Do your passions run to unmet social needs or causes? Have you volunteered or made donations in support of certain causes, but still believe there's more work to be done? If so, you may be considering starting a nonprofit business, and following in the footsteps of successful organizations like the American Red Cross, World Wildlife Fund and Charity: Water. Keep reading to learn the ins and outs of nonprofits and why they may or may not be the answer for your business.
What is a nonprofit?
A nonprofit organization is a business established to further a social cause or provide a public benefit. There are many different types of nonprofit organizations, with the most common being the 501(c)(3). 501(c)(3) organizations are tax-exempt, which means not only are they not required to pay certain federal and state income taxes, but they also can receive tax-deductible donations from supporters. In order to qualify for 501(c)(3) status, your organization must fall into one of the following categories:
- Testing for public safety
- Youth or amateur sports
- Preventing cruelty to children or animals
Regardless of the category, most nonprofits typically share the following three characteristics:
- A mission that benefits society. This social cause is prioritized over profits and success is measured according to the organization’s ability to meet their philanthropic goals.
- No single owner. Nonprofits are typically led by a board of directors where no one person can claim financial ownership.
- Other than reasonable compensation, assets are not to be distributed to individuals. Any profits must be reabsorbed into the organization to fund its mission.
In contrast, for-profit businesses deliver products or services with the intention of generating a profit, and they have a clear-cut ownership structure where profits are distributed among individual stakeholders, investors or the business's owners.
Pursuing your purpose
Launching any type of business is hard work. But launching a nonprofit business can be especially challenging as you grapple with everything from fundraising to finding volunteers to maintaining your financial records. Still, nonprofit work can be extremely fulfilling. . Just ask Sherri Franklin, founder of Mutttville Senior Dog Rescue in San Francisco, California. Franklin admits it took a lot of preparation and sacrifice to set up the nonprofit, but Muttville is thriving, thanks to careful planning — and thanks to its nonprofit designation.
Before opening Mutttvile, Franklin worked in the for-profit world for over 30 years as a salon owner. At the same time, she was volunteering at the local animal shelter. This is where she noticed a troubling phenomenon. “I kept seeing these older dogs getting passed by. People were adopting the young dogs, and sooner or later a lot of the older dogs would be euthanized.” When bringing dogs into her own home eventually became untenable, Franklin knew that she needed to do something more. She decided to open Muttville.
But of course, getting started wasn’t as easy as that. “You have to jump through more hoops than you have to in the for-profit world,” Franklin says. “Every day it seemed like there was one more step that I felt was insurmountable to take.” Yet she persevered.
Everyone will struggle with different aspects of their journey. For Franklin, laying down the foundation for the organization was a major early obstacle. She knew she had to have a board of directors, keep records, and make sure that the necessary legal documents were signed and filed. But she was ready to do what she was passionate about. "The first year is tough because you just want to get on with the work you're doing," Franklin says. "But there's a lot of paperwork that needs to be done before you can get into the work you want to do."
In addition to all of the preparatory items, other issues you’ll need to address as you form and build your nonprofit include:
- Fundraising and communicating your mission to donors
- Recruiting, inspiring and retaining volunteers
- Complying with changes in government regulation and tax reform
To tackle all of these obstacles, you must have a clearly defined mission and be passionate about what you’re hoping to do. Franklin says, “You have to keep your eye on the ball. If you feel overwhelmed, just think of all of the great things that you’re going to be doing and hold on to that.”
The benefits of starting a nonprofit business
There are, of course, the previously mentioned tax benefits that come with operating as a 501(c)(3) nonprofit. But, the financial advantages don’t end there. Unlike commercial enterprises, nonprofits can receive funding through federal grants.
Additionally, the chance to help others is a major benefit and ideally will remain a primary motivator as you move forward. Franklin started Muttville 12 years ago, and has rescued nearly 7,000 dogs since then. "I think we’ve also changed the whole conversation around older animals, adoption rather than buying and what these animals can bring to humans. So I feel really great when we succeed and I get to see smiles on people’s faces," she says.
How to start a nonprofit business
Wondering how to start a nonprofit business? According to Franklin, one of the first things that aspiring nonprofit founders should do is educate themselves. When she was preparing to open Muttville, she took classes on fundraising, joined nonprofit boot camps and surrounded herself with other people in her field to build a support network. She also met with veterinarians to find out what health issues she would be dealing with while working with senior dogs.
Prepare yourself by volunteering
“It’s about arming yourself with enough knowledge around your mission so that you can talk about it with people," Franklin says. "So if you’re going to be working with teens or children or animals, find other organizations that are doing something similar to you and go volunteer there and set up a meeting there so you can get to the heart of the challenges and what’s going to work the best.”
The steps to take next
Here are a few more steps you should take when you’re starting out:
Perform a needs analysis. Gather data to determine if there is a real need for the services that you’re hoping to provide.
Write a mission statement. Take some time to consider your purpose and what it will take to achieve your goals.
Determine who will be on your board of directors. These are the people who will help govern and support your mission.
Nonprofits play a vital role in society. They make a positive impact in our communities through their charitable work. If you're contemplating joining the ranks of the dedicated people who run these organizations, take the quiz below to assess if the nonprofit business model is right for you.
Then watch how this rock climbing business in Season 4 of Small Business Revolution tackles the unique challenges of being a nonprofit: