Thinking of starting a nonprofit? Not so fast. Spearheading a philanthropic initiative may sound like a great idea, but there are other ways to make a difference that could better align with an individual’s goals and the community’s needs. There are other options to consider besides an individual establishing their own organization.
Another New Nonprofit?
Filing the paperwork to create a nonprofit is one thing. It’s another adventure entirely to create a sustainable, scalable organization.
There will be at least 50,000 to 60,000 new nonprofits in 2022, and this might be a conservative estimate. Many new nonprofits are too small to require annual recordkeeping with the IRS, so it’s easy for them to fall under the radar.
New nonprofits are created all the time, but the rates of entry tend to vary depending on location and time. For example, larger and more diverse areas usually have a higher density of nonprofits, and there are often more new nonprofits when government spending is higher.
Alternatives to Starting a New Nonprofit
Sometimes, individuals can make a larger charitable impact when they look to existing resources. Four alternatives to starting a nonprofit are:
- Working with an existing 501(c)3 organization
- Sponsoring a charitable project with a nonprofit
- Creating a donor advised fund
- Founding a for-profit entity with a charitable purpose
Partner With an Existing Organization
The simplest and most obvious solution is to find an organization that’s already serving the intended audience and cause. Partnering with an existing nonprofit has many advantages. There’s already a/n:
- Existing operational structure
- Network of staff, volunteers, and donors
- Regulatory and tax compliance routine
Efficiencies like these make getting a charitable cause off the ground significantly easier. Depending on the nature of the project, individuals can serve on the Board, as a volunteer, start a scholarship, or lead an initiative.
Sponsor a Charitable Project
Fiscal sponsorship refers to a contract between an individual or a group and a nonprofit organization. The nonprofit agrees to sponsor the charitable project, provide administrative support, and keeps a portion of any fundraising. The individual(s) lead the project, which typically has a limited lifespan. They may not have full control, but they do benefit from built-in tax-exempt status and operational support.
Fiscal sponsorship agreements differ widely, and both the individual(s) and the sponsor can negotiate terms. It’s important to choose a sponsor with a similar vision and goals as well as one with the means to maintain compliance.
Donor Advised Fund
A donor advised fund (DAF) is a charitable investment account. It enables the account holder to make distributions, or grants, toward specific causes they designate in exchange for tax benefits.
Funds contributed to a DAF can be invested for tax-free growth, and contributions are generally tax deductible. Distributions are made through a qualifying nonprofit organization or grant making foundation. Individuals can contribute cash or non-cash assets and further their long-term estate planning goals.
Some nonprofits have a minimum distribution requirement for DAFs and the individual may lose some control over how assets are specifically distributed. But there are several advantages, too. It doesn’t cost anything to form a DAF (aside from CPA or attorney fees), compliance is easier, there are generous tax benefits, and individuals don’t have to personally vet grant recipients.
Nonprofits require a lot of recordkeeping, filing requirements, and governance. A for-profit entity has considerably more freedom and flexibility, and it need not be heavily weighted in the for-profit category. A social enterprise would still sell a product or service or could solicit investors for specific causes. These types of entities are for-profit but exist to provide a social benefit.
As a for-profit entity, it’s subject to fewer regulations and restrictions. The trade-off is that a charitable for-profit entity would probably have a lower net income, but the owner(s) could further their social causes in the ways they want.
There are a few legal entities to explore if this is a viable option:
- Benefit corporation
- Social purpose corporation
- Low-profit limited liability company
- Benefit limited liability company
- Certified B-corporation
Philanthropy Looks Different for Everyone
It’s easy for individuals to underestimate the time, money, collaboration, and compliance required to operate a successful nonprofit. And if community impact is truly the goal, it’s possible there is already an organization doing the same or similar work. A new nonprofit should only be started in areas where there’s a clear unmet need without another organization championing the same cause, and when the individual has a clear understanding of the compliance needs and costs to operate a nonprofit entity.
Alternatives to starting a nonprofit – like partnering with an existing organization, starting a donor advised fund, fiscal sponsorship, or a taxable entity with a charitable purpose – can also help to further an individual’s philanthropic goals with less time, cost, and complexity.