1  Can I Trust This Advice?

Ben had been mulling his charity dream, it seemed like, forever. He had a day job, one that he was far from giving up. His family depended on his reliable for-profit employment and income. Yet he had long had a growing and even gnawing sense that he had more to offer in life than punching a clock. Ben even felt that he had a calling to a charitable ministry. No, he wasn’t going to quit his day job to follow his dream. He would remain responsible to his family’s needs and interests. But he just sensed that he needed some sound information and encouragement about how he might at least start to pursue his charity dream, even if it might take a good while to get there.

Advice

Wise counselors make for wise decisions. If you are looking for advice about whether and how to pursue your charitable 501(c)(3) dream, then you already have the right inclination. Hold onto that thought, and pursue it. Get as much advice and information about a 501(c)(3) as you can, even as you explore your calling to a charitable ministry. Fools rush in where angels fear to tread. Don’t be a fool. Get sound information and advice. And get your information and advice from reliable sources. Sure, ask your friends and family members. They may have helpful opinions, too. You can benefit from their interest and may need their support. But don’t just listen to the uninformed. Instead, seek the counsel of those who have been there and done that. Experience is a wise teacher. Listen to those who have it.

Experience

My experience with 501(c)(3) charitable organizations is frankly substantial, perhaps as substantial as you’ll find from any readily available source. I am a lawyer, which is no special distinction when it comes to 501(c)(3) work. Most lawyers have exactly zero experience with 501(c)(3) charitable organizations, especially any experience forming, advising, and representing them. But somewhere along the way, early in my forty-year legal career, I started helping clients form, lead, and operate 501(c)(3) charitable organizations, dozens of them. When, a couple decades ago, I became a law professor and dean, I started a pro bono program for 501(c)(3) organizations with law student help. My students and I helped form and qualify as tax exempt over a hundred new 501(c)(3) charitable organizations for people from all walks of life. I also began teaching 501(c)(3) courses and writing and speaking about charitable organizations. So, yes, I have relevant experience, and although I don’t know any details of your personal circumstances or charitable dream, you can trust my general information and broad advice.

Read more of Chapter 1 in the paperback or digital guide.

2  Should I Start a 501(c)(3)?

Danielle had reached a jumping-off point in her musings about her interest in starting a charitable organization. She either had to go for it or give it up. She wasn’t sure what made her feel that way. Maybe it was because she’d been thinking about helping the poor for a long time, indeed since she was a child. And now, she was a long way from childhood. Danielle had just turned the page on yet another decade of living, which was another reason she felt as if she had to either start doing something or stop thinking about it. But she also found that other things she had been doing were no longer holding much meaning for her. She felt as if she was spinning wheels, not going anywhere. Maybe now was the time to finally start on her charity dream. Yet she wanted a clear way to decide. She might have better options. And for that answer, she needed a reliable guide.

Dreams

We all have dreams. We all have hopes and ambitions. If you don’t remember yours right at the moment, trust that they’re deep down inside of you, somewhere. A life without a dream is a life without a goal, purpose, or vision. As the saying goes, when the end of all things approaches, young men see visions, and old men dream dreams. We may live just fine day to day, doing our mundane chores. But when we look to the end of our days, we remember the visions and dreams deep within us. We are not passing through this world without purpose. We each have purposes that must unfold from within us, or we will have squelched and lost our life. That realization is what seems to spur many people who start 501(c)(3) charitable organizations. For you to know whether you, too, should do so, you may need to take stock of your dreams and visions, and your purpose, stage, and station in life.

Readiness

Don’t feel as if you’ve been wasting time, frittering away your calling to pursue your charitable purpose. What’s past is past. Chances are good that the mundane or meaningful things you’ve already been doing have been preparing you for your charitable mission. Children don’t generally start 501(c)(3) organizations. They still have a lot of growing up to do. Few teenagers start charitable organizations, either. They still have a lot of maturing and knowledge-and-skill building to do. If you’re already through college and maybe also through your twenties or even your thirties or forties, you’ve surely been gaining additional knowledge, skill, and experience, and building stronger character, that will help you pursue your charitable dream now. But wherever you are in life, take stock of your readiness. Would a little more maturing and experience help you, before you start? If so, then it’s okay to wait until the time is ripe. Or are you instead ready to launch? Consider what is true for you.

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3  What Charity Should I Do?

Deborah had a passion for helping people. Her heart went out to whomever she saw in need. Her natural inclination was to rush in with an offer and hand of help. But often, or nearly always, she felt helpless to actually make any difference when she saw someone who needed help. Deborah didn’t feel as if she had any particular program, resource, or skill that might make a difference in the lives of others. She wanted a talent, program, purpose, or personal gift but didn’t seem to have one. Then one day, she realized that her gift might be in her willingness to help rather than in any talent, vision, or skill. Maybe willingness was exactly what she needed to form and lead a 501(c)(3) organization.

Purpose

To qualify for 501(c)(3) tax-exempt status, charitable organizations must have a charitable purpose. More detail about that subject appears in the following chapters. But your 501(c)(3) organization must have something that looks, smells, or tastes like a charitable mission, or the IRS examiners who review your 501(c)(3) application may just say no, you don’t get the tax-exempt status because they can’t tell anything reasonably specific about the charity you intend to do. IRS examiners look closely at your organization’s purpose clause to determine whether your organization qualifies for the advantages of tax exemption. Your organization needs a purpose that suggests if not outright shouts charity.

Clarity

It’s not just the IRS who needs to know your charitable purpose. It’s also your donors, volunteers, staff members, the needful patrons whom you hope to serve, and you. You and everyone else connected with your charitable dream need to know, with reasonable specificity, what you plan to do. Without clarity around your charitable purpose, you’re unlikely to attract donors. Donors give to charitable causes for the good things that the charities plan to do, not to make friends or influence people. Your organization’s purpose needs to connect with the hearts of donors. It also needs to connect with the needs of your organization’s patrons, those whom your organization hopes to serve. Otherwise, you won’t find any patrons to serve. They won’t know what you can do for them and why they should contact and trust you. The same is true for your organization’s volunteers and staff members. They, too, need to know their purpose in working with you. And if you don’t know your charitable mission, well, then you won’t know what to do.

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4  What Is a 501(c)(3)?

Marcus had heard the term 501(c)(3) repeatedly, as he investigated the possibility of starting his own charity. He was beginning to suspect that he needed “a 501(c)(3),” as at least one acquaintance had already told him. But what was “a 501(c)(3)”? It sounded like some strange potion, elixir, or beast, perhaps even a supernatural entity with magic powers to unleash to help him achieve his charitable mission. Of course, he already knew better than that. But he still didn’t really know what “a 501(c)(3)” was, and he suspected that a few of the people who had bandied that term about with him didn’t know what a 501(c)(3) was, either.

Code

The term 501(c)(3) refers to the section of the Internal Revenue Code under which charitable organizations can qualify for tax-exempt status. It is admittedly a bit strange that people, not just lawyers but lay individuals, know charitable organizations by the code section number under which the IRS recognizes them. What, are we all now lawyers? Can’t we just call them what they are, which is tax-exempt charitable organizations? Yet that’s a mouthful, which is probably why so many people use 501(c)(3) as a substitute. Using 501(c)(3) to describe the charitable organization also ensures that we’re talking specifically about a charity that is exempt from federal income taxation, which is what donors, private foundations, and government grant programs generally want to know when dealing with charities. So, there you have it: a 501(c)(3) is a charitable organization that the IRS has formally recognized as exempt from federal income taxes.

Organization

Yet that definition just given, like most definitions, is somewhat circular. Of course, a 501(c)(3) is a charitable organization. But what is a charitable organization? When the IRS acknowledges that an applicant meets the requirements of the Internal Revenue Code’s Section 501(c)(3) for tax-exempt status, the IRS isn’t recognizing an individual or a loose association of individuals. The IRS isn’t recognizing a name, program, or activity. The IRS is instead recognizing a specific corporate entity, most often a nonprofit corporation incorporated under the laws of a specific state. Thus, a 501(c)(3) is usually a nonprofit corporation formed to carry out a purpose that the IRS recognizes as charitable. To qualify for a 501(c)(3), you’ll thus need to form a nonprofit corporation under state law and then obtain from the IRS an employer identification number (EIN) for that nonprofit corporation, so that the IRS has a legal entity to recognize as tax exempt. 

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5  How Does a 501(c)(3) Help?

Will was all set to start his own 501(c)(3). He’d volunteered for years for another organization. His charitable service had taught him a lot about the people whom he wanted to help. Indeed, he saw a significant unmet need among many of the people he helped, that he was sure he could find a way to meet. Yet the organization for which he volunteered wasn’t interested. They’d been doing things the same way for years and showed no inclination to do anything else. Will’s research had shown that no other organization was likely to help. He knew he was ready to start his own 501(c)(3). He just wasn’t exactly sure how doing so would help.

Benefits

You’ve already seen in a chapter above, the discussion of whether now is the time for you to pursue your charitable-organization dream. But asking is now the time differs from knowing whether you need a 501(c)(3) organization and what benefit it should produce. Whether you need a 501(c)(3) organization depends in large part on the advantages that a 501(c)(3) organization can supply. Understand the benefits of a 501(c)(3) public charity, and you’ll likely reap those benefits to a greater extent. In other words, as you form and operate your 501(c)(3) charitable organization, keep its benefits in mind so that you can make the most of those benefits and help others do so, too.

Identity

A first benefit of a 501(c)(3) charitable organization is that it supplies an ongoing, corporate, charitable identity that an individual does not possess. Your charitable mission benefits from a charitable entity behind it. Indeed, the two–the mission and the organization–go hand in hand. For instance, we all know both what the charitable organization Goodwill is and what it does. Likewise with the Salvation Army, Feeding America, American Cancer Society, and Nature Conservancy. You probably know a good dozen or two other charitable organizations and their missions, not because you’ve necessarily volunteered with them but because of the clarity of their identity. None of those entities would have succeeded if their founders hadn’t formed a corporate entity aside from themselves. You won’t succeed broadly in your charitable mission if it’s all about you. You need something, a corporate entity, apart from you. Even Mother Teresa had a charitable organization behind her. She founded Missionaries of Charity in 1950.

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6  How Do I Organize My 501(c)(3)?

Dirk was eager to start his 501(c)(3) organization. He just didn’t know how. He found many offers online but wasn’t sure if he needed their help or, if he did, which offer to choose. Dirk had done his own research, even finding helpful state and IRS instructions and forms. But he didn’t want to make a mistake, waste time and money, and have to start over. Where should he start? And should he try it alone or get help? Dirk just didn’t know, and not knowing kept him from starting.

Assistance

Whether you need help forming your 501(c)(3) organization depends on several things. One of those things is your own education, sophistication, and procedural and administrative skill. If you are a complete neophyte at administrative matters, then you may well need help. If, on the other hand, you’ve done business, government, financial, or other administrative work before, then you may be able to muddle your own way through. Following this guide closely can obviously help. I’ve helped a hundred or two hundred clients form 501(c)(3) organizations, some with just a few tips and forms, others while having to hold their hand tightly and do much of the work for them all the way through. My recommendation is that you keep reading this guide and taking its steps until you hit a wall or feel out of your league, and then get help. On the other hand, if you have little time for mistakes and frustrations, and you have the extra cash or a good network of professionals willing to step in, then by all means, get help.

Options

You may have several good options for help forming your 501(c)(3). Lawyers in niche and general practices don’t generally know 501(c)(3) laws, forms, and procedures. Some lawyers, though, can be quick and willing to learn. If you have a lawyer friend or acquaintance, then ask them about it. They may have some 501(c)(3) knowledge and experience, although that’s unlikely, or they may be willing to quickly learn the ropes. Or they may know another lawyer who can help. But beware. I’ve helped clients who went to a general practice lawyer unqualified to help with a 501(c)(3), only to have the lawyer screw it up. You may alternatively find a law school clinic or other free community resource for 501(c)(3) help, although they are few and far between. You may instead find another public charity leader who knows how to get started and is willing to help. An experienced leader’s help can be a good option, although they may not have the technical knowledge, and without a law license, they shouldn’t be outright representing you before the IRS or state as if they were a lawyer. You may also find accountants, bookkeepers, tax preparers, or similar administrative professionals willing to help, although again, if they’re not licensed lawyers, they may not have the authority, education, and experience to be effective or license to help. 

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7  How Do I Operate My 501(c)(3)?

Wardell felt a flush of pride when the mail brought back his articles of nonprofit incorporation from the state corporations bureau, with the state’s identification number and file stamp. He’d done it! Or, at least, he’d started. He had incorporated his charitable organization in a way that he was pretty sure would meet the IRS organizational test. Yet at the same time, he knew he was only beginning with his beginning. Wardell knew he had several other steps to formally qualify his new organization as tax exempt. Looking at his file-stamped articles of nonprofit incorporation, though, made him all the more eager to proceed with those next steps.

Tests

The IRS has a second test for an organization to qualify for 501(c)(3) tax-exempt status, called the operational test. The organizational test discussed in the prior chapter examines how you organized, or formed, your charitable organization to meet the law’s requirements for tax exemption. The organizational test examines your organization’s articles of nonprofit incorporation. The second operational test doesn’t bother with your articles of nonprofit incorporation but looks instead to your organization’s bylaws. Articles of incorporation are the document that forms your organization. Bylaws are the document that governs your organization’s operation. To qualify for 501(c)(3) status, you’ll need to have bylaws that meet IRS requirements satisfying its operational test.

Bylaws

As your organization’s incorporator, you prepared, signed, and filed your articles of nonprofit incorporation with your state corporations bureau. Your state’s nonprofit corporation act likely permits you, as the organization’s incorporator, to also adopt the organization’s bylaws or to defer to the first board of directors whom you appoint to adopt bylaws by their majority vote. The organization does not file the adopted bylaws with the state. Instead, once the incorporator or board of directors adopts and signs the organization’s bylaws, the organization retains the bylaws among its corporate records. A common practice is for the incorporator to prepare the bylaws after preparing the articles of incorporation, to present the bylaws to the new directors for their approval at a first meeting of the board. Template bylaws, in use by dozens of 501(c)(3) organizations I’ve helped form, appear at the back of this guide.

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8  How Do I Get 501(c)(3) Exemption?

Olivia had her new charitable organization’s file-stamped articles of nonprofit incorporation and her organization’s bylaws, signed by her organization’s newly appointed directors, in hand. She was relieved and pleased that things had gone so well for her with these early steps. But applying to the IRS for recognition as a 501(c)(3) organization intimidated her. She had taken a peek at the application instructions and forms but already had so many questions. 

Recognition

In enacting Internal Revenue Code Section 501(c)(3), Congress granted qualifying charitable organizations exemption from federal income taxes. If your organization meets the conditions that Section 501(c)(3) sets forth, then your organization is tax exempt. Yet your donors and others who wish to rely on your organization’s tax exemption generally want assurances. Those assurances come in the form of 501(c)(3) recognition from the IRS. In practice, your organization applies, and if the application satisfies IRS examiners, the IRS issues a two-page determination letter to your organization saying the IRS has recognized your organization as tax exempt under Section 501(c)(3). Your organization can then share copies of its determination letter with donors, grantors, and others needing or desiring that assurance.

Difficulty

Some organizations find it relatively easy to complete the IRS application and obtain 501(c)(3) tax-exempt status. Others find applying to be hard and confusing, while still others find satisfying IRS examiners to be even harder, to the point of failing. Just how easy or difficult your organization’s application may be can depend on whether your organization has already operated without 501(c)(3) recognition, whether your organization’s purpose isn’t obviously charitable and instead appears competitive, commercial, or ambiguous, how clearly you can describe your organization’s planned charitable activities, and whether your organization intends foreign operations. You may already be able to tell that your organization’s application will be challenging and complex. If so, get help from the sources mentioned above, especially a qualified lawyer, skilled accountant, or experienced charitable-organization leader.

Read more of Chapter 8 in the paperback or digital guide.

9  What Must My 501(c)(3) Avoid?

Belle had finally gotten back her IRS determination letter. She did it! She finally had a 501(c)(3) organization in place to pursue her charity dream. Belle found, though, that the process of forming her charitable organization and gaining IRS tax-exempt recognition had raised so many warnings and cautions that she hesitated to launch her organization’s website, recruit its first volunteers, and serve its first patrons. What if she did something wrong? What if she broke a law or rule and lost her organization’s 501(c)(3) status? If only she had a clearer understanding of what she was supposed to avoid.

Limitations

The prior chapters should have made clear that the IRS qualifies 501(c)(3) tax-exempt organizations as much by what they must not do as by what they may do. You’ve seen that your organization’s articles of nonprofit incorporation and bylaws must name certain prohibited activities. Your organization’s 501(c)(3) application had to represent to the IRS that it did not plan to engage in other activities. Violating these prohibitions can lead to IRS excise taxes and penalties, loss of 501(c)(3) status, regulatory investigations and fines, and civil liability. Your organization’s board of directors and executive director should be on the lookout to ensure that your organization does not engage in prohibited transactions. This chapter reviews the major limitations on charitable organizations.

Inurement

A prior chapter quoted a substantial portion of Internal Revenue Code Section 501(c)(3), naming the types of qualifying charitable organizations that can escape federal income taxation. That chapter referred to express limitations in Section 501(c)(3) without stating the limitations. The first and key limitation expressly within Section 501(c)(3) is that the charitable organization must be one “no part of the net earnings of which inures to the benefit of any private shareholder or individual....” The IRS and courts interpreting this provision refer to it as the inurement doctrine. The inurement doctrine means that the charitable organization must not allow the charity’s net receipts, what in the business context we would call profits, to benefit those who control the charity or those whom they favor or designate. You must not operate your charity for your own benefit, your family’s benefit, or another person you favor. Of course, you may operate your charity for the benefit of its individual patrons, the disadvantaged individuals whom your organization serves. Just don’t let its net receipts (profits) end up in your pocket.

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10  How Do I Manage My 501(c)(3)? 

Fred was pleased with the early success of his new charitable organization. The process of forming his organization and gaining IRS 501(c)(3) recognition took more than he expected. But as soon as he had his organization’s determination letter, Fred was off and running, executing his long-held plans. Yet his early success hadn’t made things any easier. Just the opposite: his early success seemed to have compounded his challenges. It was then that Fred realized he didn’t have a clear idea for how to manage his new 501(c)(3) charitable organization. He needed some guidance if he was going to be able to keep up with his organization’s growth and success. He was definitely on to something, and he didn’t want to lose it.

Management

Charitable organizations depend on sound management. Some businesses you can get up and running, and then more or less leave alone. Not so with charitable organizations. Donors, volunteers, staff members, board governance, executive-director leadership, supplier relationships, program activities, and changing patron needs and demographics all make for a complex and fluid mix. If you can manage a 501(c)(3) charitable organization, you can manage a lot of other challenges, probably including a for-profit business. If you haven’t yet managed a charitable organization, don’t be surprised if you need help. Instead, seek and find the help you need so that you master the management challenge. 

Resources

You can help yourself manage your charitable organization by realizing that you are not in it alone. The nation’s 1.5 million 501(c)(3) organizations generate a lot of offers and resources for management assistance. Investigate those resources. You may, for instance, find a local United Way chapter that offers courses, training, coaching, and other help. You may find a national, state, or regional organization devoted to helping charities in your specific field, in the way that Feeding America and the Salvation Army help local soup kitchens. Or you may find a charitable organization much like your organization, serving effectively in another location nearby, the manager of which is happy to share insights and ideas. You may also find retired charity leaders as mentors and a network of lawyers, accountants, bookkeepers, and other professionals with whom you can briefly consult for tips or advice. Build and rely on your network resources. 

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11  How Do I Conduct Board Meetings?

Jennifer knew her board members well. As her charitable organization’s incorporator, she had chosen the organization’s first directors carefully, confident that they would be just the ones to help her guide her new 501(c)(3) organization to success. Their first couple of meetings had been exciting, although a bit confusing and without much direction. Jennifer already had a sense that as her organization’s president and board chair, she didn’t really know how to run a productive meeting. And she sensed that she’d better find out quickly, if she was going to preserve the unity and increase the effectiveness of her organization’s board.

Governance

Good governance is critical to your charitable organization’s success. And good governance depends on a strong, collegial, effective, talented, committed, and reasonably unified board. You’ve already seen in the above chapters how a board with diverse talents, experiences, and skills can lead and support your charitable organization. Yet no matter how talented and skilled your board is, you still need to conduct board meetings in a fruitful manner. You can waste a great board by failing to prepare for, plan, and conduct meetings in the orderly, informed, focused, and collegial manner that effective meetings generally require. Learn what you need as board chair to conduct effective board meetings. If you’re not the board chair, then help your board chair learn. Sound directions and tremendous energy can flow from skilled boards holding productive meetings. Make effective board meetings a mark of your charitable organization, and see how doing so helps your organization grow and thrive.

Chair

Your organization’s board chair, or the organization’s president also serving as board chair, has principal responsibility for ensuring the effectiveness of board meetings. No one can do more to ensure productive meetings than the board chair. The board chair has main responsibility for meeting notices, the information made available to board members to review and prepare for meetings, and invitations to staff, contractors, guests, or directors themselves to make presentations at board meetings. The board chair also has full responsibility for convening, conducting, and closing meetings, while calling for, counting, and recognizing prevailing board votes. Board chairs who have substantial prior board experience on multiple different boards tend to make good chairs, having a well of best practices on which to draw. Reviewing Robert’s Rules of Order, describing traditional parliamentary or meeting procedure, can be a good way to get an inexperienced board chair up to speed. Meetings need not follow strict rules but benefit from the structure and order the Rules suggest.

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12  How Do I Attract Donations? 

Fundraising. Ugh. Asking people for money was the one area Carla truly dreaded, relating to her new 501(c)(3) organization. She knew fundraising was important, even critical. But she regarded it as a necessary evil more so than a fair responsibility or fruitful opportunity. Carla had no experience asking for money and no idea how to go about it. Maybe she could find someone else to do it for her, although she suspected that doing so would cost her organization money. Carla definitely needed to get her head together on the fundraising issue, or she knew her organization was already in trouble.

Attitude

Attitude, they say, is everything. And that saying is no less true for success in charitable fundraising than for success in other endeavors. Many new charitable organization leaders profess no experience or skill in, or taste for, fundraising. You are certainly not alone, if that’s your attitude. But few experienced charitable organization leaders can make the same claim. Charitable organization leadership entails fundraising. As discussed above, the IRS public-support test ordinarily requires that 501(c)(3) public charities raise at least one third of their receipts from public donations. Your organization may successfully garner significant grant support, where you may find seeking grants to be easier than asking donors directly for money. Your organization may also generate substantial program revenue from fees and sales of charitable goods and services. But your organization will still need public support in the form of donations. To be successful, you need to ask others for charitable gifts, donations, and support. Get used to it. Develop a good attitude toward fundraising. You can do it.

Plans

Your application for your organization’s 501(c)(3) recognition required that your organization share a fundraising plan. As discussed in that chapter above, you should put good thought into your fundraising plan. IRS Form 1023, included among the other templates at the end of this guide, helps you consider traditional fundraising forms. Form 1023 provides checkboxes for mail, email, phone, and personal solicitations, donations through your organization’s website or another organization’s website, vehicle, boat, or plane donations, and private foundation and government grant solicitations. Consider all those traditional forms. But do more than check Form 1023’s fundraising boxes. Put plans in place for pursuing those donation sources. Assign responsibility to implement those plans. Set targets, review progress toward targets, and adjust accordingly. Follow that standard planning format of goal, plan, assignment, measurement, and adjustment, and you should be able to overcome your natural resistance to make a good start on fundraising.

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13  How Do I Staff My Charity?

The excitement at the board meeting was palpable. The organization had previously retained a bookkeeper and various contractors but had otherwise proceeded with only board volunteer service and the devoted service of a few key program volunteers. But the organization’s work had grown too complex to continue without employees. And so, the organization had just hired its first executive director who would begin next month after meeting the full board at this meeting. Everyone knew the organization had just turned a corner. They all hoped that the turn would lead to even greater organization success.

Employees

The step from an all-volunteer 501(c)(3) organization to an organization with paid employees is a big one. Many charitable organizations operate without paid employees. They depend instead on devoted board members and key volunteers. Their advantage is that the organization expends no donated funds on employee compensation and benefits, when employee expenses can be considerable. Their disadvantage, though, is that volunteers generally have limited time and may also have limited devotion. Laboring at work one does not always enjoy is one thing when paid to do so. Paid workers tend to persevere for the paycheck, even if the job offers few other rewards. But volunteers don’t have that financial incentive and reward. If the charitable work becomes too challenging, arduous, or unpleasant, they may simply stop volunteering, leaving the organization without the human resources it needs. Employees are thus an inevitable need for many charitable organizations. They can also revolutionize the processes and progress of a charitable organization that had formerly depended on only volunteers.

Costs

Charitable organizations should look especially closely at the costs associated with employees. For-profit firms look closely at labor costs, too. Wasteful expenditures on labor cut into business profits. But for-profit business owners and leaders know that they depend on paid workers. People don’t generally volunteer for businesses, only charitable organizations. And businesses that pay workers expend their own revenue, not donations given by generous folks, devoted to public good. Charitable organizations thus have even greater reason to watch employee compensation and expenses closely. Your organization should budget for its employee costs, with a clear eye toward stewarding donations well. 

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14  How Does My Charity Use Volunteers?

Craig had done fine with his charitable organization’s volunteers initially, when the organization had only a few volunteers whom Craig knew well and deeply valued and trusted. But as the organization grew, he found that he was orienting and supervising volunteers whom he barely knew. He was also beginning to deal with volunteer issues he hadn’t anticipated and didn’t necessarily know what to do. It began to dawn on Craig that he needed to research and adopt volunteer policies rather than dealing with everything on a case-by-case basis.

Identification

Charitable organizations should understand what a volunteer is and clearly distinguish volunteers from paid employees, board members, suppliers, donors, and other roles connected with the organization. An individual may have more than one role, such as both a donor and volunteer. But even then, the organization needs to clearly distinguish when the individual is serving in which role. An organization’s responsibilities to a volunteer and for a volunteer’s selection, training, and supervision differ from the organization’s responsibilities toward other roles. Identify volunteers clearly, and treat them accordingly.

Definition

A volunteer is generally an individual who wishes to help the organization carry out its charitable purpose, in an uncompensated capacity, under the organization’s direction, but at the individual’s convenience and choice. Yes, volunteers should do as the organization requires of them in their volunteer roles. But no, the organization does not compel or compensate volunteers to perform. Volunteers serve instead out of their own desires and willingness. A lack of compulsion or other obligation, together with an absence of compensation, mark the volunteer role.

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15  How Do I Measure Success?

Angel had been leading the charitable organization she founded and incorporated, as its executive director, for years now, after stepping down as board chair. Her board continued to be a great supporter of the charity’s ministry, which Angel continued to enjoy carrying out. But lately, the thought had been occurring to her that she and her organization might just be spinning wheels. They seemed to be doing the same thing repeatedly, without noticing any particular difference in the community or the population the organization served. On one hand, Angel felt that her organization had so far been a great success. After all, it had survived and was continuing to attract donations and provide charitable service. But what, really, was success? Angel realized that if she couldn’t define success any longer, she and her organization might need to change.

Good

Do charitable organizations need success measures? Or is the good that a charitable organization does inherent in its purpose and activities? Do things need to change and improve because of a charitable organization’s activities? Or are the activities enough in themselves to justify continuing to seek donations and provide charitable service with them? These questions are important to ask and attempt to answer. Charitable organization boards, leaders, donors, employees, and volunteers should all be asking these questions and looking for answers. The organization that asks and answers these questions, and evolves, resets, and improves because of that process, is a better organization than one that just keeps going through the motions without asking questions. Living things need to grow, age, die, and regenerate again out of the seeds and fertile soil that the cycle leaves. Help your organization through that living process.

Relationships

Charitable organizations succeed in large part when they foster, establish, and nurture caring relationships. A lesson I learned long ago, from someone whose identity I’ve forgotten but whose wisdom I well remember, is that in the charitable context, the transaction is less important than the relationship. Many new volunteers believe that their hands are the most-important factor. They believe that they soup the fix and serve, or the form they complete for an illiterate patron, is the value they supply in their volunteer service. Not so. The greater value to the patron receiving the service is the caring and supportive relationship the volunteer offers, along with the volunteer’s quiet model, mentoring, and witness to the hope and faith necessary for a good life. The soup will be gone in a moment, its effects dissipated within hours. But the relationship persists in the patron’s heart and soul. Someone cared for me, the patron realizes, and I want to be like them, caring for others. That’s why charitable service may be valuable simply for the fact of its occurrence, without other, external success measures.

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16  How Do I Manage Charity Finances?

Donna was a confident executive director in all areas but one: finances. Donna knew charitable fundraising, programs, personnel, facilities, and governance. She knew charitable-organization strategic planning, communications, design, and marketing. She also knew how to manage personnel and supervise volunteers. Yet among all those skills, Donna had no confidence in her financial management. She would even tell everyone, I’m not a numbers gal. But she knew her responsibility as executive director to ensure that her organization’s finances were in order. She just relied on a talented finance team.

Finances

Attracting donations is one thing, while managing a charity’s finances is another thing. Getting donations rolling in isn’t enough. A charitable organization must also manage the organization’s finances. Charitable organizations with lots of donations can still have lots of money problems. Financial management includes more than effective fundraising. Indeed, fundraising is a separate responsibility, often assigned to different organization leaders and personnel. The organization may have a Philanthropy Committee or Fundraising Committee supported by a paid development director, as the organization’s fundraising leaders, together with a separate Finance Committee and paid financial administrator. Fundraising is one thing, and financial management another thing.

Governance

A charitable organization’s board governs rather than manages. That distinction is just as true for the organization’s finances as it is for the organization’s programs, personnel, fundraising, facility, communications, and other functions. Yet the board still has a role in the organization’s finances, and that role is to set financial parameters and goals. The board sets the organization’s financial direction, just as it sets the organization’s direction in other areas. The board may, for instance, require annual audits, approve annual budgets, require monthly or quarterly financial statements to review and approve, and appoint a Finance Committee to help the board gather and analyze financial information to carry out those governance tasks. Ensure that your organization’s board sets financial parameters and goals, and confirms that the organization is performing within those parameters toward achieving those goals.

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17  What Facility Issues Face a Charity? 

Roger was delighted that his charitable organization had grown out of its original donated space in the unused rear of a busy assembly plant. The space had helped but was far from ideal. It had been just enough to get the organization up and running, off the ground. But as soon as the organization had hit its stride, Roger knew it needed a better space. And soon, the organization had identified and acquired its new, hopefully permanent, facility. Yet as soon as the organization moved into its new facility, Roger realized that the facility presented several new issues with which he had been unprepared to deal.

Needs

A physical space out of which to operate is a critical need for many charitable organizations. Some charities can operate out of the residences of their founders, leaders, and managers. Their work may all be at special service sites such as in schools, at hospitals, and in nursing homes. What good is a facility, if all it does is add a cost? But other charitable organizations need a place to conduct their charitable service, such as a soup kitchen needing a dining area and location to store and prepare the food. Patron service and activities, storage of the charity’s supplies, production or assembly areas for charitable goods, and offices for the charity’s services and staff may all be necessary or appropriate to carry out the organization’s charitable purpose. This chapter addresses areas to consider relating to your organization’s facility needs.

Identification

The first step in your organization’s space plans should be to identify space needs. As just stated, not every organization needs a physical space. Research and study may show your organization that it can survive and thrive without a physical space of its own. If that’s the case, then all the better, because premises come with distractions and costs. Keep the focus on your organization’s charitable purpose, not on occupying an impressive facility. Charitable organizations sometimes fail over taking on too much space. Yet at the same time, other organizations fail for not recognizing, planning, and meeting their space needs. Indeed, lack of an adequate facility may condemn more charitable organizations than most other concerns. Space can be essential. Make studying, planning, and pursuing space needs a high priority for your organization’s board. And once your organization is in a space, continue to monitor space needs. Organizations can grow, change, and contract quickly, changing their space needs. Timely response to changing space needs can be critical to organization success.

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18  How May My Charity Lobby?

Desiree burned with a charitable passion for the welfare of the individuals whom her charitable organization served. She had a radar for things that she felt might adversely affect them, and when her radar went off, watch out! One day, she stormed into an Executive Committee meeting, sharing a fresh report of a bill just introduced in her state legislature’s lower house. The bill, Desiree claimed, would further undercut the limited opportunities her organization’s patrons faced for recovery and increase their risks and burdens. Someone, Desiree demanded, must speak out against the bill.

Purpose

Your organization has a charitable purpose that it published to the IRS to qualify for 501(c)(3) status. That charitable purpose is your organization’s primary or even sole reason for existing, so far as the IRS, donors, and others may be concerned. Yet many things can affect a charitable purpose, making its carrying out easier or more difficult. And many things can affect the individuals, groups, and populations whom charitable organizations serve. Federal, state, and local legislation is one of those many things. Does advocacy for or against legislation, or lobbying as the IRS and others call the practice, fall within or outside of a charitable organization’s purpose? In Section 501(c)(3), Congress indicated that some lobbying can serve charitable purposes but not much. The IRS must disqualify so-called action organizations, dedicated to campaigning and carrying on propaganda, from 501(c)(3) tax-exempt status.

Examples

First, though, understand what lobbying looks like. Lobbying might include inviting a legislative representative to the charity to hear the views of its directors and executive on pending legislation, taking a bus full of charity volunteers to a legislative hearing at the state capitol to advocate for or against legislation, or encouraging donors, volunteers, and the public to call representatives to favor or oppose a bill. The essential aspect of lobbying is that it involves attempts to influence legislators or encourage others to influence legislators regarding pending or proposed legislation.  Your organization may have zero interest in lobbying. But just wait. You may soon see a bill that could have enormous potential impacts on your organization, its charitable mission, or its patron population. Then, you might reconsider your organization’s lobbying interests.

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19  What Reporting Must My Charity Do?

The success of Frank’s 501(c)(3) fundraising surprised and pleased him. He had expected to motor along as a small charitable organization, attracting a few thousand dollars of support while doing its quiet charitable work. But to his surprise, his organization received a substantial donation, then another, then another. By the end of his organization’s second year, the part-time bookkeeper the organization employed notified Frank that the organization’s receipts had topped $50,000. Frank celebrated, until the bookkeeper reminded him that the organization might now have an IRS reporting form to complete.

Reporting

Reporting is an important function of charitable organizations, both to preserve their 501(c)(3) tax-exempt status and to inform the organization’s board, donors, and other constituents of the organization’s compliance and performance. If your organization had no legal obligation to complete and file annual reports, it might prepare annual reports anyway, just to let its board know if the organization was meeting its goals and to share with donors and the community, to retain and increase the organization’s respect and support. Keep a positive attitude about reporting. It’s not all mandated stuff, and it’s not all bad. Good can come from preparing and filing reports, and making reports privately and publicly available.

Corporate

As a state nonprofit corporation, your organization likely has a statutory obligation under the nonprofit corporation act to file an annual report with the state corporations bureau. In their typical form, state corporations bureau annual reports do not include any financial information. Instead, they include basic identifying information for the organization, its address, its resident agent and address, its board of directors and officers, and its continuing operation. The purpose of an annual report filed in the online, searchable, public records of the state is to enable the public to identify active and inactive or dissolved organizations, and reach their legal representatives. That contact includes the ability to serve court process on the organization’s resident agent, to properly initiate a civil lawsuit. Annual reports do not require financial reporting. Your organization’s executive director should be readily able to complete the organization’s annual report online, with only governance information. See, for example, the online annual report at the end of this guide.

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20  How Do I Conclude My Charity?

Dan wasn’t exactly glad to be done. But he was relieved. Dan had enjoyed forming and operating his 501(c)(3) organization. Doing so had given him a lot of confidence. He had also learned a lot and, he hoped, helped a lot of people. Yet he knew that now was the time to end it. Dan was ready to start a for-profit business. He had the plans and capital, and even the contracts. He now knew he could make it in the nonprofit world. He wanted to prove it to himself and his doubters that he could also make it in the business world. And besides, the people whom his charity had been helping were much better off than they’d been. The economy had improved, and so had the community and the prospects it offered. Dan didn’t feel bad about closing his charity’s doors. He just wanted to make a good end of it.

Cycles

Charitable organizations can have natural life cycles. On one hand, we will always have the poor with us, to serve, care for, and help back on their feet through charitable ministries. On the other hand, charity should not become a disabling excuse and crutch for others who would be better off supporting themselves. Communities and their disadvantaged populations change, and charities should change with them. Some charitable organizations find that their service is no longer necessary, critical, warranted, or helpful, under those changing circumstances. Other charitable organizations perceive the continuing need for their charitable services but lose the ability to attract the resources to meet those needs. One way or another, some charitable organizations must conclude their operations, whether voluntarily or involuntarily. 

Ends

Making a good end to a charitable organization and its service is important for several reasons. First, federal tax laws and state corporations laws require it. Do it wrong, for instance by abandoning a charitable organization’s operations while leaving the corporate shell intact and assets at risk of misappropriation, and regulatory penalties and even civil liability can result. But ending a charitable organization responsibly also serves the organization’s donors, staff, volunteers, patrons, and community. Bad endings can leave patrons unserved, staff unpaid or without appropriate severance benefits, donors unhappy over misused donations, volunteers disappointed or angry, facilities in disuse or disrepair, and disputes to resolve with suppliers, landlords, and public officials. Do yourself, your organization, and your community a service. Make a good end of it. 

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