At some point during our lives, we may come up with a great idea to improve our society. These ideas often emerge when we identify an unmet need or gap in service. But then what? Coming up with the idea can seem like the easy part. Figuring out what to do next, how to turn your passion into a reality, can be the daunting part.
Years ago, there was a go-to option for someone who wanted to pursue social good – becoming a 501c3. You had to fill out the 30-page application, pay a fee to the IRS, wait, then wait some more – sometimes upwards of a year — to finally get the go ahead to accept donations for your project.
However, in 2016, there is a plethora of social or legal structures to help you meet your goals: benefit corporations and Certified B corporations, fiscal sponsorship, for-profit/nonprofit collaborations, nonprofit LLCs, social enterprise, and of course, the many variants of the 501c. For the purpose of this article, we will focus on the more common legal structures and ones that are, at least in part, charitable in nature.
There are five key questions to ask yourself when embarking on the path to try to figure out what structure is best for you and your vision:
- What is your primary motivation? Is your motivation for this project solely to meet a community need, or is there some profit incentive as well?
- What is the purpose of your project? Is your project or idea of a scientific, literary, educational, charitable, or religious in nature; or is it something else entirely?
- How important is having control over the project? Do you want to have sole discretion over your project and its outcomes, or are you comfortable being overseen by a board of directors?
- Does your project have a foreseeable end date? Is this a short-term project that will end when you meet your outcomes, or is this something that you want to be a permanent fixture in society?
- How much money do you need, and where will it come from? Do you need grants and donations to fund your work, or would a small sum and/or a GoFundMe account do the job?
And although it isn’t necessarily essential to move forward, it is important to think about who is already doing work in this realm. Is there space for collaboration?
Once you have a clear idea of what your project is and what it needs, you can move forward with figuring out if you should incorporate within a certain legal structure, and if so, which one will be best for your vision. Of course, it is helpful if you have a basic understanding of each of your options and the pros and cons of each in the format of the key questions above.
Pros: Tax-exempt, Ability to Receive Donations, Protection from Personal Liability, Organizational Perpetuity, Credibility, Discounts
Cons: Paperwork, Time, Expense, Commitment, Legal Obligations
A 501c classification is provided to an organization by the IRS. While there are 29 different sub-classifications of the 501c, most charitable organizations in the United States choose the 501c3 classification, which allows donors to give tax-deductible gifts to the organization. Additionally, government and foundation grants are often available only to organizations with 501c3 status. Registered nonprofits can also receive certain discounts that the other structures may not offer, such as inexpensive software through TechSoup.
The traditional 501c3 status is best suited for ideas that are charitable in nature and are solely to address public need. Because a 501c3 is a nonprofit organization, no net earnings may inure to the benefit of any private shareholder or individual. And because a 501c3’s power lies in the hands of the board of directors, if you want to retain sole discretion over your project, this isn’t the best option for you.
Becoming a 501c3 is ideal for those projects that don’t have a short time frame in mind. The requirements and application process for 501c3 status are no walk in the park. On the other hand, going through this process forces you to be clear about your mission, think through your operating rules, and develop procedures for decision-making.
In 2014, the IRS introduced the express version of the traditional 501c3 application, the . Although the 1023-EZ may make the application process less painful, the general requirements and expectations, such as having a board of directors and a budget, are still required. Additionally, some funders are hesitant to make grants to organizations that secured their status with the 1023EZ, because they believe the application process is not rigorous enough to show that these organizations are truly appropriate to receive larger grants.
Pros: Fast, Flexible, Ease of Entry and Exit, Tax-exempt and Ability to Receive Donations (through the sponsor), Credibility Through Sponsor Due Diligence
Cons: Lack of Hands On Accounting, Fee for Service, Potential Funder Concerns, Sponsor Rules and Regulations
Fiscal sponsorship entails a nonprofit organization (the “fiscal sponsor”) agreeing to provide administrative services and oversight to the activities of groups or individuals engaged in work that relates to the fiscal sponsor’s mission. The fiscal sponsor also assumes some or all of the legal and financial responsibility for the group. Basically, a fiscal sponsor “adopts” a person or project who wants to do social good but doesn’t want to become a 501c3, either now or ever. The level of oversight of the fiscal sponsor depends on the model of sponsorship they use.
The criteria, application process, and program guidelines vary from sponsor to sponsor, but the overall process is significantly less arduous and quicker than the 501c3 application process. For instance, two Twin Cities fiscal sponsors, MAP for Nonprofits and Springboard for the Arts, both review applications on a monthly basis.
Fiscal sponsorship is ideal for short-term projects (making a documentary), or projects that are just starting out and want to test the waters and gain some experience before they go down the 501c3 super highway. It is also a great solution for multiple entities (nonprofits, for-profits, individuals) who want to collaborate on a specific project or cause and are looking for a neutral third party to administer the grant.
Although you have control over project activities and outcomes, this option offers the least organizational and financial control. Technically, your donations belong to the sponsor and are housed within their existing systems. So, while you may hate QuickBooks reports, if that is the software your sponsor uses, you likely will have no ability to change it.
Benefit corporations and Certified B corporations
Pros: Individual and Shareholder Profit, Brand Differentiation, Control, Flexibility
Cons: No Tax Benefit, Paperwork, Still “New”
Although these two entities share similar names and aspirations, they are not the same thing. A benefit corporation is a legal entity recognized under a state’s corporate laws, while a B Corporation is a certification a company may receive from a certifying entity, such as B Lab. Both structures are for-profit entities that have a focus on social good and want that focus to be an official part of their organizational mission and governance structure. However, the public benefit still must be in the best interests of the corporation.
These types of structures are ideal for ideas that aren’t solely charitable in nature and don’t want to be funded by grants and donations. Because a benefit corporation/B Corp isn’t a recognized nonprofit by the IRS, donations aren’t tax-deductible. However, being a benefit corporation or B Corp may make your company more appealing to certain investors, especially those involved in impact investing.
As a for-profit business owner, you do have a large amount of control over your organization. Other than the institutionalized social mission of which you need to adhere, decisions are widely left in your hands, rather than that of a funder or the IRS. However, you are still responsible to your stakeholders (and shareholders, if you have them).
Do your research
Of course, everything mentioned here is a generalization. Before embarking on any journey, do your own research. MAP for Nonprofits, the Minnesota Council of Nonprofits, and the Nonprofit Assistance Fund are excellent local resources for professional advice.