BEFORE ORGANIZING THE NONPROFIT ©

Why Nonprofits Come Into Being

The overarching reason for the creation of a new nonprofit organization is the creators’ perceived need to fill a void. The void may be in the artistic community’s need for self-promotion and the exchange of ideas; the void may be in the neighborhood’s need for after-school programs for teenagers; or the void may be within a family, which believes it should set aside money to create a foundation dedicated to combating disease in the developing world. The wonderful thing about the nonprofit world is that, usually, the motivating factors driving the creation of a new organization are altruistic, not selfish. That fact alone makes being part of the creation of a new nonprofit innervating and, dare I say it, fun.

Why Plan?

Just as wise people plan new undertakings—moving to a new city to take a new job, going into businesses for themselves, deciding what will happen to their assets when they die—creating a new nonprofit organization requires careful thought. Without planning, chaos often ensues. One example should suffice:

The case of the nonprofit purpose that wasn’t carefully considered. By way of background: in the nonprofit world, the Internal Revenue Code imposes a tax upon the operations of nonprofit organizations that generate income from trade or business activities that are regularly carried on and which activities are not related to the tax-exempt purpose of the nonprofit. There once was an organization whose exempt purpose was to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about the fine arts. This same organization decided to undertake a new activity consisting of leasing studio apartments to artist tenants and operating a dining hall primarily for these tenants.

The Internal Revenue Service (IRS) determined that the new activities did not contribute importantly to accomplishing the organization’s exempt purpose. Therefore, the leasing and dining hall operations were “unrelated business activities” subject to income tax.

How easily this result could have been avoided by a little planning. Either at the time of organization or at some future date, but in any case prior to undertaking the leasing and dining hall activities, the organization’s purpose could have been reworded to include “the promotion of artistic education and growth for artists through the interaction of artists living within a community of artists.” By this addition, the nonprofit organization would have added an additional “education” component to its purpose; this additional purpose would have been aimed at the artistic community itself rather than the general public. Educational activities are exempt purposes under the Internal Revenue Code; therefore, by adequately describing its educational purposes to include both the public and the artistic community the organization could have avoided the result of having its leasing and dining hall activities subjected to tax.


HOW TO PLAN

The Need for Volunteers or Deep Pockets

In order to do effective planning, the originator(s) of the new nonprofit organization must first be willing to pay the cost of hiring professionals or obtain the commitment of those same professionals to donate the necessary time and skills to the planning process. At a minimum, the organizers will need to secure sufficient initial funding to underwrite the cost of bringing the organization into legal existence even if all the consulting help is donated. 

In addition to adequate pledges of funding, the organizer(s) will need consultants. These consultants may be members of the organizing group (thus saving the group this expense) or they may be paid, outside consultants. Three critical areas for which consultants are recommended include strategic planning, law, and industry structure. The strategic planner will coordinate the planning process, helping folks to stay focused during the often arduous planning steps and stages. The lawyer (who should be knowledgeable in nonprofit and tax law) will help the organization avoid the traps for the unwary such as the “organizational purpose” trap described in the example above. The consultant knowledgeable with the structure and financing of the “industry” in which the nonprofit plans to operate will ensure that planning is realistic and achievable. 

Finding the consultants needed for the planning process at a cost that is affordable is not an impossible task. The person who is knowledgeable with the industry in which the nonprofit plans to operate will very often be the prime driver of the new organization: the person who most wants to create the new organization because there is a need not currently served. Lawyers who will offer limited services for free or for reduced fees can often be located through the state or local bar association’s “lawyer referral service.” Strategic planners, if not easily identifiable, may be located by talking to other nonprofit organizations, particularly such organizations as the United Way or the local University’s Extension Service, which have many contacts throughout the consultant community. Strategic planners understand the need to offer services at little or no cost to new organizations as a marketing tactic (“lost leader”) to keep their names in front of the groups that may employ them in the future.

 

 

THE STRATEGIC PLANNING PROCESS

In a nutshell, the strategic planning process is designed to formulate a workable guide that will direct the development of the organization over time. Strategic planning comes in many different guises and under many different names, but most planning strategies cover some very common elements, described as follows. A more sophisticated version of strategic planning called "logic modeling" should be undertaken by organizations that are serious about "doing it right."

1. SWOT Analysis: “Strengths, Weaknesses, Opportunities, and Threats.” Planners will explore the strengths and weaknesses that the new nonprofit organization will bring into the arena of competing services offered by both nonprofit and for-profit corporations. Planners should determine the opportunities the market presents for the new nonprofit to address in novel ways. Threats to the new organization to also be addressed. Threats may come from organizations already serving the targeted population, from funding issues, or from changes in the law.

Effective SWOT analysis requires the interaction of the strategic planning consultant, those conversant with the “industry” and population to be served, and those committed to the idea of the new nonprofit but who lack in-depth knowledge of the industry and population to be served. The results of the SWOT analysis will form the basic building blocks of the strategic plan.

2. Mission, Vision, Values. (The following comments are the author’s and come from many years of leading and participating in strategic planning sessions. These views are not sacrosanct and will not be followed by all consultants). Derived from the SWOT analysis, the Mission of the new nonprofit should be relatively easy to state. The Mission Statement should be succinct, stating exactly whom the organization will serve, what it will do, and how it will do it. 

The organization’s Vision should be a statement of what the “world” (the population served or the larger society) will look like if the organization effectively performs its Mission. Some people disagree, but the author believes that the organization should be able to accomplish the Vision within a reasonable timeframe; after which period of time, the organization will create a new Vision at an even higher level of achievement. A contrary view is that a Vision should be so lofty that it can never be accomplished, which view seems to set the stage for organizational failure.

The organization’s Values consist of those beliefs and actions that everyone connected to the organization will hold in common—those “things” that are so crucial to everyone that they must be a common milieu from which all actions stem. Organizations frequently adopt values such as “organizational transparency,” “personal integrity,” and “teamwork” as Values. Value statements require introspection by strategic planning participants as well as a willingness to conceive of organizational operations in the absence of these shared Values—such an obverse viewpoint should help determine which Values are really “key” values to the organization’s success.

3. Goals. The organization will need to develop goals that can be accomplished during varying lengths of time; i.e., both short and long-term goals. The goals and the actions necessary to accomplish the goals will lead the organization directly to the successful completion of its Mission. Developing these goals and the actions (often called “action steps”) required to meet the goals require tremendous thought and effort. “Action steps” needed to fulfill a goal usually contain a “what” (what action is to be taken), “who” (who will complete the action), “when” (the projected date of completion), and “cost” (the cost to complete the action).

One Goal with attendant actions steps might look something like this:

Goal: Bring the Organization into Legal Existence.

Action Step1. Engage attorney to draft and file articles of incorporation in compliance with the Mission, Vision, and Values stated in the strategic plan. Jones to complete this step by June 1. Expected cost is $200 plus filing fees ($150).

Action Step 2. Engage attorney to draft bylaws for consideration at first meeting of incorporators. Jones to have attorney complete this step by July 1. Expected cost is $400.

Action Step 3. Hold first meeting of incorporators, adopt bylaws. Jones to schedule this meeting by August 1. Expected cost is $100.

One of the goals within the strategic plan for a new organization will be to develop a management system for the organization. The author strongly suggests that any new organization consider a management system driven by the Malcolm Baldrige seven criteria for organizations seeking continuous improvement. (For a great explanation of the Baldrige criteria and their application to organizations, see Baldrige Award Winning Quality (2006), Mark Graham Brown, Productivity Press). 


SUMMARY

In these few pages, I have attempted to bring into focus the need for forethought before launching a nonprofit organization. Without planning, how will the organization know: where to seek funding to support its efforts, how to manage its affairs, how to measure its results, or how to develop its employees’ skills? Without careful planning, how will the organization know how much it will cost to operate (the organization will not receive funding from the government or foundations without budgets)? 

With a desire to accomplish “good” for the population to be served foremost in his or her mind, the nonprofit organizer may push ahead to form the organization without adequate planning. The result is often frustration because there is no solid foundation upon which to operate. Too often, I have witnessed nonprofits stuck in the downward spiral of chasing funding from ever more reluctant grantors. Meanwhile, services may have to be curtailed until a new funding stream is found. In desperation, the nonprofit may morph its purpose and mission to “fit” within the latest request for proposals from a government agency or foundation simply because the nonprofit is desperate for funds. These scenarios can be avoided, as least in part, by simply taking the time to plan exactly how the organization will move from point A to point B.

Copyright 2007 by Conley Salyer, Attorney. 

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All rights reserved. For permission to use any part of this document or if you would like me to help plan your nonprofit organization, contact me, Conley Salyer.