Need a Job? Don't Start a Nonprofit!
In tough times like these, many people are looking for opportunities to make serious
changes in their own lives. One option that many consider is a best-of-both-worlds
idea -- to start a nonprofit and create a good job for themselves at the same time.
Unfortunately, there is often a good bit of misunderstanding about what it means
to be a nonprofit corporation, and the realities of running a nonprofit do not lend
themselves to improving the founder's financial future.
Nonprofit corporations exist to fulfill needs in society that are not effectively
handled by government or private industry. From competitive youth athletics to dog
shelters to cancer research, the availability of the nonprofit classification allows
public money to be collected and used, tax-free, for purposes related to the greater
good that aren't likely to be accomplished any other way. To that end, the IRS has
strict standards for how the finances and activities of a nonprofit can be handled.
Perhaps the most important factor is that no individual can be unjustly enriched
through the activities of the organization. Thus, it is necessary to justify and
explain all instances of payments to those involved in the organization, from board
members to consultants. To obtain and maintain 501(c)(3) status, all transactions
of the organization are reported to the IRS and are available for public perusal.
Any questionable circumstances are reviewed by the IRS and a finding of inappropriate
activities will result in the organization losing its exempt status.
Another common misconception is that the tax-exempt status of a nonprofit somehow
translates to an easy path to personal wealth. There are two problems with this idea.
First, only income directly related to the stated purpose of the organization is
protected from federal taxation. That is, any income that is not directly related
to the stated purpose of the club is taxable as it would be in a for-profit corporation.
For example, collecting adoption fees at a no-kill shelter would be directly related
to the purpose of the nonprofit, whereas running a side business under the nonprofit
that provides dog training to the public for a fee may not qualify. Thus, the income
from the training portion of the business would likely be subject to federal income
tax. Entrepreneurs are far better off turning their business idea into a separate
for profit business and donating a portion of the profits to the organization.
The second problem with using the tax-exempt status for nefarious purposes is that
any income received by employees or board members (in salary or bonus) is subject
to the same employment taxes as any other job. That is, if the organization hires
direct employees, employment taxes must be paid either by the organization and employee,
as usual, or are taxed at the self-employment rate on the worker's personal income
taxes. The reason for tax-exemption is simply to allow the nonprofit to use appropriate,
related funds, such as from donations and grants, to further the purpose of the organization.
There is no legitimate way to translate a nonprofit's tax-exempt status into a direct
benefit to an individual, including the founder, board, and staff.
Most startup nonprofits have limited funds. The salaries of those paid positions
that are necessary to effectively run the organization must be well-controlled, comparable
to similarly situated nonprofits, and be completely justifiable given the purpose
and activities of the organization. It is unrealistic to assume that a startup is
going to be able to sustain much in the way of a salaried employee, especially during
the first year or two. Most grants come with conditions attached, and most are not
to be used for overhead (like salaries). Savvy donors will check your budget before
contributing any substantial sum of cash, and they will be less inclined to donate
to an organization in which most of the money goes to pay employees.
If you are looking to make a drastic change, consider separating the two goals. Start
a business to create a job and volunteer your time (or some profits) to a worthy
nonprofit. Trying to accomplish both by launching a new nonprofit is likely to be
frustrating and futile, but setting two separate goals can be the way to find the
path to the future that you want to be on.
About the Author
LaunchX.com is dedicated to training entrepreneurs to turn their good ideas into
great companies. The LaunchX System provides step-by-step education in the mindset
and skill set entrepreneurs need to succeed. Our program includes intensive seminar
training, key business software, and specialized workbooks that teach you the fundamental
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