Posts Tagged irs

Nov 20 2014

A non-profit business is still a business.

I get a lot of calls from people seeking advice about starting a non-profit business. The first thing I ask for is information about what the business does. How does it generate revenue? Who is going to run it? How much starting capital does it have? What are the projected finances?

These questions always seem to surprise people. “That’s not what the IRS requires!” they think. And it’s true, that’s not what the IRS requires. Filling out the IRS forms is a simple clerical matter. CPA Carol Topp has a neat little checklist for what the IRS requires:

  • Do you have a Board of Directors, regular meetings and a method to elect the board?
  •  Do you have Articles of Incorporation and nonprofit corporation status from your state?
  •  Do you have bylaws?
  •  Do you keep minutes of your meetings?
  •  Do you have three years of financial history or can you predict two years of budgeted financial statements?
  •  Do you have a written mission statement? Can you explain your purpose and activities? Is your mission charitable, educational, scientific or one of the IRS’s other charitable purposes?
  •  Do you have a Conflict of Interest policy?
  •  Would you be willing to forgo any political candidate endorsements? 501(c)(3) organizations may not endorse political candidates.
  •  Do you have enough money to pay the IRS filing fee of $300-$750?

What people came to me for, isn’t really to pay me to fill out the forms. They came to ask about the holes in their plan, they just didn’t know that’s what they were asking about.

When it comes to merely filling out the application for 501(c)3 tax status, a lawyer can do the job for you. An accountant can do the job even better. After all, there are numbers involved and most lawyers went to law school because math was not their strong suit.

The hole people tend to overlook is almost always the same, “what is the BUSINESS of the non-profit business?” Just because a non-profit is not legally allowed to distribute its profit to its shareholders, it doesn’t mean that the non-profit doesn’t need to make a a profit. Put another way, a non-profit has to be profitable.

Logically speaking, if a business loses money every year, it will fail in the long run. Losing money is an unsustainable business model. If you lose money, where will you have the capital to do the community service or other non-profit work that you aim to do?

At that point, people think “OOoooohh… I need to give this more thought.”
Tl;dr: 501(c)3s have to make money, they just use the money for charitable purposes