Congratulations on the formation and approval of your nonprofit organization and best wishes for success ahead! However, approval was the easy part. Now the ongoing requirements of managing a nonprofit organization is more demanding. I compiled these observations from watching dozens of new nonprofit organizations throughout the country move from their initial launch through early operational stage. Core concepts in management of a nonprofit organization are highlighted below. This article is meant as a brief introduction of nine next steps you are likely to consider.
1) Basic Governance
All nonprofit organizations should have a solid Financial Procedures Policy and a Conflict of Interest Policy. These should be written, reviewed, and distributed to directors and staff at least annually. A written record of Board of Directors minutes is important. I also strongly recommend a Social Media Policy that covers directors, staff, and volunteers. In addition, most nonprofits consider adapting policies for other aspects of operations including, for example, social media policy, use of logos, demonstration of environmental and social values, etc. We can share some of the best practices that work best with organizations like yours.
The required recordkeeping is more complex for a nonprofit organization than a for-profit company. Grantmaking organizations, state and federal funding organizations all have unique requirements. Many nonprofits start out with part time volunteer bookkeepers who are unfamiliar with these requirements. Fortunately, it is not difficult or expensive to find one-on-one personal coaching on an as-needed basis for a part-time volunteer bookkeeper as the best way to quickly ramp up for this task. Modern tools for smartphones, once installed and adapted, help to automate much of the day-to-day procedures.
3) Chart of Accounts
Nonprofit accounting is organized differently than other types of businesses. Income and assets is segregated and tracked as either “Restricted“ or “Unrestricted“ and that tracking is kept throughout your reporting to third parties. Income is usually “Individual Donations“, “Corporate & Foundation Grants“, or “Government Grants and Contracts“. Expenses are segregated into “Operations“, “Fundraising“ and “Administrative“ classes. All of this tracking is important in addition to the typical natural accounts like “Telephone”. Fortunately there are tools to simplify and automate the process.
4) Banking and Security
Nonprofits have good reason to be concerned: fraud and general mishandling of funds occurs at a much greater frequency in nonprofit organizations than other types of organizations. Good internal control procedures combined with the security tools of today’s online banks address most of these concerns. We advise that nonprofits that use a local bank also utilize online bank services.
5) State Requirements
Remember that your organization is a state-controlled entity just like every other business. Business licenses, permits, some taxes and annual state filing requirements apply. These might not have been considered fully during your organization’s set up, especially if the operation plan was still evolving. Steep fees for missing annual filing deadlines are common. Some states have insurance and other requirements. We recommend a review shortly after your startup or whenever operations change.
6) Federal Requirements
IRS requires an annual Form 990 nonprofit filing for most nonprofit organizations. Missed filings results in automatic termination of the nonprofit status. Small nonprofits with revenue under $50,000 have an easy filing option. For those that require a more detailed filing, the disclosures and attestation requirements are significant. Some nonprofit information is available to the public, so plan accordingly.
7) Audit requirements
Grantors, as well as state and federal governments, have financial statement review and audit requirements based on the revenue of the nonprofit organization. It is important to know and plan for this far in advance. The key to a successful is running year-round operations with the audit in mind.
There is a misconception that nonprofit organizations do not pay taxes. Actually, a nonprofit is subject to all taxes except on business earned income tax for specific income related to your nonprofit purpose. Nonprofits may be subject to additional taxes called “excise taxes“. Planning in advance helps avoid any problems.
Running a nonprofit can be expensive. Fortunately, many firms offer discounts in software, accounting, banking and debit/credit card processing.
While these are the most common issues, you may find other accounting-related issues. They are all addressable. If you have a bookkeeper, make sure they have easy access to helpful resources. If you don’t and want complete professional ‘turnkey’ operational support, let’s talk. I’m happy to help you out in fulfilling your mission. Please give us a call to discuss these operational issues.