The Mistakes Charitable Startups Make

Adrianne Geiger Dumond

Adrianne Geiger Dumond

 

Since 2013, the number of nonprofits in this country has more than doubled.[i] An article in the Wall Street Journal, on September 20, this year, and by the same title, explains the risks of starting a nonprofit. Passion and commitment to the cause do not measure up to the time commitment and skills required to launch a nonprofit. I will quickly summarize the main points, but urge the reading of the whole article by Veronica Dagher, a reporter for the WSJ.

The Mistake: Not doing the research to discover how many other charities also provide the services you plan on giving.

The fix: Before starting a charity, get the kind of work experience and specific skills needed to launch. Research and speak with the leaders/Executive Directors of similar nonprofits for direction and possible roadblocks so you know more about the lay of the land – especially for your community. Volunteer at a similar organization, or serve on a Board, or speak with other founders to understand the challenges. Have a business plan and a mission statement ready to go.

The Mistake: Underestimating the time commitment. To gain official, tax-exempt status as a 501(c) (3) a nonprofit must register with the state, and in some cases, local agencies and the IRS. Approval of the status can take months. In the meantime it is difficult to raise money.

The fix: Be patient and truthful with prospective Board members and donors so that they maintain their commitment to your cause and don’t become disillusioned.

The Mistake: The lack of proper insurance that can lead to serious financial consequences. There is the case, cited in the article, where a nonprofit sponsored a bicycle race in which a participant was injured. The incident went to court, the Board had no insurance and was forced to pay legal fees which caused liens to be placed on some members’ property while the suit was pursued.

The fix: Don’t cut corners while waiting for the tax exempt status. Obtain the proper insurance right away, keep accurate financial records, and know where the money is coming from and how it is being spent to keep donors content.

The Mistake: Selecting the wrong Board members. Avoid the temptation to appoint close friends and family to the Board of Directors. They may admire your dedication but may not have the skills and experience you need.

The fix: Find the Board members who have a passion for the cause, but also bring skills for good governance that the startup might not be able to afford early on – attorneys, accountants, management skills, and some knowledge about the nonprofit business. All Board members should be expected to make donations. Some Foundations will not grant money to a nonprofit to which Board members do not donate.

The Mistake: Not recognizing the importance of fundraising. Often new organizations spend more time on program development than on raising money. They may target Foundations as the primary source of funds. Without plans for solid, lucrative fundraising from individuals, also, there will be no programs.

The fix: It is important to establish a donor base initially – contacts, businesses, companies that match employees contributions. It’s also recommended to understand how agencies competing for donor dollars obtain funds. One of the consultants in the article recommends having one year’s operating budget in the bank before implementing programs.

Source: Urban Institute’s Center on Nonprofits and Philanthropy, based on IRS business master file for public charities, exempt under 501(c) (3), May 2015[I]

Author:  Adrianne Geiger DuMond, Executive Coaches of Orange County, www.ECofOC.org