Structuring a new nonprofit requires thought, planning

It’s worth the time to get it right and lend a helping hand

By John Love

MacKenzie Scott and husband Dan Jewett made headlines in June with their $2.7 billion largesse to 286 equity-oriented nonprofit groups across the country, including a gift of $1.5 million to Dallas’ Big Thought. I hope their generosity inspires other people of means to fund causes they believe will make our world better. Or even start a nonprofit meaningful to them.

During the past several years, I’ve been able to help many new nonprofit groups get their legal footing, and that has given me a perspective on how best to approach the process. While setting up a nonprofit entity is a fairly straightforward legal undertaking, the best outcomes result from a well-thought out plan about the endeavor, its mission and its operations, and giving yourself the time to do it.

Here is a quick guide to the process:

Step 1

Define the nonprofit’s source of income. Raising money from the public requires a different approach than relying on the generosity of one donor. The former results in what’s typically defined as a public charity, while the latter is often formed as a private foundation. The designation also affects the composition of the board of directors. Related persons can serve on the board of a private foundation, however a public charity must have a majority of unrelated persons, or “outsiders.” Whether the organization is a public charity or a private foundation, there still can’t be any self-dealing, though. That means the organization sometimes can’t transact with certain persons, which are called “disqualified persons.”

A hybrid structure is beginning to emerge in the nonprofit world. With it, a for-profit company owns certain intellectual property that is used to support a nonprofit entity and help that nonprofit fulfill its mission. This dual use of the IP can be tricky, as the profits funding the nonprofit must be tracked and accounted for accordingly. Good accounting is often critical to the proper functioning of any nonprofit.

Two other notes. A nonprofit chooses its classification when it applies for tax-exempt status. And if the founders are unsure about which classification to seek, they can leave that decision to the IRS. (Yes, it is the IRS that approves these tax-exemption filings.) Founders should always be mindful of this perspective – the goal of a nonprofit isn’t to create profit for the founder or any other one person. That’s not to say workers can’t be paid, but the pursuit should always be for the tax-exempt purpose.

Step 2

The method for soliciting donations is another determinant of the nonprofit’s structure. Each state has different stances on registrations, disclosures and other regulations. This is certainly a matter where you need an attorney to provide guidance.

Step 3

Be patient. I’ve found that many people with big hearts are surprised at the time, cost and effort involved in setting up a nonprofit. The process often does takes longer than it should. Currently the IRS has a backlog of filings to approve because of lower productivity caused by the pandemic lockdown. Plus, state filings are needed, which can also create delays.

But good things usually require an effort. Once the nonprofit has established its structure and legal classification, it can help make our world a better place.

Contact John Love at john@wrightconnatser.com for help with legal questions regarding nonprofit organizations.