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We once received a telephone call from a man who was shopping for a nonprofit. “Do you know if there are any nonprofits for sale in New Hampshire?” he asked. Although this question doesn’t come to us often, it illustrates a misconception about the status of nonprofit organizations. No one person or group of people can own a nonprofit organization. You don’t see nonprofit shares traded on stock exchanges, and any “equity” in a nonprofit organization belongs to the organization itself, not to the board of directors or the staff. Nonprofit assets can be sold, but the proceeds of the sale must benefit the organization, not private parties.

If you start a nonprofit and decide at some point in the future that you can’t or don’t want to manage it anymore, you have to walk away and leave the running of the organization to someone else. Or, if the time has come to close the doors for good, any assets the organization owns must be distributed to other nonprofits fulfilling a similar mission. You’ll need to follow the laws of your state to close the nonprofit organization, including selection of an appropriate and, in some cases, an approved nonprofit that will receive the assets.

When nonprofit managers and consultants talk about “ownership” of a nonprofit organization, they’re using the word metaphorically to make the point that board members, staff, clients, and the community all have a stake in the organization’s future success and its ability to provide needed programs.

Benefiting the public

People form nonprofit organizations to create a public benefit. In fact, nonprofit corporations are sometimes referred to as public benefit corporations. A nonprofit organization can’t be created to help a particular individual or family, for example. If that were possible, we’d all have our separate nonprofit organizations. You can start a nonprofit to aid a specific group or class of individuals – everyone suffering from heart disease, for example, or people living below the poverty level – but you can’t create a nonprofit for individual benefit or gain.

Just because you’re working for the public’s benefit doesn’t mean you can’t receive a reasonable salary for your work. And despite the name nonprofit, such an organization can have surplus funds – essentially, a profit – at the end of the year. In a for-profit business, the surplus money can be distributed to employees, shareholders, and the board of directors; however, in a nonprofit organization, the surplus funds are used to strengthen the organization or are held in reserve by the organization to respond to emergency needs or invest in future programming.

Being accountable

Although nonprofit organizations aren’t public entities like government agencies and departments, their tax-exempt status and the fact that contributions are tax deductible require them to be more accountable to the public than a privately owned business is.

It only takes a few media reports about excessive salaries or concerns about how a nonprofit has spent donated funds to prompt donors, legislators, and the general public to begin asking questions regarding the nonprofit’s finances and management.

A few nonprofit organizations have taken on the task of collecting information about other nonprofits and sometimes rating them in various categories so prospective donors can use this information to help them decide which organizations to support. Charity Navigator (www.charitynavigator.org), CharityWatch (www.charitywatch.org), GuideStar (www.guidestar.org), and BBB Wise Giving Alliance (www.give.org) are four prominent organizations providing information about nonprofits. If you’re just starting out and your nonprofit is small, it’s unlikely that your organization will be evaluated by one of these organizations. But it will serve you well to remember that the degree of operational transparency, financial stability, and program results in your organization can be put under scrutiny.

We discuss nonprofit disclosure requirements in more detail in Chapter 5, but at a minimum, federal law requires that nonprofits file a report (Form 990) every year with the IRS. The amount of detail required in the report depends on the size of the nonprofit organization. States have their own reporting requirements, so contact your appropriate state office to learn what is required.

Most nonprofits with annual gross receipts equal to or less than $50,000 can file the 990-N; nonprofits with gross receipts less than $200,000 and assets less than $500,000 can file the 990-EZ. Nonprofits with gross receipts equal to or greater than $200,000 or assets equal to or greater than $500,000 must file the long-form 990.

Federal law also requires nonprofits to make their three most recent 990 reports, as well as their application for tax exemption and supporting documents, available for public inspection. State and local laws in your area may require additional disclosures. Posting your 990 reports and other required documents on the web is an acceptable way to meet disclosure requirements.

To get familiar with the 990 report, download a copy of it from the IRS website at www.irs.gov. You also can view completed 990 forms from other nonprofit organizations at GuideStar (www.guidestar.org).

A WORD ABOUT EXCESSIVE COMPENSATION

Although nonprofit employees have no dollar limit on the amount of compensation they can earn, the IRS does have the authority to penalize individuals (and organizations) who receive (or pay) excessive compensation. Whether the IRS considers benefits “excessive” depends on the situation. For instance, a staff member earning $100,000 annually from an organization with a budget of $125,000 may need to worry, but someone earning $100,000 from a nonprofit with a $5 million budget probably doesn’t.

An employee who’s found to be receiving excessive compensation may be required to return a portion of his compensation and to pay an excise tax, and, in dire cases, the nonprofit organization may lose its tax-exempt status. Chapter 5 offers more information on excessive compensation.

So when setting your nonprofit’s executive director’s salary, make sure the amount of compensation is justified by salary surveys of similar organizations. Also factor in the local cost of living, the size of the nonprofit’s budget, and the type of services being provided. Community foundations and nonprofit consulting firms can offer salary guidelines to aid in the compensation decision. Also, many states have a statewide nonprofit organization that collects information about and provides information to other nonprofits.