Nonprofit Startups Beware of Online Service Providers

Many nonprofit startups seek the support of on-line service providers to prepare and process their corporate documents and to apply for tax-exempt status. Though the hands-off approach to starting a nonprofit may appear to be the easiest and best approach, there are risks -- especially for applicants with little or no knowledge about the documents.

I recently met with a new client who unfortunately had used an on-line service provider to prepare the IRS form necessary to secure tax-exempt status (Form 1023). During our meeting, I reviewed the form with her. We were both shocked to discover many issues with it, including the fact that the form was outdated! The IRS's most recent update to the form was in 2012; however, the form the on-line provider used was the 2006 version.

Even the fees were out of date!

There are two fee categories on the IRS Form 1023. The lesser fee is for small groups that will earn less than $10,000 annually. This fee is for nonprofits that will stay small and typically never hire staff. A good example is the Parent Teacher Association (PTA) at a public school. The higher fee is for nonprofits that plan to grow -- adding programs and staff over time. Though my new client's business model fits the higher fee category, the on-line provider prepared her form at the lower fee.

In further discussing the form and the process the on-line provider used to prepare it, I was shocked to discover that she'd only had a short conversation with the representative who did not go through each question with her. In fact, she was only asked four or five questions to complete the multi-page application that includes financials. In reviewing the financial section, we discovered that it too was incorrect.

Though automated service providers offer expedited processing, they could cost a startup both time and money in the long run. Having a consultant who can provide personalized services is invaluable to any nonprofit but especially a startup. And when it comes to document preparation, the fees charged by on-line providers are generally about the same if not more than those charged by a consultant. A consultant not only provides customized services to meet the specific needs of each client, a startup can benefit from the natural learning that takes place during discussions with the consultant during document development process.

Board Governance: Is your baby protected?

You may be wondering what protecting a baby has to do with board governance. Well, a nonprofit is like a baby in many ways. It relies wholly on others for its development, growth and sustainability. And like a baby, a nonprofit needs dedicated adults to take responsibility for both its well-being and its financial interests.

A nonprofit is dependent upon its board of directors to guard it from all threats, internal and external alike. Collectively, board members must be willing to make the hard decisions necessary to protect the organization and sometimes that means going against the staff, including executive director (even if when he is the founder). The board’s primary responsibility is to ensure that the nonprofit achieves its mission. Any threat to that possibility must be swiftly neutralized. Yet, time and time again, we hear stories of boards failing to meet their responsibility.

Just this week Nonprofit Quarterly ran Kate Barr’s story, Improving Nonprofit Decision Making amid Economic Crisis, in which she describes how the board of directors at a highly respected nonprofit failed over nearly two years to exercise its duty to take quick, responsive, and sound action in response to numerous red flags indicating a financial crisis was looming. When some members of the board were ready to make the hard decisions, others cowered when executive director scoffed at their recommendations. Ultimately, the board chose to appease the executive director, leaving the organization not only in a financial crisis but also with a tarnished reputation.

In this case the board made protecting the feelings of the executive director more important than protecting the organization, and now the nonprofit is paying dearly for it. Would your board have responded differently?  Can you be sure?  Kate includes strategies your board can take to improve its decision making and better protect your organization.