The downsides of starting a nonprofit organization
There are many benefits that come with starting a nonprofit organization, from tax advantages to grant eligibility; however, too often we forget to consider the downsides to starting a nonprofit—and there are some potential dealbreakers! While Candid offers many resources for starting a nonprofit, it’s also important to fully understand the disadvantages before getting in too deep.
Let’s take a closer look at some of these potential downsides to starting a nonprofit organization to determine whether setting one up is right for you.
The cost of incorporating
Starting a nonprofit is a big financial commitment. It’s difficult to give a single dollar amount or range of anticipated expenses because financial costs can vary greatly by organization and state. However, there are definite costs associated with operating at the state level, filing with the IRS, and registering for charitable solicitation. You may also have legal fees and operational costs, such as office space, salaries, and insurance. Unfortunately, funders do not typically give grants for start-up costs, so you will most likely need to pay these expenses out of pocket or rely on donations from friends, family, board members, or your supporters.
In addition to the hard costs of starting a nonprofit organization, consider the time and effort, or the soft costs, also required. Instead of starting a nonprofit, you might spend your time and effort in other ways to help drive your mission forward, such as volunteering, consulting, or fiscal sponsorship.
If you aren’t a fan of paperwork, this might be a major factor to consider when thinking about starting a nonprofit organization. Nonprofits are required by the IRS to keep detailed records, and there is a lot more paperwork for nonprofits than for other organizations, such as Limited Liability Corporations (LLCs). Paperwork requirements are significant both in the incorporation phase and every year until the organization dissolves. For example, in addition to the annual Form 990, all nonprofits must submit incorporation forms, state required paperwork, charitable solicitation registrations for each state the organization will be fundraising in, board meeting minutes, and financial statements—and this is just to name a few of the requirements.
Additionally, filing paperwork requires time and expertise (and possibly money for hiring a professional, like an accountant or lawyer). These costs can take you away from important mission work—the reason you started your nonprofit organization in the first place!
To learn more about such filings and paperwork, read our blog 4 essentials of e-filing your nonprofit’s Form 990.
Although many people like to be in the driver’s seat, no one “owns” a nonprofit. The board controls the organization, not the founder, and they are subject to laws and regulations, including their own articles of incorporation and bylaws. This means personal control is limited—and in fact, the board can technically fire the founder! This lack of control can be a huge dealbreaker, especially if you have a strong vision and want to take charge of all aspects of your nonprofit organization.
More public scrutiny
Given that nonprofits serve the public and are eligible to receive donations and grants, they must operate transparently. To support this, the IRS requires that nonprofits make their Form 990 tax returns and Form 1023 exemption application available to the public upon request. 990s are also made freely available through Candid so the public can see sensitive financial information about your organization, including employee compensation for key staff. Because this information is required to be made public, it’s worth considering whether an “open books” approach to advancing your cause feels right for you.
One way your nonprofit can operate transparently is by updating your Candid profile on GuideStar, so funders, researchers, and potential donors can all easily access your information.
Determining the best approach
Going over the nitty gritty and not-so-fun parts of starting a nonprofit organization can be eye opening, but that’s a good thing; you should understand both the pros and the cons before determining the right course of action. Ultimately, the goal is to further your mission and make a difference, whether that’s by starting a nonprofit organization or through these alternatives. Whatever you decide, we’re here to help.
To prepare and gauge your readiness, check out our full article, What are the advantages/disadvantages of becoming a nonprofit organization? We also recommend using the nonprofit startup assessment tool.
The information provided in this article is intended to offer general guidance on the disadvantages of starting a nonprofit organization. Specific steps may vary for each state, and Candid recommends consulting with a legal or tax professional for detailed assistance.
A great starting point, Melissa. I think another key factor is competition. I constantly question, "how will your organization distinguish itself from all of the others?" Scan the community and see which organizations are working in your space. See if you can be complementary rather than competitive as there are limited financial resources.
Jim Fruchterman, Tech Matters says:
I tell every aspiring leader who wants to start a nonprofit to seek fiscal sponsorship. That way, you avoid all of the hassles above, and can focus on your idea and whether it works. If it does work, you can always start a c3 when your budget reaches into the millions!