Info You Can Use: Considerations Before Forming A Non-Profit

Last month, as many non-profits were faced with losing their status due to a change in the tax filing laws, Board Source President/CEO Linda Crompton suggested the situation might be good for the non-profit world by removing duplicative and ineffective/inactive non-profits. Because non-profits really aren’t required to generate a business plan or survey the need and competition before filing for status, she feels there may be too many non-profits in existence.

No for-profit company would start up without doing a thorough analysis of the competitive landscape; that analysis would be baked into the business plan and would inform all other decisions — one of which might be “not here, not now.” It’s incumbent upon our sector to school itself on this point: just because we have an idea, and a mission, and a great, good heart, does not mean that we need to start our own, brand-spanking new organization to fulfill that mission. The same truth applies to organizations in all stages of their lifecycle. Boards should be asking themselves: are we still relevant? Are we fulfilling our mission effectively and sustainably? Is there another organization across town doing the same thing, only better? Should we be discussing merger, or even dissolution?

I have mentioned a number of times over the years that I have often many arts organizations have been started that could have easily been part of an existing group or that could have merged with other groups when it was clear that their service area couldn’t support both groups very well. I will admit that I have seen many more groups in merger talks over the last few years since the economy has gotten worse than I had during previous economic down turns. It was good to see people considering this route. But I have also seen new groups peel off because of personality differences or a desire to perform a slightly different genre. Admittedly there is a difference between classical and modern realism, but Shakespeare festivals manage to produce both without compromising their souls.

To be honest though, I don’t know if the IRS would be in a position to evaluate whether there was or wasn’t a need for any type of non-profit, be it an arts organization or social service agency. Imagine the work involved in developing criteria to measure if there was a sufficient support base for the organization in a community. Imagine the bad press the IRS would get for denying someone non-profit status for a social service organization serving a very emotionally charged cause.

Which doesn’t mean due diligence shouldn’t be done. In a comment to Linda Crompton’s entry, Don Griesmann links to an entry on his blog in which he enumerates all the considerations that should be made before creating a non-profit. He also footnotes his arguments with the largest number of stories on the difficulties faced by non-profit organizations I have ever seen.

His entry came at the end of 2009 and he proposed that no new non-profits should be allowed to be created in 2010 unless a whole multitude of conditions were met. A brief sampling:

•Unless you understand the nonprofit will not be “your nonprofit” and you have enlisted an incorporating board that is interested in the concept and capable of performing the necessary tasks of incorporating and operating the organization and

•Unless you understand there is no “free money” from the federal or state governments. The federal government distributes funds through scholarships, fellowships, contracts, grants and loans. Each requires an application, meeting eligibility requirements, demonstration of a task to be undertaken, proof that the task was performed and the money used appropriately and in many instances a report evaluating the use of their funds…

….•Unless you have a concept of what it costs to develop and operate a nonprofit in terms of shared leadership, time, thought, study, serious planning, hard work, evaluation and annual reporting as well as money and
•Unless you have no intention of attempting to raise more than $5,000 a year for the next 5 years…

…•Unless you have performed due diligence and created a board of mixed talents, diversity, shared passion and vision concerning a truly unserved issue or need supported by some empirical evidence. If the need is an underserved need, why not join with the current providers and increase the service or product? And
•Unless you understand that there simply are not grants available to pay for the incorporation process. If you and others cannot raise the first $1,000 or so to incorporate, then where do you think you will get the money to run the organization? When someone asks, as many do, does anyone know where I can get a grant to start my nonprofit, we should either not respond or tell the truth – you are not ready to start a nonprofit. Go volunteer at a local nonprofit….

One of his next “unless” includes having a business plan that answer 19 different questions. One of his other conditions might be that you shouldn’t form a non-profit if you don’t have the patience to read his whole entry. While it is very long, it asks many pertinent questions and raises many points that ought to be considered. It is good to see people starting to advocate for this level of consideration prior to forming a non-profit.

Of course, non-profit status covers a lot of situations, including block associations and other purposes that wouldn’t necessarily be competing for grants from a shrinking pool of resources. These will certainly benefit from being well planned, but aren’t likely to struggle to stay in existence or become a drain on their community if they don’t meet every criteria.

Things To Ponder: Who Is Your CEO?

Gene Takagi at the always enlightening Nonprofit Law Blog links to a two part entry on why the title of the senior leader of a non-profit should transition from Executive Director to President/CEO. The argument made in the pieces is that the person in that position gains credibility within and without of the organization.

Takagi only touches upon this very briefly because his greater concern is who is legally the CEO of the organization, the executive director or board chair. I voraciously consumed the post because I have dealt with organizations where the dynamics were such that one was clearly in a dominant position. I often wondered to whom people would look for leadership in a crisis–versus who was ultimately responsible for the decisions that were made during that time.

Takagi’s advice is-

“However, if the organization has a paid executive director who is tasked with operational leadership and the board chair is a volunteer who is not active in management of the organization’s operations, the CEO designation should be given to the executive director. Nonprofit boards should (1) review their bylaws to understand how their management structures have been established, and (2) amend them, as necessary.”

Acknowledging that the board chair may not want to give up the CEO title in this case, especially if said person is the organization’s founder or the board is very active, Takagi suggests the board seriously think about what is in the best interests of the organization. There are legal repercussions the nominal CEO may face.

It must not be overlooked that whoever has the CEO title may face increased exposure to liability for failure to meet his or her duties. Any CEO should be very familiar with the organization’s current financial position, programs, legal compliance issues, and overall strengths and weaknesses. Imagine a judge’s or jury’s reaction to a CEO who claims not to have reviewed the financials for several months or failed to take any steps to help ensure that the operations of the organization were compliant. Such reaction may be very different if it were the volunteer board chair’s liability that was being considered and the organization had a separate executive director designated as the CEO.

I did a quick read of other sources to see if Directors and Officers Insurance and Errors and Omissions Insurance would cover this sort of negligence and my results were inconclusive. Different insurance companies offer different coverages which contain different exclusions. Some seemed to imply this was the sort of thing you buy the insurance to guard against. Others said the insurance companies will look for any blatant omissions to use as a pretext to deny a claim.

Effectively Merging Non-Profits

I apologize for missing my postings on Monday and Tuesday, I was away at a retreat to examine and discuss how to effectively merge the booking consortium to which I belong with the consortium that it spun off from. The meetings occurred in another part of the state and I didn’t have ready access to a computer and the time to write entries.

I use the phrase “effectively merge,” the same words we used throughout most of our discussions, because the truth is that an actual merger of two non-profits is a lengthy, involved and expensive process. What will happen in reality is that the one organization will be dissolved and its assets and members will be transferred to the other as is allowed by its founding documents. But in effect, it is a merger.

A good portion of the first day seemed to be spent composing the correct syntax for the required motions that would be made the next day at the annual meetings of both organizations to start this process. Since we already intended to rewrite our bylaws per the suggestions of an attorney we consulted, we were resolved to dedicate the next year to working on the rewrite. We also were determined to examine the organization and what we wanted it to be. As a consequence, both groups will remain in existence as separate entities for another year laboring jointly to define the bylaws and purpose of the combined organization.

Even though it is likely to be the most dry and boring, I joined the Governance and Membership Committee just for the experience of redefining the nuts and bolts of the organization. I figured it would make good material for blog posts if nothing else.

I also joined the Artistic Selection Committee. The other committees are Marketing/Sponsorship/Grants and Education. Among the things the committees are going to explore are what does it mean to be a member? What are the benefits of participation? Should membership be tiered to both allow casual partnerships with non-member groups and provide greater benefits to those who are more extensively involved.

We are going to examine how we go about selecting artists to present in the context of many different factors. Since we would like to pursue gaining sponsorships as a group and offer companies the opportunity to have exposure across the state, we will have to decide how the program is designed and the sponsored show is chosen. There is also the big issue of whether such arrangements will endanger relationships individual members had with these companies previously. Why sponsor shows at a single venue when you can do so across the entire state? On the other hand, perhaps your brand is diminished by having your name associated with theatres that serve a less elite clientele and you don’t want your ads appearing in their programs.

There are similar questions for the education area. A recent partnership resulted in an experience between schools, audiences and artists that could have yielded a more extensive interaction had the time and resources been available to exploit the situation. If these are the opportunities we want to pursue, where do the staff hours and other resources come from?

That brings us back to the work of the other committees exploring what it means to be a member and what sort of investment in the organization is needed to benefit from its efforts, including any packages put together to offer potential sponsors.

One of the desires stated this week was to expand the membership to include other arts organizations around the state. By redesigning the purpose of the organization a little, we hope to increase our relevance to other groups. They may only do a show once or twice a year, but they can find the process greatly facilitated by our expertise. I think there could be a reciprocal benefit. Perhaps connections the new groups have open up more churches and schools to chamber concerts and outreaches. (Or local artists and churches/schools became more aware of each other.)

So my question here at the end of the entry is this—has anyone had any experiences similar to this? I have to help generate bylaws and policies to guide this organization and it would be nice not to reinvent the wheel. Are you a member of a consortium or partnership between different arts organizations which works together to achieve certain goals?

I am looking more for an arrangement where all decisions and initiatives are generated and executed by the members rather than a situation like an arts council where the council works to advance the interests of the members. We operate as a board organization rather than a membership organization. Though I would be interested in learning about any multi-organizational partnership arrangement that diverges from everyone else does.

Board Stories (Plus Board Development Scholarship Info)

I don’t often see blog entries on someone’s practical experience solving board related problems so I was pleased to follow a link on a Non Profit Law blog Tweets of the Week Entry to BoardSource’s Board Life Matters blog. There Melissa Sines talks about her experience on a board experiencing Battered Board Syndrome in the wake of the Executive Director’s unexpected departure.

She relates some very common problems her board faced:

“The relationship between board and staff had always been a rocky one in our organization. It was hard to ignore the finger-pointing taking place on both sides of the table. It was a classic case of management saying, “The board doesn’t fundraise enough, what good are they?” and the board saying, “The staff doesn’t listen to anything we say, anyway, what use are we?”

She credits a grant that allowed her board to engage in a year long training process covering myriad issues with saving the organization.

I haven’t had the opportunity to read the rest of the blog to see how useful it might be, but I couldn’t help but notice the most recent entry offering 20 scholarships to allow “emerging nonprofit leaders to participate in the annual BoardSource Leadership Forum to deepen their governance knowledge.”

This is the first scholarship I have heard with the aim of improving board governance so it bears attention. The criteria are:

* Are either
o nonprofit board members with less than three years of experience serving on a nonprofit board
o nonprofit executives or staff members with less than three years of experience working with a nonprofit board
* Have demonstrated leadership ability and potential for their organization and the nonprofit community
* Are affiliated with a nonprofit organization that has an annual budget less than $5 million
* Will enrich the diversity of the sector. Diversity includes but is not limited to age, race/ethnicity, sexual orientation, and disability.
* Would not otherwise be able to attend the BoardSource Leadership Forum and have not attended a previous Forum