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Financial Journeys

SPRING 2023

Entering the nonprofit world

What business leaders should know about the nonprofit sector

Successful business leaders and entrepreneurs often have opportunities to serve on the board of directors of nonprofits or may even want to form their own nonprofit to pursue a cause they are passionate about.

But entering the nonprofit world can be a little disorienting to those who have found success in business. The legal rules, of course, are different between these two worlds, as is the ultimate objective.

So, how can you have the most effective impact in the nonprofit sector? And is serving on a board or founding your own nonprofit worth the effort? Here are a few important questions to consider before exploring your nonprofit opportunities.

Parsing the differences

Seems obvious, but the most noticeable difference – and one you may find uncomfortable – is that no one actually OWNS a nonprofit. Very different from your day to day.

Because there are no shareholders of a nonprofit, the board’s mission isn’t to protect their interests. Instead, the nonprofit board members ensure the organization fulfills its mission and abides by state and federal legal requirements. The details of how a specific nonprofit board provides oversight will vary from one organization to another, but most nonprofit board members become involved in strategic planning, financial oversight and executive selection and compensation. Skills you likely have in spades.

If you’re thinking of creating a nonprofit, the fact that you wouldn’t own or control what you create is also something to consider. And you’ll need to think through how you’ll protect your vision for a nonprofit even if you play no role in managing it.

Here are a few answers to some frequently asked questions about taking a seat at the nonprofit table.

Q. Does serving on a nonprofit board of directors pay?

In general, those who serve on a nonprofit board are only compensated for expenses related to board service, such as travel and hotel expenses. Moreover, nonprofit board members are expected to provide a significant annual donation to the nonprofit ($10,000 or more) and to support fundraising efforts, including connecting the nonprofit to potential donors.

Q. What are the benefits of serving on a nonprofit board?

Although serving on a nonprofit board does not pay, the experience enables you to further develop as a leader. You’ll practice budget evaluation, financial management and strategic planning.

Of course, service on a nonprofit board is also a great way to serve a noncommercial goal you care about and to grow your network while gaining new perspectives.

Q. How should I structure my nonprofit?

The most conventional way to structure your nonprofit is as a tax-exempt 501(c)(3) organization – that is, an organization set up exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.

The actual steps you’ll need to complete will vary from state to state, and the easiest approach is to work with a company that specializes in helping individuals form nonprofits.

Under federal law, all nonprofits must have a minimum of three board members, which can include the founder.

Because the board of directors has ultimate control over the nonprofit, it could in theory oust the founder if it feels that the founder is not serving the organization’s mission. This outcome could be devastating if you invested all of your time and money in forming the nonprofit and intended it as a second career.

To remove any possibility of losing control of a nonprofit you founded, some states allow you to form a sole member nonprofit, with the founder as the sole member. While such a nonprofit must still have a board of at least three members, the board cannot remove the founding member. Moreover, your nonprofit’s bylaws can be written so that the board serves at your discretion.

The downsides of sole member nonprofits, though, may outweigh this advantage. One downside is that you may have trouble finding individuals who are willing to serve on your board, given that they will have little power. With a sole member nonprofit, you also potentially miss out on dissenting voices that might help you realize your vision better than you would alone.

Q. How can I ensure my nonprofit maintains my vision?

One effective strategy is to create a very clear and specific mission statement. If your mission statement is too broad or vague, those interpreting it may see it very differently than you. For example, a mission focused on helping all veterans live meaningful lives is difficult to interpret and implement. Does such a mission include more than just U.S. veterans? What constitutes a meaningful life?

Compare that to a mission to help U.S. veterans find employment. While there is still room for debate about the best tactics to achieve this mission, the mission is much clearer.

Next steps

• Talk to your advisor about how to pursue creating a nonprofit, and research companies that specialize in this service.

• For causes you care about, connect with the board members of organizations devoted to these causes and explore how you can help.

• Let those in your network know that you are open to board members roles at nonprofits.

Sources: councilofnonprofits.org; growthforce.com; forbes.com; shrm.com; 501c3.org; ssir.org