run without having to throw around phrases like ‘shoe-string budget’ or ‘beg, borrow and steal’.

As you work to grow your organization, work with clients, or establish your own business and tax status, I hope these thoughts will help you identify some of the ways you can help create success for yourself moving forward.

Have a great rest of the week! – Mandy

Starting a Nonprofit and the Questions to Consider


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