Category Archives: Getting Started

Selecting Board Size: How Big Should The Board Be?

It’s one of those questions that sometimes seems to sneak up on new organizations (and sometimes troubles existing organizations too): how many people should we have on our board? Board size can affect your organization’s effectiveness, so we need to get it right.

Make Sure You Have the Minimum For Your State

Most states require 3 directors minimum, and most of the others require just 1. This number is a minimum; your organization is welcome to have more directors. In fact, it probably should have more directors; 3 people will have difficulty managing all but the smallest organizations.

There are no maximums; some boards have memberships over 20 and even into the 30s. I think that’s probably too many for most organizations.

Goldilocks and Board Size

Just like Goldilocks found the three bears’ beds were too hard, too soft, and just right (and was awfully picky, seeing as she let herself in), I think there’s too big, too small, and just right when you set up your board. Both the bare minimum size and the 20-30 member board are probably not the right choice for most organizations. Something in between those extremes, somewhere between 7 and 15, is probably best in most cases.

A board that’s too small can cause problems. The value of having numerous board members is that different board members have different perspectives. Board members with varying perspectives see problems and come up with solutions in different ways, and that’s not something you want to miss out on. Small boards make it more difficult for a quorum to be present, and can lead to more tied votes if you have an even number present.

Small boards may also have trouble staffing committees within the organization. Committees are not required, but they can help organizations address specific issues in the organization. Committees, whether permanent or temporary, often work on finances, fundraising, membership, and other issues.

Boards that are too large can quickly become unwieldy. When a proposed action comes up, board members may want to debate the matter, and if ever board member wants to speak on an issue, and you have a large board…well, your meetings could get really long, really fast. In such a large group, it’s also easier for board members to become disengaged with their duties, figuring someone else will bring up or deal with important topics.

Odds or Evens?

I usually advise organizations to have an odd number of members on the board. The obvious reason for this is to avoid ties. Of course, this is not a foolproof method of avoiding a tie; someone could abstain from a vote or not be able to attend a meeting. Still, I can’t see planning a situation to foster tied votes, like boards with even numbers of members.

What If I Have More People Interested in Serving Than I Have Board Positions?

First, be grateful to have so many people interested in leading your organization! Many organizations, especially in the startup phase, would love to have this problem.

Second, I don’t recommend expanding the board to add everyone that’s interested. People get burned out on board service, move away, have other things come up in their lives…and they may need some time away from board service. Also, your by-laws may require board members to take time off after a certain time on the board. In those cases, you could wind up with more positions than board members very quickly.

Instead, I suggest having those interested people serve in other capacities–committees, volunteers, that sort of thing. You want to keep them engaged in the organization. As you need new board members, you can start with these folks.

Board size is one of the first big decisions a new organization makes, and for most organizations, using Goldilocks as our guide–not too big, not too small, but just right–is what we want to strive for when it comes to board size.

10 Tips For Writing an Effective Form 1023

For folks that are starting a 501(c)(3) organization, preparing Form 1023 is usually a pretty daunting task. I’ve prepared a few of these, and it can take significant time and work to really prepare the form properly. Ideally, you want to get the application through on the first try, and limit the amount of follow-up and supplemental information you have to provide. There’s no guarantee or magic formula for getting your 1023 approved (and approved quickly), but there are things you can do to improve your chances:

#1: Write a complete, detailed response to Part IV, Narrative Description of Your Activities.

Here’s the most important question on the application:

Part IV

You’ll want this description to be as complete as possible; the way I like to think about it is that you want to give the IRS reasons to approve your application. Here’s what you need to work through:

  • What does your organization do–past, present, and future? If you’re a really new organization, and you haven’t done much, that’s okay, you’re just going to have an answer that is more forward-looking.
  • Use the 4 Ws & 1 H: Who performs your activities? What are the activities? When do you perform the activities? Where do you perform the activities? How do you perform the activities. The IRS suggests this approach, and I think it makes a lot of sense.
  • Align your activities with your charitable purposes. Remember, 501(c)(3) organizations have to be organized for one (or more) specific purposes: charity, education, literary, religion, science, testing for public safety, fostering national/international athletic competition, and preventing cruelty to children/animals. Your activities should be fulfilling those purposes.
  • Take the opportunity to brag about what you do. This is a great chance to tell people what you do–if you’re approved, this is public record. I don’t know that many people will look at your completed Form 1023 after approval, but to the extent people do look at it, it gives you a chance to tell the public what you do.

#2: Make sure you attach answers whenever necessary.

Most of us are used to filling out IRS forms–fill in the blanks, check the boxes, and you’re done…Form 1023 isn’t like that. Often, the form will ask you to attach answers that explain in greater detail. Here’s an example:

Attach stuff

When the form tells you to “explain” or “describe,” you’ll need to attach an answer to your application.

Extra tip: When I prepare a 1023, I answer the questions on the form, and as I answer the questions, I make a list of every additional response I have to attach. When I finish preparing the form, I use the list to make sure I didn’t miss any needed responses. This has been effective for me, and it might help you not miss anything as well.

#3: Provide supporting documentation.

If you’ve produced documents to accomplish any of your exempt purposes, include that material. Provide an annual report to your donors? Have an application for your scholarship program? The IRS often looks for these sorts of documents, and if you’ve got them, it’s helpful to include them.

That said, don’t provide anything you wouldn’t release to the public.

#4: Look up terms that the IRS defines for you.

If you look through Form 1023, you’ll notice there a lot of bolded terms. Any time you see a term in bold, that means that the IRS has a definition for that term in the Instructions for Form 1023. The instructions are a separate document from the form itself. Here’s an example:

Compensation Question

Notice that the word “compensation” is in bold. If you went into the instructions, you could find a definition for compensation. Lo and behold, here it is:

Compensation Definition

Notice that “compensation,” for our purposes here, goes way beyond salary or wages, and includes some items you might not have otherwise thought of. This is why I suggest that even if you think you know what a word means, if you’re doing your first 1023, you should look up just about every bold term, so that you understand the question you’re answering.

#5: Read the first few pages for changes or adjustments to the form.

Updating any document, I suspect, is kind of a pain for the IRS. So, instead of releasing a new form each time they make a change, they sometimes put changes to the form at the beginning of the form. Unfortunately, most people skip right over that stuff and get to the first page of the form. Don’t do that! You’re only going to guarantee yourself follow-up questions from the IRS (or other problems).

For instance, as I look at the form today, here are the changes mentioned in the first couple of pages before the form itself actually starts:

  • There’s a new mailing address to send the application to; the one listed on page 28 is not the correct address (that seems important);
  • Advance rulings are no longer available, even though the form says they are;
  • The amount of financial data you must provide has changed;
  • You should skip certain lines in Part X about public charity status; and
  • The user fees have increased.

Those changes are significant; missing something like that could cause some problems and delays for your application.

#6: Make the best financial projections you can in Part IX.

For a new organization, completing Part IX (the financial data section) can be very difficult. New organizations don’t have a lot of data, but the IRS requires them to make projections. Your projections don’t have to be perfect, but they do need to be made in good faith.

But how can you make good faith projections? First, do some research–are there similar organizations to you that might be willing to help you make projections? Second, consult with professionals that have experience with nonprofit budgeting–an accountant who works with nonprofit organizations might be particularly helpful here. Additionally, if you or others in the organization have experience with budgeting, that should help as well.

Also, doing these financial projections is a useful exercise, and you should treat it that way. You should do some financial planning as part of the startup process, and you should know how much money you need to raise to fund your work.

#7: Include your organizing documents.

There are a few different types of organizations that can apply, most commonly nonprofit corporations and trusts. For a corporation, there are two important documents to submit: your articles of incorporation (or something similar–the exact terms might vary from state to state) and your by-laws. You’ll also need to include any amendments made to these documents.

The IRS uses these documents to determine if your organization is set up in compliance with the requirements of 501(c)(3) organizations. In particular, they’ll be looking for language that limits your organization’s activity to the 501(c)(3) exempt purposes we discussed earlier and that requires the organization’s assets be given to another 501(c)(3) organization when your organization dissolves.

#8: Don’t forget the schedules.

Form 1023 contains eight different schedules that might apply to your organization. Here are the schedules:

  • Schedule A: Churches
  • Schedule B: Schools, Colleges, and Universities
  • Schedule C: Hospitals and Medical Research Organizations
  • Schedule D: Section 509(a)(3) Supporting Organizations
  • Schedule E: Organizations that Have Not Filed Form 1023 Within 27 months of Formation
  • Schedule F: Homes for the Elderly or Handicapped and Low-Income Housing
  • Schedule G: Successors to Other Organizations
  • Schedule H: Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures

Of course, not all of these schedules will apply to your organization, and it’s entirely possible that none of these schedules will apply, but if one (or more) of these applies, make sure to complete each schedule that does.

#9: Don’t release any social security numbers in the application.

I have no idea why this is a problem–the form never asks you for a tax ID other than the nonprofit organization’s–but the IRS reports that SSNs show up fairly regularly in applications. SSNs from directors, officers, volunteers, staff, and donors have shown up in applications. They should not be in there, and they certainly shouldn’t be released publicly, so do not include them. Simple as that.

#10: Use the checklist to make sure you’ve got everything.

At the end of the application, there is a checklist reviewing everything that you need to submit. It’s there to help you–take advantage of it! You’re much better off finding anything you missed before submitting rather than having the IRS request it later.

Photo credit, Kaitlin Gentry, via Unsplash.com, licensed under CC-0

Is Starting a Nonprofit for You?

“This dream of theirs is just that. Most of them don’t even have anything written down that they can present to me. They don’t have even a starting point yet. But they have the passion. They have the dream.”

Jim Maltry, SCORE Cincinnati

And many times the people who have the dream do not wind up creating a nonprofit. I agree with the article–that’s not necessarily a bad thing–but it’s important to understand why that is and how you can go from dream to functional organization.

Is the nonprofit itself a good idea?

Starting and running a nonprofit organization is a lot of work, and I think it makes sense at the beginning to decide whether or not what you want to do will work. If you’re thinking about it, I recommend asking yourself these questions:

1. Do you do something unique compared to the other organizations around you?

Often, people think of non-profits as somehow separate from the world of business. I don’t see it that way. Nonprofits have to deal with many of the same issues for-profits do, and one of those issues is competition. If you duplicate something that an already-established organization does, you might be better off working with them instead. Duplicate organizations compete with each other for donors and grant dollars, and that may lead to each organization being less effective than it could be without its competitors.

2. Is this organization aimed at a recent disaster or tragedy?

Sometimes a tragic event can cause an outpouring of support and assistance. There are others who disagree with me on this, but I’m generally not a fan of creating an organization in response to a specific event. Here’s why:

  • Other relief organizations already have assets in place to assist; if the disaster spurred you to create an organization, odds are you probably don’t.
  • Putting together an organization takes time. Governance structures, legal entity creation, and tax-exemption application are all important steps, and it really can’t (and even if it can, it shouldn’t) be done overnight.
  • Organizations that appear in response to a disaster are more likely to be scammers. Obviously, not everyone falls into that category, but that perception can hinder your efforts.

Short version: when a disaster or tragedy occurs, help through reputable, established organizations.

 

3. Do you have a plan?

I think that business plans can be helpful for a new (or established) business. It’s not so much that I think you need to have this pretty report with cool charts and graphs, but rather that putting together the business plan is serious work. It forces you to think about your business, and seriously answer questions like:

  • What is my business going to do?
  • Who will my business help?
  • Who is going to buy my product?
  • How will my customers know I exist?
  • How much money does the business need to keep running?
  • Who is going to run the business?
  • What competition does my business face?

Those questions, with minor modifications, can be asked of non-profits quite easily:

  • What is my organization’s mission?
  • Who will my organization help?
  • Who will donate to support my organization’s mission?
  • How will my organization’s potential donors and potential clients know I exist?
  • How much money does the organization need to accomplish its mission?
  • Who will be responsible for leading the organization?
  • What other organizations are doing the same thing my organization is doing?

I think that even if you don’t put together a pretty report with cool charts and graphs, I recommend writing your answers out. Putting the answers in writing focuses and clarifies your answers.

Is starting a nonprofit a good idea for you?

Also, starting a nonprofit organization isn’t for everyone. If you’re going to lead the organization, here’s what you should be asking yourself:

1. What skills do you and the other people involved bring to the organization?

In the early days of an organization, the people running the organization are usually the people that are working directly on doing the work. Later on, you might have people that manage the organization, staff, and volunteers, but in my experience, it usually doesn’t start that way. However, the startup phase is where a lot of the groundwork is laid–so the skills of you and your team are very important.

What kind of skills should you be looking for?

  • Management: At the board level, you want to have someone who can make high-level management decisions. In the beginning, those same people might also need to be able to lead others, both staff and volunteers.
  • Fundraising: Almost every mission requires some money to be accomplished. Without money, an organization is bound to fail. People with connections throughout the community and the ability to raise funds are vital to almost every organization’s success.
  • Finance: That money you need to bring in needs to be tracked. Even if you need help creating financial reports, it’s important to have people that can understand them on board.
  • Legal: Organizations can run into a variety of legal issues. It’s great to have your very own expert on board, or at least someone who may be able to recommend outside lawyers.

2. Have you (or at least someone involved in your organization) done work in the area you want to serve already?

If your organization wants to complete a certain mission, it’s reasonable to expect someone in the organization to have some experience executing the mission. This will help you understand what resources you need, the logistical issues you face, and the challenges of completing that mission. If the answer to this question is “no,” maybe now isn’t the time. If you don’t have this, you might be better off volunteering for a similar organization to learn about how to better fulfill your mission.

3. How will you support yourself during the start-up phase?

When you start a for-profit business, money doesn’t just appear out of nowhere; you need customers who want to trade money for whatever you sell. It’s a similar idea for a non-profit; money won’t just appear. You’ll have to get people to donate, and to do that, they have to believe that you will handle their donation wisely. That requires trust, and that doesn’t appear overnight either. I’d suggest to you that’s even harder than starting a business, because when you accept a donation, you have nothing to give in return. Money may be hard to come by early on in the organization’s life, and if you plan to work full-time for the organization and be paid, you may find life very difficult in the early stages.

Starting a nonprofit organization is not impossible, but it does require an honest assessment of your chances of creating something successful. If you’re gone through this assessment and you are confident in your project, then you likely have a good foundation for success. If not, you may need to make some adjustments before going forward.

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. I have updated the post for posting here. Enjoy!

Photo credit, Tim Gouw, via Unsplash.com, licensed under CC-0