by Retta Parsons | September 4, 2024
The nonprofit industry contributed $1.5 trillion to the United States economy in the first quarter of 2023. It has been reported in the Independent Sector Report, that in the U.S., the nonprofit sector is the third largest private workforce. It is logical then, given its size and importance, that aspiring entrepreneurs seek information on how to form and open their own nonprofit organization. When thinking about creating a business under a nonprofit structure, there are several factors that should be researched and considered.
Nonprofit Organization Structural Items to Consider
- The C structure: Once a 501c3 (or other “c” structure) is granted, the organization is not owned by the entrepreneur. By its nature, a nonprofit belongs to the community. The organization is governed by a Board of Directors that is comprised of, “a majority of members who are unrelated by blood, marriage, and outside business ownership”, as stated in the 5013c website. The Board of Directors has policymaking, fundraising, and CEO supervision responsibilities. As such, the CEO serves the Board. This means that if a Founder/CEO is let go, their relationship with the organization is severed. There is no return of any starting capital or other donations provided by that person over the years.
- Internal Revenue System (IRS) Public Support Test: There is an Internal Revenue System (IRS) Public Support Test for nonprofits. A nonprofit is expected to have a broad base of public support. Basically, this parameter entails that over the most recent five-year period, an organization’s public support must be over one-third of its total support. For example, if the organization had an average gross income of $1M, an average of $333,333.33 of that total must come from public support each year. Learn more here.
- Disclosed Compensation: A final item to consider is that if the organization qualifies to file a 990 (as opposed to a 990-EZ or a 990-N), the annual compensation of current key employees is listed. If the entrepreneur functions as the CEO of the organization, their compensation must be disclosed. A 990 is a public document and can appear on several governmental, group, and other websites.
Realities of Working in the Nonprofit Industry
For several aspiring entrepreneurs, this is their first foray into the nonprofit industry. As such, the realities of employment in the nonprofit sector should be considered.
- Image: A nonprofit CEO’s image both professional and private must be closely managed. Social media and website posts need to be crafted in ways to not offend a wide range of potential donors or sponsors. Daily actions need to bring positive attention to the organization and its cause. Public appearances need to communicate the cause and its needs without giving the appearance of being “too preachy.”
- Salary and Hours: The hours for most staff are long and the pay is not comparable to similar positions in the private sector. Many organizations experience continual turnover in staff as this reality plays into employees’ lives. As stated on the Nonprofit Quarterly website, a survey conducted by the National Council of Nonprofits of approx. 1,600 U.S. nonprofits found that, “[n]early three-fourths of respondents cited salary compensation as a major challenge…while 50 percent additionally cited stress and burnout among employees.”
- Approvals: Requests for new programs, grant acceptance, fundraising events, strategic plans, etc. should be approved by a vote of the board of directors with that vote recorded in written meeting minutes. This can be a stark departure from a for-profit structure where an owner is the one who ultimately decides the direction of their business.
Positive Aspects of a Nonprofit Organization
Many times, a nonprofit business structure is considered to address a perceived need in the community. It provides an aspiring entrepreneur an opportunity to bring attention to a cause in which one is passionate and to make a positive impact in the lives of persons adversely affected by the cause. In addition, through donations, sponsorships, and volunteer services, people and businesses in the community can connect with a cause and the people effected. Ultimately, successfully addressing the needs can lead to increasing the overall strength of the entire community.
Overall, several important factors should be considered when thinking about opening a nonprofit. Once open, the organization has a crucial responsibility to meet the needs of the people it serves. If the organization fails, people, real people, who are homeless, hungry, disabled, etc. could lose essential services that are crucial to meeting their basic needs and could, ultimately, jeopardize their very existence.
Retta Parsons
Consultants, Hillsborough, ParsonsFlorida SBDC at Hillsborough County
Specialty: Start-up, Bookkeeping
Retta Parsons brings a wealth of knowledge and experience in business management and public administration to her role as a business consultant. She previously served as CEO of Shiawassee United Way. In that position, she provided leadership to ensure the construction of a $26 million county medical care facility. She also led the change process and alliance establishment that resulted in the implementation of United Way 2-1-1 in Shiawassee County. Parsons also served as a training director for Girl Scouts, where each year she managed the delivery of approximately 124 trainings for more than 700 attendees. Parsons enjoys being active in the community. Past roles include chairperson for the State of Michigan, Department of Health & Human Services, Shiawassee County, board; chairperson of the Shiawassee Human Services Council; and ambassador for the Shiawassee Regional Chamber of Commerce. She earned a Master of Public Administration degree from Western Michigan University and a Bachelor of Arts degree in Human Resources Management from Spring Arbor College. She is a certified Child Care Facility Inspector, Instructor of Trainers, and Bridges Out of Poverty Trainer. In her spare time, Parsons enjoys bike riding with her husband, Roger, and spoiling her children and granddaughter.