A Quick Update

Summer is here!!! Yay!!!

I know it has been awhile since Project Create has put up a post, but fret not, we are still moving forward.  As the summer progresses, I am finishing up work here in Chicago and getting ready to make the move to New Orleans in less than 3 weeks!!!

Here is a quick update on where Project Create is:

Now that we are incorporated in Louisiana and have our Employee Identification Number, I am currently (as in writing this post is a break during) filling out my application for our 501(c)3 tax exempt status.  This puppy is HUGE, and it really takes a lot of planning and preparation. I did not start working on it today, and I will not finish everything for at least another week or so. I do not suggest finishing it in one sitting.

If I can complete the application accurately the first time around, I should receive a response in about 60 days. This is a much better option than hastily submitting and having my application either rejected completely or assigned to an Exempt Organization Specialist. An EO Specialist is generally a helpful case worker who will further scrutinize my application and help me complete it more accurately. However, the timeline for approval increases dramatically if an EO Specialist is assigned, so I would like to avoid that altogether.

If all goes well, I should have a determination letter sometime this fall. This means there is a very real possibility of opening the Project Create facility in October or November of this year!!!

Once I complete my application, I will post about the process with some tips and hints. Until then, you can find out more here.

This is a slow but very important step, so bear with us! Until then, enjoy the summer and stay CREATIVE!!!

Does Nonprofit Mean No Profit?

I have had a lot of people asking me why I am starting a nonprofit organization rather than a for-profit. The most common questions have something to do with how nonprofits stay in business, and more importantly, how  I will pay my student loans, which are depressing to say the least. These are great questions, and ones I have definitely had to consider myself.

While everyone knows nonprofits exist, there are a lot of misconceptions about what they do and how they operate. The biggest misunderstanding is that “nonprofit” means “no profit”. To shed a little light on what a nonprofit actually is, here are a few differences between nonprofits and regular businesses from nonprofit.about.com:

• When you start a business, it is for the financial benefit of its owners and/or shareholders. Profit is the goal and the business pays taxes on that profit.
•  A nonprofit entity has a mission that benefits the “greater good” of the community, society, or the world. It does not pay taxes, but it also cannot use its funds for anything other than the mission for which it was formed.
• Nonprofit organizations can and do make a profit, but it must be used solely for the operation of the organization or, in the case of a foundation, granted to other nonprofit organizations.
•  When a for-profit organization goes out of business, its assets can be liquidated and the proceeds distributed to the owners or the shareholders. When a nonprofit goes out of business, its remaining assets must be given to another nonprofit.

There are many ways that nonprofits operate just like a regular corporation. For example, a nonprofit is also controlled by a board of directors. It is the board’s responsibility to ensure the nonprofit is fulfilling its mission, whether this is through direct action or supervision over an executive director.  

Another important similarity is that nonprofits can, and commonly do, have paid employees.  I won’t go into the politics of how much (or little) salaries should be, but they generally vary based on location, mission, and operating budget. For example, in an art nonprofit with an annual budget of $100,000, it would not be proper for a salary of $50,000/year. Also, while the major benefit of 501(c)(3) nonprofit status is that the company itself is not taxed on income, paid employees pay income taxes just like everybody else.

I know this is only a brief explanation, but I hope this helps clear up any confusions about how a nonprofit operates. My friends (and parents) can now rest assured that I am not signing up for a life of servitude without recourse. I don’t plan on becoming a millionaire through Project Create, but I certainly plan on being able to eat!

Fiscal Sponsorship

In my last post, I discussed some the steps Project Create is taking to become a legally recognized nonprofit organization. While this is one way to achieve nonprofit status, I want to discuss a very useful, alternative approach called a fiscal sponsorship. 

Instead of rewording a perfectly good explanation, here is an excerpt from Grantspace.org:

Fiscal sponsorship is a formal arrangement in which a 501(c)(3) public charity sponsors a project that may lack exempt status. This alternative to starting your own nonprofit allows you to seek grants and solicit tax-deductible donations under your sponsor’s exempt status

An important requirement is that the sponsored group’s activities must be in line with the sponsor’s mission because they are considered one legal entity. This means that if a charity’s mission is to provide food to the homeless, then an art based nonprofit (i.e. Project Create) most likely cannot use them as a fiscal sponsor.

The major benefit is that the sponsored group gains 501(c)(3) status faster than applying with the IRS, meaning it can begin operations that much sooner. The new program is subject to the bylaws and rules governing the sponsor, and in some agreements, the sponsor provides administrative oversight. In return, the sponsor receives a percentage of the donations and grants received in the sponsored group’s name.

Another plus is that a fiscal sponsorship can be temporary, allowing the sponsored group to apply for independent 501(c)(3) status and break away from the sponsor. This brings us back to Project Create’s journey. I fully intend to form an independent nonprofit, but I don’t want our mission to sit on the backburner while the IRS approves our application. Therefore, while we complete our filings, Project Create will also seek a fiscal sponsorship.

Finding a fiscal sponsor, however, does require some research. There are organizations such as the Fiscal Sponsor Directory that can help connect you with potential sponsors, but keep in mind that many people are applying for limited sponsorships. Another more obvious option is to research on your own and approach existing charities with similar missions.

After thoroughly researching the nonprofit field in New Orleans, I found a potential sponsor that was interested in sponsoring Project Create. We are negotiating with an education based nonprofit focused on afterschool and summer programs. We can use this group as a sponsor because our mission to increase art education and provide free resources to students is perfectly in line to accomodate its afterschool programs.

As soon as we sign our contract, I will provide more information on our sponsor.

Some Legal Steps to Forming a Nonprofit

As I said in the beginning, this blog is meant to show you every step Project Create takes. Unfortunately, this also includes the boring, nitty gritty ones (read: anything that might require a lawyer).

Project Create’s transition from a thought bubble into a fully functioning business is a fairly complicated process. It involves quite a bit more than daydreaming about teaching Dolly Parton to paint, which I do. Daily. Alas, to ever meet Dolly, I need to take action and bring Project Create into legal existence.

 Here are the general steps Project Create will be taking to become a legal entity:

1. File Articles of Incorporation: This step is equivalent to the birth of a company. The document is filed with the Secretary of State in the state where the nonprofit will operate. In Louisiana this costs $60 for a nonprofit and usually has a 3-5 day turn around. Most states allow you to file these online and can be done in 10 minutes. When the state issues a certificate of incorporation, the two documents together give the corporation its legal existence. Information you will need: Company name, purpose, address, incorporators, and board of directors (which I will discuss in a separate post).
2. File for IRS Employer Identification Number: This is the employer equivalent of a social security number. This can be done online and is free.
3. File with IRS for 501(c)(3) status: This designation is the lifeline for a nonprofit because it gives an organization a few benefits. First, 501(c)(3) nonprofits are exempt from federal income tax. A second major benefit is that donations made to a 501(c)(3) recognized charitable organization are tax deductible for donors.  Third, many federal, state, and local grant foundations will only award their grants to organizations with 501(c)(3) status. This filing can be done online and is bit more expensive ($850). It can take up to a year for a response.
4. File for state tax exemptions: Louisiana has both state income tax and sales tax exemptions for federal 501(c)(3) recognized organizations. These filings can be done online and are free.

I will keep you updated as I complete these filings and Project Create becomes a living, breathing business. Also, look out for the next post on non legal steps (i.e. recruiting a board of directors, drafting a business plan, etc.).

The “Hold Your Horses” Disclaimer: Nothing in this blog is intended to be legal advice. If you are thinking about starting your own business, these are very important steps that should not be taken lightly. The internet is an amazing place and there are plenty of resources available on filing these documents. Please do enough research to ensure you are comfortable with the relevant legal jargon, or seek the help of an attorney.