Should we be a non-profit? If so, how?

September 13, 2023 2:59 PM

I am part of a small, national, membership based organization and we are trying to manage our dues more effectively. How do we figure out whether we should register as a non-profit vs..LLC.. vs. something else? I recognize many of you will say, "talk to a lawyer". If that is your advice, I would like more details.

I am based in the SF Bay Area in California, however as mentioned, this is a national org.

We want to have a system where individual volunteer treasurers reduce their financial risk, payment and income related tasks can be done smoothly and easily, and we have some sort of accountability/good practices for avoiding abuses by treasurers or whoever has access to funds.

If the answer to this question is, Hire a Lawyer, then how would you recommend I find the appropriate legal advice given our very small amount of money. Or if you think there are useful books or websites where I could get the basics needed to make this decision, I would welcome that advice.

posted by latkes to Work & Money (10 answers total)

Setting up a 501(c)(3) entails a significant amount of work. Many budding non-profit groups begin by getting Fiscal Sponsorship from a likeminded organization. The fiscal sponsor can receive tax-exempt donations on your behalf, disburse the funds to you, and perhaps perform other administrative functions. In return, they often keep a percentage of the donations.

The Tides Foundation is an example of a no-profit organization that provides fiscal sponsorship to a number of smaller non-profit projects.
posted by Winnie the Proust at 3:16 PM on September 13, 2023 [2 favorites]

One question I would consider is whether the fiscal sponsorship model could work for you. It's basically a set up where an umbrella organization serves as the financial and legal entity for a non-profit project for an overhead fee. This can be really useful for small or start-up non profits to get competent infrastructure without needing to directly hire people.

[On preview, agree with Winnie}

Order of magnitude, this will probably cost you 10-15% indirect, but it will mean that you have experts handling things like taxes, state filings, and insurance. It will also give you clear rules about how to do things like accept donations, spend money for expenses and do annual reporting, without needing that expertise in your volunteer base. There will probably be some rules they have that annoy you and probably those are also guardrails that can be important. They might also have standardized donation portals that could do your billing from the previous question.

I work in the non-profit world and if I were starting a small org, it's 100% how I'd go.
posted by mercredi at 3:23 PM on September 13, 2023 [1 favorite]

Kajabi is a good platform where you can post content and collect fees easily. Many memberships use it successfully.
posted by parmanparman at 3:27 PM on September 13, 2023

Thirding fiscal sponsorship as a great first step in getting your feet wet as a non-profit. As noted above, most fiscal sponsors do expect a cut of the money they process for you to cover their admin costs and risk.

But, if you want to set up a 501c3, you should be able to find pro bono legal help setting up a non-profit in big cities -- see if there's a local non-profit that coordinates access to pro bono lawyers for non-profits and reach out to them, or see if your local bar association has any leads. There are still some hoops to jump through and it takes a while, but having a lawyer who can help you customize model bylaws and fill out the IRS paperwork will make everything much easier.

I also wonder if some of the other not-for-profit categories (501c4, 501c6, etc) might be appropriate for what you have in mind, not knowing the nature of your organization. But that's a good question for your pro bono lawyer.
posted by snaw at 3:30 PM on September 13, 2023 [2 favorites]

This is an industry, believe it or not: the membership association industry. And they have their own membership association: ASAE. Their site may have some valuable information for you. Good luck.
posted by rachelpapers at 3:32 PM on September 13, 2023 [2 favorites]

I think the key point here is "what does your organization do?" Non-profits have to have a charter, a mission of some kind, that is of benefit to society. 501c3s, for example, are for educational non-profits. There are other designations for religious groups and charities and so on. 'Non-profit', contrary to popular opinion, does not simply mean a company that makes little to no money in its business activities. A non-profit is organized and operated for a collective public or social benefit, as opposed to an entity that operates as a business aiming to generate a profit for its owners (whether or not a profit is actually made).

If you association is not actively engaged in educational or societally beneficial work, you should register as an LLC. If it is, I agree with the above comments to find a fiscal sponsor.
posted by ananci at 8:49 PM on September 13, 2023 [1 favorite]

I'm not sure that starting a non-profit will address all of your needs. Let me break them down:
We want to have a system where individual volunteer treasurers reduce their financial risk,
As in, they won't be personally liable? Not 100% certain that the treasurer for a non-profit who goofs up wouldn't have some level of liability, so not sure that this would resolve things for you.

payment and income related tasks can be done smoothly and easily,
Not sure how having a non-profit status would do this for you. Is this due to banking?

and we have some sort of accountability/good practices for avoiding abuses by treasurers or whoever has access to funds.
You don't need a non-profit to do this. You could either hire an auditor, or have a small committee run an audit each year. The audit is literally just looking over the income/expenses and making sure everything is accounted for.

I've been involved in several very small (with little money) non-profits and it is a hassle. You are required to hold board meetings (with quorum), keep minutes, have officers and file taxes/paperwork. Unless you plan on leveraging tax-deductible donations, it isn't worth it.
posted by Toddles at 9:32 PM on September 13, 2023

I would start an LLC with two types of members. Group 1 would have fiscal responsibility to oversee the spending of the LLC. Group 2 would be all members. Group 2 would have authority to move people in and out of Group 1, and have approval of certain major decisions. There is a lot less paperwork for an LLC than a non-profit. The problem with an LLC is accountability, especially if only the leadership are members and the board is sui generis. By creating multiple categories of membership and keeping control of the leadership in the broadest group, much of that accountability issue is handled.
posted by hworth at 1:06 AM on September 14, 2023

You should see a lawyer. However, some things you should ask the lawyer about are fiscal sponsorship and bonding.

Can you talk more about what you mean when you say you want individual treasurers to mitigate their risk? Do you mean 'if they spend the money wrong' or 'if they don't count the money right' or 'if they take the dues and go vacation in Mexico'?
posted by corb at 5:12 AM on September 14, 2023

Before spending lawyer money, talk to your state. In the US, tax exempt orgs are overseen by a state office, usually as part of the Attorney General’s or Department of State offices. Check this link for info about tour own state, You can begin with their online resources and also reach out to give them a cam for guidance. Many states also have nonprofit incubators (public and private) and nonprofit service organizations. There is much free information out there. Once you’ve digested what’s relevant to you and your location, next steps should be a lot clearer.
posted by Miko at 5:27 AM on September 14, 2023