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Friends Don't Let Friends Start Nonprofits

Posted By Guest Blog: Alan Canter, Monday, February 1, 2016

I’m often approached by people asking for advice on creating a new nonprofit.

My response, inevitably: Don’t do it!

I say this not because I question the power of nonprofits to change the world for the better. Nor do I doubt the sincerity of the person hoping to create that new charitable institution. But there is an awfully good probability – I’d say, 99% – that there’s no rational justification for creating a whole new entity.

There are currently 1.4 million nonprofits in the United States. That’s one-point-four-million organizations that need to recruit board members, raise money, keep minutes, file financial returns, hire staff, pay staff, develop logos, maintain Facebook pages, buy copy paper, apply for grants, update websites, design strategic planning retreats, and – assuming there’s time – do a little bit of good in the process.

As a consultant over the last few years, I’ve seen time and again how nonprofit organizations, many of which provide critically important services, have been dealing with chronic budget deficits, high staff turnover, and uncertainty. I find myself involved in conversations to help these nonprofits merge or shut down or reconfigure their missions to survive.

And yet each year there are more and more nonprofits competing for the same limited resources. It makes no sense.

So who are these people who are so hell-bent on creating new nonprofits?

The first group is The Emotionally Motivated. For example, there’s the retired executive who credits learning to rock climbing as a boy with much of his success in life. He tears up talking about it. So in his retirement he starts a rock climbing school for kids from less advantaged backgrounds. Or take the group of people who grew up attending a small rural synagogue. They’re distraught because, with shifts of population, the temple has gone out of business and the building has been abandoned. So they raise funds to preserve the synagogue, even though it no longer functions as a regular house of worship.

The most common among the emotionally motivated are people who want to commemorate the death of a family member or a publicly prominent person. A family creates a nonprofit to fight the particular disease that killed their loved one – even though there are undoubtedly organizations already doing just that. Or there’s a police officer who is shot in the line of duty, or a journalist who is killed while on assignment in a war zone. These are lives that are absolutely worth commemorating, and the emotions of those involved are very real, and very raw. But there are lots of ways to accomplish this commemoration short of creating a nonprofit organization. Supporters could make memorial gifts to the deceased’s favorite cause, or they could create a special scholarship fund to be managed by the local community foundation. They could start an annual 5K charity race in the person’s name. There are dozens of viable, meaningful, and relatively efficient ways of remembering the person short of creating a new organization.

But instead many people reflexively have an urge to start a new nonprofit. They’ll file for tax-exempt status, recruit a board, and launch their effort. They are moved by emotions, and they overlook the fact that the new organization will be ineffective at best, may not be viable at all, and likely will be cannibalizing support from more established and effective agencies.

I’ll call the second set of nonprofit establishers The Splinter Groupers. These are staff and board members of an organization that has gone in a direction that they don’t approve, or that has little interest in their particular passions. For example, a land conservation trust may acquire a parcel of land that includes a historic house, but the land trust has no interest in managing the house as a tourist destination. So a new group forms to oversee the historic building. In many ways that makes sense, but it’s another 501(c)(3) that needs to be cared for and fed, often drawing from the same donors and board members as the original organization.

Or take the example of parents of students at a private middle school who are frustrated that the administrators won’t consider extending the school beyond eighth grade. They lead an effort to spin off a new high school. Once the high school is established, different Splinter Groupers then start a separate nonprofit booster club to support that school’s sports teams because they feel the school is inadequately funding athletics. (Splinters beget splinters.)

And then there is, frankly, a third group: The Scam Artists. These crooks throw together a putative nonprofit for the sake of stealing money from naïve donors. As I have written before, these scoundrels prey on donors (particularly the elderly) by creating organizations whose names inevitably include some combination of the words “children,” “cancer,” “veterans,” “police,” and “firefighters.” These are the scourge of the nonprofit world, ruining the reputation of the field and bilking innocent donors out of millions.

One would think that it’s fairly hard to start a new nonprofit, but that’s not the case. The Internal Revenue Service’s Exempt Organization Division is the traffic cop on this beat, and one of its concerns should be on keeping unqualified nonprofits from getting 501(c)(3) status. But that’s simply not happening. The IRS Exempt Organization Division by most accounts is woefully understaffed, so a significant backlog of nonprofit applications built up in recent years. You’d think that the solution for eliminating the backlog would have been to add staff members and capacity, but (responding to budget restraints and political pressure) the IRS instead instituted a new, speedier process of granting tax-exempt status through something called the 1023-EZ form – a three-page electronic application that for smaller nonprofits has replaced what had been a 26-page paper application.

The highly predictable result? Last year the IRS approved more than double the usual number of new nonprofits, accepting over 94,000 new organizations in 2014, while rejecting only 67. (No, that’s not a typo. Put another way, for every 10,000 nonprofit applications that spill over the transom, the IRS rejected only seven.)

Not surprisingly, there are some problems with these new nonprofits. A study by the Taxpayer Advocate Service (an independent watchdog group within the IRS) suggests that over one-third of the new applicants could and should have been quickly dismissed up front for their failure to present an acceptable purpose clause. How many of these newly minted nonprofits are pure scams is anyone’s guess.

It’s a mess. As Tim Delaney, the president of the National Council on Nonprofits, put it, “The IRS is handing out tax-exempt statuses like Halloween candy.”

So can you create a new nonprofit? Yes, and, unfortunately, more easily than ever. Should you? Almost certainly, no. And should we be concerned about what’s going on? Absolutely.



About the author: Alan Cantor spent nearly three decades in the nonprofit sector before founding Alan Cantor Consulting LLC in January 2012. He focuses on helping community-based nonprofits be more effective. He has facilitated strategic retreats, conducted development and strategic assessments, trained staff and board members, conducted campaign feasibility studies, mentored CEOs, presented at conferences, and written widely on the challenges facing the nonprofit sector. Learn more about Alan.

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