Chapter 1

Journeying into the World of Nonprofit Organizations

IN THIS CHAPTER

Defining the nonprofit sector

Getting started with a nonprofit

Encouraging volunteerism

Identifying the key components of a strong mission statement

Creating an effective mission statement with the help of your board

Acquiring the resources your nonprofit needs

It's a typical day in your hometown. Your alarm wakes you from a restful sleep and you switch on your radio to hear the latest news from your local public radio station. You hear that a research institute's study reports that economic indicators are on the rise and that a health clinic across town is testing a new regimen for arthritis. Plato, your golden retriever/Labrador mix, adopted from the animal shelter when he was 5 months old, bounds onto your bed to let you know it's time for breakfast and a walk. Plato is followed by Cynthia, your 4-year-old daughter, who wants to help you walk Plato before she's dropped off at her preschool housed in the community center. You remember that you promised to bring canned goods to the food bank that's next-door to Cynthia's school. You haven't even had coffee yet, but already your morning is filled with news and services provided by nonprofit organizations.

You know that your public radio station is a nonprofit because you hear its pledge drives three or four times a year and you volunteer a few hours each month for the food bank, so clearly that's a nonprofit, too. But you may not know that the research institute is probably a nonprofit organization, just like the health clinic where the arthritis research is being tested and the animal shelter where you found Plato. Cynthia's preschool and the community center where the preschool rents its space are likely nonprofit organizations. Whether you realize it or not, all of us - rich, poor, or somewhere in between - benefit from the work of nonprofit organizations every day.

Nonprofits find revenue from a variety of sources in order to provide services. Because most nonprofits serve a need in the community, tax-deductible donations are an important revenue source. Sometimes nonprofits charge a fee for the service they provide or the work they do. Other nonprofits may sign contracts with your city or county to provide services to residents. Usually, nonprofit organizations scrounge up their income from a combination of all these revenue sources.

The nonprofit sector isn't a distinct place - it isn't some plaza or district that you come upon suddenly as you weave your way through the day. It's more like a thread of a common color that's laced throughout the economy and people's lives. No matter where people live or what they do, it's not easy to reach the end of a day without being affected by the work of a nonprofit organization.

Perhaps your lifelong goal is to find a way to help others in your community, your state, your country, or the world. (If this statement is true of you, thank you, kind citizen.) You think about your options every day, but you haven't the foggiest notion about the next steps to take to help you reach this admirable goal. You have so many topics to research and tasks to determine how to complete - and so much necessary funding to nail down to help you get started. Think of this chapter as the beginning of the journey. Here we help you understand exactly what a nonprofit organization is and how to start and manage one.

Check out File 1-1 at https://www.wiley.com/en-us/Nonprofit+Kit+For+Dummies%2C+6th+Edition-p-9781119835745#downloads-section for a list of web resources related to the topics we cover in this chapter.

What Is a Nonprofit Organization?

People hear the term nonprofit and picture a different type of business where the owner isn't allowed, by tax law, to make a profit or draw a paycheck. But, in fact, some nonprofit organizations end their fiscal year with a profit, and that's good because surplus cash (also referred to as reserves) keeps a nonprofit operating in the black versus the red.

Comparing for-profits to nonprofits

The main difference between a for-profit corporation and a nonprofit corporation is what happens to the profit. In a for-profit company like Amazon, Google, United Parcel Service, or your favorite fast-food chain, profits are distributed to the owners (or shareholders). But a nonprofit can't do that. Any profit remaining after the bills are paid has to be invested into the organization, whether into its service programs, infrastructure, and so on, or stored in reserve for a rainy day. Profit can't be distributed to individuals, such as the organization's board of directors.

What about shareholders - do nonprofits have any shareholders to pay off? Not in terms of a monetary payoff, like a stock dividend. Rather than shareholders, nonprofit organizations have stakeholders - they're the people who benefit from the nonprofit's mission and services to their target population (those in need, from animals to humans). These people are often called stakeholders because by being committed to the success of the nonprofit, they have a stake in it; stakeholders include board members, volunteers, community partners, and the people whom the nonprofit serves directly and indirectly.

Introducing the coveted 501(c)(3) status for nonprofits

When we use the term nonprofit organization in this book, for the most part we're talking about an organization that has been incorporated (or organized formally) under the laws of its state and that the Internal Revenue Service (IRS) has classified as a 501(c)(3) and determined to be a public charity. If the term 501(c)(3) is new to you, add it to your vocabulary with pride. In no time, "five-oh-one-see-three" will roll off your tongue as if you're a nonprofit expert.

Private foundations also have the 501(c)(3) classification, but they aren't public charities. They operate under different regulations, and we don't cover them in this book.

Other kinds of nonprofit organizations do exist; they're formed to benefit their members, to influence legislation, or to fulfill other purposes. They receive exemption from federal income taxes and sometimes relief from property taxes at the local level. (These types of organizations aren't discussed in this book.)

Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law. They are, with minor exceptions, the only group of tax-exempt organizations that can receive contributions that are tax-deductible for their donors.

The Internal Revenue Code describes the allowable purposes of 501(c)(3) nonprofit organizations, which include serving religious, educational, charitable, scientific, and literary ends.

Check out File 1-2 at https://www.wiley.com/en-us/Nonprofit+Kit+For+Dummies%2C+6th+Edition-p-9781119835745#downloads-section for a more detailed list of the activities that 501(c)(3) nonprofits take on.

A SECTOR BY ANY OTHER NAME

Not everyone thinks that nonprofit sector is the best name. That's because of the array of organizations with different types of nonprofit status. Some of these organizations are formed to benefit their members - such as fraternities and labor unions - and don't share a broad public-serving intent. Another reason nonprofit sector may not be the best choice of terms is its negative connotation. After all, what's worse than not making a profit? But, as we point out earlier, and we remind you again in later chapters, not making a profit isn't the determining factor. Here are some alternative terms you may hear:

• Voluntary sector: This term emphasizes the presence of volunteer board members and the significance of voluntary contributions and services to the work of 501(c)(3) organizations. In this definition, the organizations alone don't represent the meaning of nonprofit; the definition includes the vast web of supporters who participate as volunteers and donors.
• Independent sector: This term emphasizes the public-serving mission of these organizations and their volunteers and their independence from government. (Independent Sector is also the name of a nonprofit organization that provides research, advocacy, and public programs for and about the nonprofit sector.)
• Charitable sector: This term emphasizes the charitable donations these organizations receive from individuals and institutions.
• Third sector: This term emphasizes the sector's important role alongside government and the for-profit business economy.

We use the term nonprofit sector throughout this book, but we want you to understand its limitations and be familiar with other commonly used terms.

Being a nonprofit organization doesn't mean that an entity is exempt from paying all taxes. Nonprofit organizations pay employment taxes, employee salaries, and wages just like for-profit businesses do. In some states, but not all, nonprofits are exempt from paying sales tax and property tax, so be sure that you're familiar with your jurisdiction's laws and nonprofit reporting requirements. Also, check...