Nonprofit Organizations

This is the fifth article in a series on grant writing. Read the introduction to the entire series.

Most grant opportunities are only available to nonprofit organizations or government entities.  While some are open to entities that are not classified as a nonprofit by the IRS, the vast majority are not. There are other benefits for organizations being recognized as a nonprofit. Mission-related income is not taxable, there is an inherent public trust that the organization is “doing good” in the community, and there are tax incentives for people to donate to the organization. However, there are also limitations to being organized as a nonprofit and several unique rules that must be followed.

What is a Nonprofit Organization?
The most common type of nonprofit organizations are those designated as a 501(c)3 organization by the IRS. These are organizations that have completed a comprehensive application process and been approved by the IRS as serving a charitable purpose for the public good. Any organization that exists for general welfare, instead of making a profit for owners or shareholders, can organize as a nonprofit. Legally, this status means organizations are exempt from income tax for income related to their charitable purpose, and donations to the organization are tax deductible. Most funders require applicants to be organized as a 501(c)3 (or another type of nonprofit) in order to apply. Currently, there are 29 nonprofit designations from the IRS. For a full listing, you can go to Charity Navigator which gives a brief overview of each. To find out more and access comprehensive information, visit the IRS’ website.

A common classification that a neighborhood association might fall under is a 501(c)4, which encompasses local associations of employees and social welfare organizations. Neighborhood associations would fall in the latter category. The main difference between the two designations is that a 501(c)4 has a little more leeway to engage in lobbying activities, as long as those activities are not the primary purpose and they directly relate to the purpose of an organization. For example, if you were to feel a proposed city ordinance had the potential to positively impact your neighborhood, or those living in it, you would be allowed to engage in activity to promote that ordinance. You would, however, not be able to engage in political activity that was in support or opposition to any political candidate. There are other more nuanced differences and, as with any legal matter, you should consult a lawyer before making any legal decisions about your organization.

A common misconception is that nonprofits cannot sell goods or services, or even make a profit. This is untrue. The main distinction is that nonprofits are not set up to make a profit. Instead, they are set up for a charitable purpose. Nonprofits can, and should, strive to make a profit each year as this makes their work sustainable. They can even make money from goods or services, called “earned income,” tax-free as long as those goods or services are related to their charitable purpose. For example, your neighborhood association may operate an event for your neighborhood at a local community center and charge a small entrance fee. Because this income is related to your charitable purpose, not only would it be tax-free, it would not jeopardize your nonprofit status. This money can then be used to buy supplies, pay staff/contractors, and generally operate programs.

If you need to set up your organization as a nonprofit, there are several steps you must take to form a legal entity and submit to the IRS for tax-exempt status. Take a look at the Groundworks New Mexico.

Requirements for Nonprofit Organizations
While nonprofits enjoy tax-exempt privilege, can accept tax-deductible donations, and are eligible for a wide array of grant opportunities, there are requirements that a nonprofit must fulfill to maintain their tax-deductible status.

• Board of Directors – Nonprofits need to have an established body of leaders who can help guide the organization’s mission, purpose, and financial decisions. Funders will want to see a list of those governing your organization. Often people start with family members, friends, and mentors as the basis for their board of directors, but as the organization grows it will be important to seek out community leaders, representatives of your target population, subject experts, and others with interest in the mission of your organization. These individuals will bring depth, knowledge, and important points of view to your board. It is also a good idea to include individuals with professional backgrounds that can offer advice and guide decisions for your nonprofit in areas such as finance and law.
• Articles of Incorporation – Articles of Incorporation are formal documents filed with the state of New Mexico that legally document the creation of a corporation. The Secretary of State website lists the forms necessary to file for incorporation in New Mexico.
• By-laws – These are the formal policies and procedures that the board of directors has approved and the organization will follow. You will need to draft and finalize the by-laws before filing your Articles of Incorporation.
• Maintain good standing – You will need to ensure your organization maintains good standing with all regulatory and government agencies. In New Mexico, that includes registering with the Secretary of State and Attorney General. You must also file a tax return each year with the IRS. The IRS determines what, if any, of your income is taxable, ensures you are not making an inordinate amount of income from goods or services not related to your tax exempt status, and ensures that your nonprofit is enriching the community and not individuals who are associated with the nonprofit.