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Before you create a formal non-profit organization, consider the alternatives which might suit your situation better. Broadly speaking if you are a social entrepreneur you have five options for formalizing your project:

  1. Register as a new non-profit (often called a ‘501c3’)
  2. Become a project of a professional fiscal sponsor
  3. Become a project of an existing non-profit
  4. Register as a for-profit company
  5. Stay informal

Register as a new non-profit
Many people rush to this option, often supported by pro bono legal help. It makes sense when you have a large project (over $1m budget), that is long-term in nature, and needs sustained governance by stakeholders. A lot of people don’t realize the compliance requirements of formal non-profits: you have to recruit a board, the board has to meet at least once a year, you have to keep official board meeting minutes, you have to implement bookkeeping, you have to file annual tax reports with both the IRS and your state government, and you have onerous and complex legal requirements for managing you employees and contractors etc. etc. At the very least this takes $30-50K of time and money each year. If you are still interested consider reading Get ready, Get set: What you need to know before starting a non-profit by Peter B. Manzo and Alice Espey, Legal Responsibilities of Your Nonprofit Corporation by Peter B. Manzo and How to Form a Nonprofit Corporation by Anthony Mancuso.

Become a project of a professional fiscal sponsor
This is a non-profit that specializes in providing non-profit services to a project. For a fee that typically ranges from 7-10% of revenues, the fiscal sponsor will do such things as write tax letters to donors, manage your accounting, take care of staffing paperwork, and prepare and execute contracts with contractors. You don’t need a board, although you can set-up an advisory council. This is an excellent way to focus on your mission rather than the paperwork of running your own non-profit. It typically makes sense to work with a fiscal sponsor when your project is small (under $1m per year), is short term, or is experimental and has a high chance of failing. If you want to know more consider reading: Fiscal Sponsorship: the state of a growing service by Alexis Krivkovich or search for fiscal sponsors in your area using the Fiscal Sponsor Directory.

Become a project of an existing non-profit
Some non-profits let social entrepreneurs operate under their non-profit status as a favor or for a small fee (2-7% of revenues). This is an option you might pursue if your project is small (under $1m per year), and where there may be some strategic reason to work with the host organization – for example they have specific programmatic expertise or partnerships you want to take advantage of. However, this arrangement does not always run smoothly especially if the host organization has little experience in managing arms-length projects. Sometimes project funds are co-mingled and you may not get the attention your project deserves when the host organization goes through periods of high activity. Plus your project is at the mercy of the host organization’s board or staff which could decide to drop you because of changing priorities.

Register as a for-profit company
Many social entrepreneurs have business models that are essentially for-profit in nature. Non-profits can generate a portion of their revenues through fee-for-service but at a certain point this will jeopardize their non-profit status. Consider this option if you plan to sell you products or services at or above cost and raise proportionately little revenue from foundations, government and major donors. Don't for get about employee benefits such as cheap health insurance and 401ks. You don't want to be caught not taking care of them properly.

Stay informal
The great thing about Web 2.0 and social media is that the cost of coordinating and managing projects to deliver social goods is very low. If you plan on using a lot of volunteer labor and funding requirements are low, stay informal and avoid all the reporting and compliance hassles altogether.

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Some musings here on what non-profits should think about when they embarking on using web 2.0 tools. Originally posted at Working Wikily where I am a contributing blogger. Key take aways:

Principle 1: Find your audience where they already are

Principle 2: Experiment for free

Principle 3: Think about the off-line component

Principle 4: Actively recruit and manage your community