6 Common Mistakes When Starting a Nonprofit

Before you start a nonprofit organization, consider these 6 common mistakes founders make with starting a nonprofit.  Given how easy it is start a nonprofit, I have seen too many people rush into things without first examining whether a nonprofit is even the right choice.  Here are 6 common mistakes.

Mistake # 1 – Having the Wrong Motive

Why are you starting a nonprofit?  Will you be duplicating the effort of an existing organization?  Many founders make the mistake of creating a nonprofit to serve a deeply personal need.  The nonprofit then serves the founder rather than society.

Yes, you can be passionately and emotionally involved in the nonprofit.  What you shouldn’t do is run it as a one-man shop that mostly benefit you and provides little benefit to the general public.

For more information about this and how to assess whether you are ready to start a nonprofit, click on this resource.

Mistake # 2 – Ignoring Your Governance Documents

Let’s be honest; governance is boring and a bunch of legal mumbo-jumbo.

It is not uncommon for nonprofits to begin informally.  Perhaps you borrow some bylaws and policies from the internet.  Maybe an attorney drafts them so you can obtain tax-exempt status.  But what usually happens?  They end up in a binder and collect dust.

Governance documents are important.  The board of directors should review them at least every other year.  If you are not following them, either start following them or revise the documents.

Mistake # 3 – Not Understanding Tax Laws

This is a common and costly mistake.

First, not all nonprofits are tax-exempt.  Each organization must apply for recognition of tax-exempt status.

Second, nonprofits are not exempt from all taxes.  Yes, they can be exempt from most income tax.  Still, they will pay employment taxes, sales taxes (on sales to the public), unrelated business income tax (UBIT) and others.

Nonprofits often heavily rely on volunteer labor.  This means it is easy to overlook important tax obligations, such as filing the annual IRS Form 990 return.  It is important that your management and board of directors clearly understand the tax filing obligations.

Lastly, in exchange for federal income tax exemption, the government prohibits nonprofits from engaging in certain political activities.  Don’t risk crossing this line.

Mistake # 4 – Violating Fundraising Laws

Pennsylvania regulates fundraising through the Soliciting Funds For Charitable Purposes Act and the Small Games of Chance Law.  These laws apply to fundraising that occurs in Pennsylvania.  It is the location that matters and not where the nonprofit is based.  Likewise, if a Pennsylvania nonprofit raises funds from neighboring states, there is a good chance the nonprofit must register in those states.

Mistake # 5 – Operating Like a Charity and Not a Business

“Nonprofit” does not mean “no profit”.  Indeed, the point of a nonprofit is to raise money (a profit) so that money can be used for the public good.

The most effective nonprofits employ for-profit business principles.  They carefully watch their income and expenses.  They analyze the financial risk and reward of various fundraising opportunities.  They regularly measure performance.

You can earn money and still provide free, sliding scale, and discounted services to the needy while still operating on sound business principles.

Mistake # 6 – Ignoring Intellectual Property

Nonprofits need to be aware of intellectual property laws.  You do not want to infringe on someone’s copyrights, trademarks, or patents.  Likewise, you do not want others to infringe on yours.

Your name, logo, slogans, certain fundraisers, and ideas can be very valuable intellectual property.  They generate public trust and confidence in your mission.  They can also generate great revenue when properly marketed.

It is not uncommon for national nonprofits to vigorously protect their rights.  Think of the Pink Ribbon (breast cancer awareness) trademark or the Girl Scouts of America trefoil trademark.  These trademarks generate a lot of money and these organizations are not afraid to reprimand you when you use them without permission.

Think before you use someone else’s name, slogan, or idea.  Likewise, be on the lookout for other organizations ‘borrowing’ yours.