Strong Foundations: A Practical Guide for Nonprofits with Limited Resources

by Michelle Harvey

For over 30 years, NCHH has convened and led the healthy housing movement, conducting practical research, translating and disseminating credible science into useful tools, garnering broad cross-sectoral support for better housing, and advocating for and with traditionally marginalized populations.

In the last six years, NCHH has provided capacity-building assistance to over 175 communities in all 10 federal regions and distributed over $1 million in micro-investments (via direct grants and scholarships). When we work with community-based organizations, we focus on an “accompaniment” model where we stand beside community-based organizations, not for a single grant term but for the long haul. According to NCHH partner Romona Taylor Williams, executive director of Mississippi Communities United for Prosperity, “[T]here are few national organizations that have a proven and trusting track record of working to assist frontline organizations to meaningfully build their capacity beyond website toolkits and webinars. NCHH sets the standard for capacity-building delivery.”

Most of NCHH’s work with community-based organizations includes translating its scientific research into practice to provide policy recommendations, hands-on guidance, technical assistance, and training.

Lately, we have heard our partners share their need for capacity building at an operational level. While we cannot provide specific advice and technical assistance for every situation, we have compiled a list of considerations when starting and growing a nonprofit.

These steps provide a general framework, but it is essential to consult with legal and financial professionals to ensure compliance with specific state and federal regulations.

1. Incorporation and Legal Status

In general, it’s important to develop a relationship with an attorney in your state, ideally, one with nonprofit experience. They can walk you through the following steps, making sure you’re protected and file the proper paperwork with the correct entities.

Also, you’ll find the IRS website, specifically, the Charities and Nonprofits page, particularly helpful in the forms you’ll need to legitimize your nonprofit.

• Nonprofit Incorporation: Ensure your organization is properly incorporated as a nonprofit in your state by following the steps below.
  • Define Your Mission and Purpose: Clearly articulate the mission and purpose of your nonprofit. This will guide your activities and help attract supporters and donors.
  • Choose a Name: Select a unique and descriptive name for your nonprofit. Check with your state’s business registration office to ensure the name is not already in use.
  • Form a Board of Directors: Assemble a board of directors, as most states require at least three board members. The board will govern the nonprofit and ensure it adheres to its mission.
  • Draft Articles of Incorporation: Prepare and file articles of incorporation with the appropriate state agency (usually the secretary of state). This document typically includes the nonprofit’s name, purpose, registered agent, and board members.
  • Create Bylaws: Draft bylaws that outline the rules and procedures for operating your nonprofit, including board meetings, officer roles, and membership guidelines.
  • Apply for an Employer Identification Number (EIN): Obtain an EIN from the IRS, which is necessary for opening a bank account, hiring employees, and filing taxes.
• Apply for Federal Tax-Exempt Status:
  • Obtain federal tax-exempt status from the IRS, which allows donors to make tax-deductible contributions. Utilize free or low-cost workshops and resources from nonprofit support centers to navigate the 501(c)(3) application process. Additionally, the IRS website offers helpful manuals and videos to walk you through the process.
  • File for federal tax-exempt status by submitting IRS Form 1023 or Form 1023-EZ (for smaller nonprofits) to apply for federal tax-exempt status under Section 501(c)(3) or another relevant section. This allows donors to make tax-deductible contributions.
• State Tax Exemption:
  • Apply for state tax exemptions, which may include exemptions from sales, property, and income taxes.
  • Register with your state’s charitable solicitation office if you plan to solicit donations. Check for additional local requirements or permits needed to operate.
  • Tip: Check if your state offers simplified filing processes or fee waivers for small nonprofits.

2. Governance and Compliance

• Board of Directors: Most states require at least three board members who fill positions like board president, secretary, and treasurer. Check the appropriate state agency (usually the secretary of state) where you are incorporating your nonprofit for specific requirements for your state.
  • Assemble a diverse and skilled board of directors to provide oversight and strategic direction.
  • Recruit passionate volunteers with diverse skills from your community to serve on your board.
  • Board members with knowledge in accounting, human resources, and legal services can bring your organization critical operational skills while offsetting some administrative costs.
• Bylaws: Develop and maintain clear and comprehensive bylaws that govern the organization’s operations. In many states, bylaws are not filed as a part of the incorporation process but must be adopted by the board of directors.
  • Organizational bylaws typically outline details such as the purpose and mission of the nonprofit; the structure of the board of directors, including the number of directors, their terms, and election procedures; the roles and responsibilities of officers and directors; procedures for board meetings, including frequency, notice, and quorum requirements; membership guidelines, if applicable, and procedures for amending the bylaws.
  • This is where your attorney will come in. If necessary, you can use templates available online from reputable nonprofit support organizations to draft your bylaws.
• Annual Filings: File annual reports with the state and the IRS, including Form 990, to the IRS to maintain compliance and transparency.
  • Tip: Set calendar reminders for all filing deadlines and use online filing systems to reduce costs.

3. Financial Management

• Budgeting: Create and adhere to a detailed annual budget that reflects the organization’s priorities and goals. Start with a simple spreadsheet to track income and expenses and use free budgeting templates. As soon as you’re able, you’ll want to graduate to accounting software to help track grants, budgets, expenses, and conduct reporting.
• Accounting: Implement robust accounting systems and practices, including regular financial statements and audits.
  • Develop financial operating procedures that include documentation about authorization, internal controls, financial timelines, compliance with regulations, reporting mechanisms, and provisions for review and updates. Use templates available online from reputable nonprofit support organizations to draft your financial procedures.
  • The generally accepted accounting principles (GAAP) are a set of accounting rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). These principles ensure consistency, accuracy, and transparency in financial reporting across various industries in the United States. Public companies must follow GAAP when preparing their financial statements, which are also widely used in governmental accounting.
• Fundraising Plans: Develop and execute diverse fundraising strategies, including applying for grants, creating a donation strategy/giving campaign, and hosting fundraising events. Social media campaigns and community events can be beneficial and require minimal upfront investment.

4. Human Resources

• Staffing: Hire qualified staff and provide ongoing training and professional development. While it can be tempting to leverage 1099 contractors, volunteer talent, and interns, it is important to be mindful of personnel and payroll laws.
• Volunteer Management: Develop a volunteer program that includes recruitment, training, and retention strategies.
• Policies: Establish clear HR (human resources) policies, including job descriptions, performance evaluation processes, and employee benefits. Remember to include volunteer management procedures in those policies, as well. Create an employee handbook and invest in legal counsel to be sure that your policies meet federal, state, and local laws.

5. Risk Management

• Insurance: Obtain adequate insurance coverage, including general liability, directors and officers (D&O), and workers’ compensation. Shop around for insurance quotes and seek advice from other small nonprofits on affordable providers.
• Policies and Procedures: Develop and implement policies and procedures to mitigate risks, including conflict of interest and whistleblower policies. Utilize free policy templates available from reputable sites online and customize them to your organization’s needs. Consider investing in a legal review of these forms before distributing them to employees, consultants, and volunteers.
• Crisis Management: Create a crisis management plan to address potential emergencies and disruptions, using guidelines from nonprofit support organizations.

6. Technology and Data Management

• IT Infrastructure: Use donated or refurbished equipment and free software to build your IT infrastructure. As you grow, invest in reliable technology infrastructure, including hardware, software, and cybersecurity measures.
• Data Management: Implement data management practices to protect sensitive information and ensure compliance with privacy laws. Use free cloud storage solutions like Google Drive to store and manage data securely. When you can, invest in IT management software and staff to provide your organization with even more stability and protection.
• Online Presence: Maintain a professional and user-friendly website and utilize social media platforms to increase visibility and engagement. Remember to establish clear IT policies that address computers, phones, social media, et cetera.

7. Program Development and Evaluation

• Needs Assessment: Conduct community needs assessments to identify and prioritize services. Conduct surveys using free tools like Google Forms or SurveyMonkey to gather community input.
• Program Design: Develop programs that align with the organization’s mission and address identified needs. Start small with pilot programs and use feedback to refine and expand them gradually.
• Evaluation: Implement evaluation methods to measure the impact and effectiveness of programs. Use simple methods like participant feedback forms and basic metrics to measure success.

8. Community Engagement and Partnerships

• Outreach: Engage with the community through outreach efforts and partnerships with other organizations. Attending community events and networking with local organizations can help you build partnerships and raise awareness. Invite those groups to your community events as well.
• Advocacy: Advocate for policies and practices that support the organization’s mission and goals. Use social media and other free online platforms to advocate for your cause, engage supporters, and find partnerships.
• Communication: Maintain clear and consistent communication with interested parties, including a strong online presence and social media engagement. Create a free website using platforms like WordPress or Wix and do your best to stay active on one or two social media platforms.

Completing the steps to incorporate a nonprofit organization and investing in a proper organizational structure offers several tangible and intangible benefits. Here is a breakdown of these benefits:

1. Legal Recognition and Protection:
   • Limited Liability: Incorporation limits the personal liability of board members and officers, protecting their personal assets from lawsuits or debts incurred by the nonprofit.
   • Legal Entity Status: A nonprofit is a separate legal entity that can enter contracts, own property, and take legal action.
2. Tax Benefits:
   • Federal Tax-Exempt Status: Qualifying for federal tax-exempt status releases the organization from federal income taxes and allows donors to make tax-deductible contributions.
   • State Tax Exemptions: Many states offer sales, property, and income tax exemptions for qualifying nonprofits.
3. Access to Funding:
   • Grants and Donations: Many foundations, government agencies, and individual donors require nonprofit status as a prerequisite for funding.
   • Public and Private Support: Tax-exempt status and a clear mission can enhance credibility and attract financial support from a broader range of sources.
4. Perpetual Existence:
   • Unlike unincorporated associations, incorporated nonprofits can continue indefinitely, regardless of changes in leadership or membership.

Other benefits that can impact the success of your nonprofit include:

1. Credibility and Trust:
   • Professional Image: A formal structure and tax-exempt status enhance the organization’s legitimacy and professionalism.
   • Public Confidence: Being a recognized nonprofit builds trust with stakeholders, including donors, volunteers, and the community.
2. Mission Focus and Clarity:
   • Clear Purpose: Defining a mission and purpose helps align activities and resources toward achieving specific goals.
   • Strategic Planning: A structured approach facilitates long-term planning and decision-making, which equals long-term impact to your community.
3. Effective Governance:
   • Structured Leadership: Having a board of directors ensures diverse perspectives in decision-making and governance.
   • Accountability: Established policies and procedures promote transparency and accountability within the organization.
4. Enhanced Community Impact:
   • Collaboration Opportunities: Nonprofits often collaborate with other organizations, businesses, and government entities, increasing their reach and impact.
   • Advocacy and Influence: A well-structured nonprofit can effectively advocate for its cause, influencing public policy and societal change (which is the entire point, right?).
5. Volunteer Engagement:
   • Attracting Volunteers: A clear mission and structured organization make it easier to attract and retain volunteers.
   • Sense of Purpose: Volunteers and staff are more likely to be engaged and committed when working towards a clearly defined mission.

By focusing on these key areas, nonprofit organizations can build a strong foundation for growth, financial stability, and increased impact in their communities.

Like NCHH, you are likely driven by a deep sense of purpose to meet needs, right wrongs, and be a powerful force for good. With motivation like that, it can be tempting to skip the tedious, never-ending administrative details and get right to work solving the problem. Don’t. Honor the community you wish to serve by doing things right. File your paperwork. Pay your taxes. Invest in your systems and your team. Treat the operational side of your nonprofit with the same respect as your programs, and your impact will be exponential.

Let’s change the world.

 

Michelle Harvey, Chief Operating Officer, joined NCHH in December 2008. She oversees human resources, communications, operations, and IT management. An accomplished professional with nearly 25 years of experience in operations, human resource development, and employee relations, Ms. Harvey’s duties include partnering with members of senior management to guide corporate business objectives, workforce planning, and communications across the organization. Her strengths include innovation, leadership, change management, organizational development, and capacity building. Prior to joining NCHH, Ms. Harvey worked with Community Preservation and Development Corporation in the capacity of Operations Manager, where she played a leading role in managing both materials and personnel, in addition to human resources tasks such as managing payroll and hiring employees. Ms. Harvey graduated from Prince George’s Community College in Largo, MD, with an associate degree in business administration..