How to Start a Non-Profit Organization – Step 3: Legal Necessities


*Common sense reminder – You’re probably already tuned in to this fact, but just in case I want to emphasize the following… This series is provided for informational purposes only. I’m not a lawyer. I’m not an accountant. (Heck, I have trouble calculating a 15% tip at restaurants.) If you get deep into legal, tax, or other accounting issues, find trusted legal or accounting advice.*

 

One of the most common mistakes I see when non-profit starters research how to start a non-profit organization is getting hung up on the legal aspects of starting a non-profit.

While it’s certainly important to take certain steps in building a solid foundation on which to grow your non-profit, it’s not always the case where you have to go out and find expensive legal or tax counsel when you are getting started. There are groups who will provide pro-bono services to non-profits, and if that is what you decide you need, then by all mean go for it. But for those interested in how to start a non-profit organization in a low-cost and efficient manner, I recommend going the fiscal sponsorship route.

 

Fiscal Sponsorship: An alternative to incorporating your organization

Conventional advice says you should go out and draft articles of incorporation as a first step to starting a non-profit. Certainly you’ll need to do if you plan to start a full-fledged 501c3 early on.

But there are some problems with the 501c3 route. Incorporating a non-profit organization and getting tax-exemption takes significant time and money. This can often hinder the actual start of the work. That said, very few foundations award grants directly to an individual, as most of them limit funding to organizations only.

Enter a fiscal sponsor. A fiscal sponsor is a non-profit, tax-exempt organization that extends these benefits to a project or a group that does not have a non-profit or tax-exempt status. Primarily, the fiscal sponsor receives and administers grants for the project, often in exchange for a small percentage as an administration fee. They may also handle payroll and HR issues and extend insurance to the sponsored organization.

Fiscal sponsorships are a good solution for small projects that don’t have the resources to become a full- fledged non-profit, or for projects that have not yet been tested for viability. The one major downside is that you are essentially giving up some control over decision-making, especially around funding.

Most projects also establish a timeline for eventually detaching from the fiscal sponsor and becoming entirely independent. Once an organization is fiscally sponsored, they can generate donations and funds until they are ready to separate from their fiscal sponsor and apply for 501c3 non-profit status.

Each fiscal sponsor has different terms or conditions so contact a couple in your area to shop for the one that best meets your needs. Some have formal application processes but most assess candidates through informal, in-person conversations. A few well-known fiscal sponsors:

Need more information on how to start a non-profit organization with respect to legal aspects? Here are some general non-profit legal resources:

  • Corporate Pro Bono - plays matchmaker by allowing non-profits to list their needs which can then be searched by lawyers looking to volunteer their services; there are various region-specific organizations that offer pro bono legal advice to non-profits.
  • Nolo – offers hundreds of plain-English legal documents and guides on a variety of issues.

This brings us to the end of this installment in the How to Start a Non-Profit Organization series.

Ready for the next part?

Click this link to go to Step 4 for How to Start a Non-Profit Organization: Fundraising- attract and engage donors and supporters for your non-profit organization.