Friends Don’t Let Friends Start Nonprofits

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 5-k 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 Nonprofit Associations, 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.

Copyright Alan Cantor 2016. All rights reserved.

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14 Comments. Leave new

  • As often with your posts, you have put your finger on something that’s really relevant and rarely mentioned, and you explained it well. The “emotionally motivated” group you describe lead a large number of the smaller charities in my community. They work really hard, have incredible passion, but lack the basic management skills that any for-profit enterprise would require, and most are in perpetual crisis-funding mode. But you hit on another important point. There are too many charities vying for the same resources and often their services overlap. One antidote to the over-proliferation of nonprofits could be a move toward merging agencies with similar or complementary services into one (i.e. combining resources much like for-profit mergers in order to cut costs and expand services)? I’d love to know your thoughts about this. Thank you again for an insightful read.

    Reply
    • Thanks, Tim, for the kind and generous remarks. And I’ve heard from a lot of people off-line on this post — charity regulators, nonprofit executives, donors, and consultants — that there’s a lot of truth in the way I laid things out here.

      You’re absolutely right about the mergers: there should be more of them, and fewer, stronger nonprofits as a result. One of the challenges — and this is something I wrote nearly four years ago — is that smaller nonprofits have very strong cultures, typically reflecting the personalities and priorities of their founders and current leaders. There’s a convincing bit of evidence (described in Thomas McLaughlin’s book, Nonprofit Mergers and Alliances) that it’s easier for two huge nonprofit hospitals to merge than two small nonprofit agencies.

      This seems counter-intuitive, here’s the reasoning: Hospitals deliver a universally recognized set of services. If they each have a maternity ward and a cancer center, then it’s not a culturally wrenching event for the entities to merge, with maternity care now being provided at only one hospital, and cancer care at the other. But if there are two small organizations that both work with kids from families with low incomes? Each will have its own way of dealing with that population. Merging can be wrenching, challenging — but, perhaps, necessary.

      Thanks for weighing in!

      Reply
  • Alan, Thank you for writing about two endemic problems. The first, the wanton proliferation of non-profits with no effort to differentiate mission-driven from ego-driven ones. The second is the dismal impact of conservative efforts to “starve the beast” and defund the IRS. Many thanks for this fine piece. Bill Schubart

    Reply
    • Thank you, Bill, for your kind words and smart observations.

      I didn’t get into it in my piece, but your mention of “starving the beast” prompts me to say that the 1023-EZ form seemed in some ways to be a reaction to the grilling that Congressional Republicans gave to the IRS Exempt Organizations unit over what they saw as prejudicial evaluations of the applications of conservative 501(c)(4) “public welfare” organizations.

      Reply
  • Alan,

    As a veteran of a certain period in the anti-human-trafficking movement I can say with emphasis: you are. So. Right.

    I was among the many who started hearing about the abominations of human trafficking with a sense of absolute shock that I’d never heard it before, that no one else I knew seemed to know about this. That sense of “wait, am I *practically the first*?!” combined with a desire (I suspect) to be a hero led perhaps dozens of my anti-trafficking comrades to spin their wheels on the launch and administration of itsy-bitsy-teeny-weeny new nonprofits–rather than throwing their organizing power into the fundraising, awareness and activism campaigns of the few, but fairly good, existing organizations.

    I was lucky enough to go a kind of middle route. As the New York State Director of the Not For Sale Campaign, I was in some ways starting a new venture–but with the direction, legitimacy and tools provided by a young but already international nonprofit. But even at NFS, the state directorship program proved to be relatively short-lived. The administrative demands of that kind of a structure don’t make sense when volunteers and organizers could instead be doing one-off events and sending dollars and signatures to a national office.

    It makes me sad to think of the many hours of work (including my own) that could have gone toward the actual meat of the cause that went toward administrative issues instead. And I completely recognize that, especially for those of us who were devoting upwards of 30-40 hours a week to such a massive and perhaps Sisyphean task, with no remuneration and little chance (in many circles of the movement) of even meeting the people we were trying to help, that the idea of starting a nonprofit that one day rivals the Red Cross in size and respect, with the attendant praise and thanks of society, is a more than understandable motivator. I felt it myself. But in the end, even that can be the pride that comes before a fall.

    Obviously, every great nonprofit had to start somewhere. And the anti-trafficking movement was very young, and remains so–inevitably there will be space and even need for some new organizations to fill in gaps. But a good healthy dose of reality is an important medicine to take before deciding that the world needs your nonprofit!

    Reply
    • Thanks so much for sharing that story, Diedre. I think your example — and the nuances of your particular situation — illustrates the tugs on both sides of this issue. It has to be an extremely helpful experience for you, now that you are working for a foundation. Thanks for weighing in!

      Reply
  • As always, Al, well-reasoned and insightful. But when I convened a group to contemplate creating a community foundation in Boston’s western suburbs 22 years ago it was fortuitous that you were not there by my side telling me to “OMG…hey!…wake up…get real!” Because after some early years of the kind of struggle you so clearly describe, the organization, now called “The Foundation for Metrowest”, by dint of hard work, a highly valid raison d’etre and a serious dose of good fortune has become a real success. But would I do it over again? Most unlikely! So keep your thoughtful musings coming! Best wishes, Woolsey

    Reply
    • Woolsey — Thanks so much for your comment.

      First, I openly embrace that the title of my post (though catchy) comes across as more absolute than I intended. A friend of mine whom I helped start a nonprofit only a few months ago pointed out the cognitive dissonance, to which I say that, even those with the strongest opinions sometimes are caught modeling a certain “do as I say, not as I do” attitude. But what I was trying to get across is that starting a nonprofit is hard, and often is not necessary or even helpful. You should think long and hard before you leap. And, as Bill Schubart noted in his comment above, you need to do an honest assessment of whether the enterprise is ego-driven or mission-driven.

      I think the “highly valid raison d’etre you referenced above, combined with the hard work (and, yes, good luck), led you to be successful with the Foundation for Metrowest. I’m certainly glad you did that, and I’m sure it was needed. Not all new nonprofits are a bad idea. After all, every nonprofit was new once. But we as a society and we as individuals need to be intentional and careful about establishing new entities.

      Thanks, Woolsey!

      Reply
  • Charles Goodwin
    January 26, 2016 10:22 pm

    Hi Alan,
    Great article on an issue that we frequently discuss at Cogswell, both in regards to new non-profits and the sensibility of non-profits merging with like-minded organizations to avoid the duplication of services. And, I notice, with more frequency, the number of people who attempt to start a non-profit as a response to a death and hope that is not a continuing trend! Hope you are well.

    Reply
    • Thanks, Charlie —

      It’s interesting to hear your perspective as a funder. It’s tricky — sometimes creating a new organization is indeed called for. But usually not. And as Bill Schubart noted in this comment section, the key is to know when the motivation is mission-driven and when it is ego-driven. Unfortunately, at the very time more and more of us want the growth of nonprofits to slow down, the IRS has opened the floodgates with this new 1023-EZ application. Let’s hope we all find some equilibrium soon.

      Best to you as well — and thanks for weighing in!

      Reply
  • I just wrote a response on a similar topic the other day. I am trying to get people talking about instituting a non-profit “certificate of need” process (as they used to do for hospitals or hospital expansions). Start up organizations would have to address several items before they get approval to form. Questions could include: What is unique about your service? Are their other agencies already providing services to this population? Have you approached them with your idea? Are they supportive of the formation of the organization you are proposing? What is your business plan? Hopefully this would slow down the ever growing sector.

    The other point I would like to make is by adding a catagory – baby boomers who want to do some good and want to run the show. Instead of joining and helping an existing agency, they choose to start another non-profit. They want to be the director and support themselves in a job that would feel good.

    Reply
  • Mary Beth Bunge
    January 28, 2016 8:16 pm

    Hi, Al–thanks once again for insightful, relevant exploration of the non-profit world. Your blog has just become required reading for my Ithaca College course, “Fundraising in the Performing Arts!”–mbbb

    Reply
  • This captures the situation brilliantly. I am a founder, and my first advice to would-be founders is an emphatic NO, don’t do it. In addition to the market position and business case arguments you raise, there is also the personal aptitude for entrepreneurism. Like starting a business, starting a nonprofit requires enormous personal drive, persistence, and resiliency. This is the side of nonprofit startups that would-be founders don’t know enough about.

    Reply

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