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If you're like me, you have a ton of ideas for how to make things better: perhaps a neighborhoodbeautification project, a tutoring program, a community-owned healthy grocery store, or a peer-to-peer car sharing service. Some of these ideas require little more than a meeting with friends or the purchase of tools; after that, it's time to get to work! But other ideas are more involved and complicated and likely require that a legal entity be formed. This post is about how to decide if you need to create a formal organization and, more importantly, how to go about doing so.
First, let me make clear that I am not providing legal advice. You should always consult an attorney before making, well, a legal decision! That said, here are some basic things to consider before going the legal entity formation route:
1) Is what you are proposing a one-time thing, or is it ongoing? Common sense would dictate that if you are going to buy seedlings and a shovel so as to plant trees in the neighborhood, you need little more than a few hours on a Saturday. However, if you want to, say, gather a group of volunteers and do tree planting every week in a different neighborhood, you may want to consider something more formal.
Why? For one thing, there may be legal issues: suppose someone gets injured, or it turns out that you are not allowed to dig in a certain area. Being part of a legal entity--be it a nonprofit, for-profit, or a program within one of those--affords you protection from being personally liable in those instances. What's more, as your venture grows, you will likely need to raise funds. As soon as you are dealing with inflows and outflows of money, you need to have a way of accounting for the funds, as well as a bank account into which they can be deposited and from which they can be withdrawn. There are lots of examples of informal groups that do this without a legal entity--think of AA meetings, for instance--however the more money involved, the more likely it is that you will want to be part of a non or for-profit.
2) Can you house your project within another organization? One of the things I highly recommend is that before you go off and start your own nonprofit, you consider fiscal sponsorship. Here's how that works: suppose you are looking to tutor refugees. Rather than start an organization dedicated to the tutoring, you can partner with an existing nonprofit that already has a relationship with refugee communities. That nonprofit--let's call it Bob's House of Social Service--can "lend you" it's tax-exempt status, which means that it is vouching for the charitable nature of your work. In so doing, Bob's House of Social Service enables you to accept tax-deductible grants and donations while giving you legal protection and a means of tracking your money. Basically, instead of cutting a check to you, the leader of the tutoring initiative, the donor makes it out to Bob's House, who then takes a small cut (usually 3% - 5%) before making the funds available to you.
The fiscal sponsorship route has several advantages. For starters, it's a hell of a lot easier than filing for tax-exempt status, setting up an accounting system, creating articles of incorporation and a Board of Directors, etc. Why not leverage all the work Bob's House has put into doing all of that? In addition, Bob's House already has relationships with the community you seek to serve--by working under them, you get instant trust and access to clients.
So why not be fiscally sponsored forever? The simple answer is that there comes a point where funders look askance at it, especially as they start to make larger contributions. You may become too large and complicated for your sponsor. You may want more freedom in what you do. You may want to have your own Board of Directors. Or, you may decide to permanently become a program within the sponsor.
Make It Legit
But okay, let's now assume that you are ready to create a legal entity (for the sake of simplicity, I'm going to focus on starting a nonprofit). The truth is that this is both incredibly simple and fast, as well as shockingly complicated and long-term. First, the easy part. You start by filing Articles of Incorporation in the state in which you are going to be headquartered. Typically this can be done via the Secretary of State's Office, or the Department of Business Regulation, and often you can do the filing with a web browser and a credit card. It's a good idea to have a pro bono attorney help you write the Articles, though there are a lot of templates online. I can tell you that when I filed Capital Good Fund's Articles, they were a complete mess and had to later be re-written by an attorney.
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All you need to file your Articles is a name, a small incorporation fee, and at least in Rhode Island, the names and contact information of three incorporators. Once your application has been accepted, you are now an officially incorporated nonprofit. However, this does NOT mean that you have tax-exempt status: that is a federal designation, and one that we'll get to in a bit. The next step is to contact the IRS and request an EIN, or Employer Identification Number. This becomes your organization's equivalent to a Social Security Number; in fact, I can more readily write down our EIN than I can my own SSN.
Once you have an EIN you can move on to the next phase, which is opening a checking account. Talk to your local credit union or bank to see what they can offer you. Some things to consider: ease of depositing funds (e.g., how close is the nearest ATM to your office); fees associated with the account; interest paid on business savings accounts; any limits on transactions; and other perks, such as free check refills.
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Now comes the hardest part: getting your tax-exempt status. You may have heard the term 501c3 nonprofit, which simply refers to the section of the IRS code that deals with traditional nonprofits (note that there are other nonprofit structures you may have heard of, such as 501c4s, but in the vast majority of cases, you'll be a 501c3). This federal designation is what allows people to make donations to you that are tax-deductible, and it is an absolute must if you are to take any grants from foundations.
Applying for 501c3 status is, on paper, simple: you pay a fee (it's in the high hundreds of dollars), fill out a ton of paperwork and send it off. In practice, however, it's not that easy: you have to really make the case for why what you are doing is charitable (remember, whenever the IRS allows a donor to write the gift off his or her taxes, the government is foregoing tax income). Also, it can take months for the IRS to review your application, and the process can be further delayed if they have additional questions. In our case, it took 9 months from application to approval.
Once your application is approved, your legal obligations aren't too onerous: you must file a form 990 each year, and that's about it. The magic happens as you build your organization from something that exists on paper to something that can grow and thrive in the real world. I will focus on that process--which is really the one that matters, given that everything I've talked about in this post can be done with the help of Google and an attorney--in my next article. I would also be remiss if I didn't mention that Lend For America, an organization dedicated to helping campus groups start microfinance institutions, has an in-depth guide to getting started, which you can download here.
Please, please feel free to ask any questions in the comments section below!