Nonprofits are good, right? They are intended to make a positive social impact. Yet, they can be very bad and they most certainly can be very ugly…very…like ugly crying ugly or even worse…train wreck ugly especially when the wrong people are in charge or even involved in the lower ranks.
So, why do we have nonprofits anyway?
Doing good for others goes back to Bible times and really is a dominant theme in most any theology if we were to take a gander.
In the US the formal nonprofit started to be birthed in the 1900’s during the Progressive Era (late 1800’s-1920s) when policies & regulations addressing topics like child labor (think sweatshops), women’s suffrage, pasteurized milk and clean water, prohibition, & anti-lynching were beginning to become a priority for progressives or the more “socially conscious”. Oh, and these do-gooders were targeting corruption in politics (imagine that) and the tyranny generated through what they believed resulted from bad business practices and the ultra wealthy.
We, in the US, also experienced a time of prosperity during this time.
What is a nonprofit anyway? Do these organizations really make no profit? If so, how do they continue to exist let alone grow? Are we in trouble with the Feds if we make a profit? All the questions associated with this industry- the industry that was established to fill gaps expeditiously where the government could not respond as quickly AND provide an incentive for donors and investors by providing a tax shelter of sorts encouraging citizens to invest their money in a positive social impact of their choice. Sounds pretty nice right? Well, any seasoned nonprofit “operator” knows it’s a dog eat dog world in this “biz” of doing good.
Personally, I have worked in all three US business sectors and the nonprofit world has served to be the most miserable, most complex yet most rewarding industry I’ve worked in. Dramatic- I know. I have stories that are almost unbelievable…almost. If I didn’t have all the proof in the way of documentation, audios and eyewitnesses over the years, I know that my many tales would be chalked up to blustery lies and propaganda or just an emotional woman. I also know the cheese does not stand alone either.
Examples of nonprofits include churches, fraternities, charities, and both public and privates foundations to name a few. These organizations are established to address social issues making a positive impact in local and even global communities. They generally have qualified for 501c3 federal corporate IRS income tax exemption status. Once these organizations qualify for 501c3 exempt status, donors & investors receive a tax deduction upon making a monetary donation to the organization. Also, these organizations are exempt from being taxed just so long as they abide by the unrelated business income “UBI” guidelines set forth by the US federal government (see: www.irs.gov/charities-and-nonprofits).
Founders and the board of directors are completely separate from the organization protecting individuals from 501c3 nonprofit organizations provide a limited liability (to some degree…we can talk about this more later); the organization does not pay taxes; donors and investors receive tax deductions when they contribute and these organizations are quite nimble with lots of flexibility in delivering their programs and services to make a positive impact in their communities compared to the red-tape and ugly slow moving bureaucracies of the government.
Limited Purposes. In order to be exempt under the tax laws, a nonprofit organization can only perform certain functions listed in those laws. There is something called unrelated business income or “UBI” when dealing with nonprofits. The IRS has certain rules that 501c3s must adhere to when it comes to revenue. If that revenue is unrelated to your standard donations, event sponsorships, federal, state or private grants or campaigns, you may be required to pay UBI taxes and you may even be at risk of losing your 501c3 status. The IRS’s website is very helpful to understand UBI and JPG also provides high-level education regarding UBI.
Lobbying. Many times NPOs move into the murky water of lobbying and that is an absolute no…no. When I was at the Green Beret Foundation, I would take it on the chin often because I, as the Executive Director and a Board Member, refused to get involved with controversial issues such as the 2nd Amendment. Our supporters, mostly Special Forces community members, just couldn’t understand why I wouldn’t take a stand and use the foundation’s network to protect Americans’ gun rights. After all, Green Berets used firearms everyday to carry out their mission to “Free the Oppressed”. What was hard for them to understand is the Green Beret Foundation’s mission was to support those Green Berets that were wounded, became ill or injured or were transitioning out of the military and to support Green Beret families and fire arms are not required to carry out that mission. If I would have chosen to become vocal about controversial topics, I would have risked losing the 501c3 status which means donations would not be tax deductible and may I just say that Americans are charitable but they are not that charitable. They want that tax deduction and I understand why. Most types of tax-exempt, nonprofit organizations are forbidden from contributing to political campaigns and may only do a limited amount of lobbying and it MUST be relevant to their mission. In the GBF’s case that would include topics like veterans’ medical and mental support & therapies etc.
Public Scrutiny. I had never experienced the level of arm chair quarterbacking and attacks from competing orgs like I did when I worked at the GBF. Green Berets that may have donated $10 and never ran a business whether for profit or not were experts in my business because they were Green Berets. Aside from the program recipients and Green Beret community, we would be under constant scrutiny of the larger donors and our competition. If you think you are not competing for market space in a nonprofit, you will learn very quickly how wrong that line of thinking really is.
Additionally, unlike a for profit company you must provide your financials and audit reports to the public when they request them and you should have these documents hung on your website for easy access. “Under IRS regulations, you must provide any member of the public who requests it with a copy of your application for tax exemption (Form 1023 or 1024) and copies of your nonprofit’s recent tax returns (Form 990 or 990-EZ). You can charge a reasonable fee for the cost of copying and delivering them” (source: LegalZoom.com). They aren’t that easy to read by the common eye either which is why it is imperative to invest in an annual report to help communicate your organization’s impact each year. You can also explain activity that may even seem negative via your annual report.
Limited Resources to Meet Unlimited Needs. I think this bullet is fairly self-explanatory especially for smaller and/or newer NPOs. It seems we are constantly chasing a dollar to just get that dollar out the door to a program recipient in need which leads me to the next bullet- Risk of Burnout.
Risk of Burnout. I have noticed and personally experienced myself that most folks involved in a NPO have some level of personal and emotional tie to the mission. You will see these folks continually working never take a break. These highly emotionally charged missions and work environments lead to lots of actual work too. So your brain and spirit is overloaded. It’s not IF your team will experience burnout. It’s WHEN they will experience burnout. As the Executive Director, it is your responsibility to keep your finger on the pulse of your staff members, volunteers and non-paid staff members. You owe it to the person and you owe it to the foundation because they will become a negative pull on the foundation if they do not rest.
Lack of Investment in Required Business Resources,Processes & Systems. It starts with your staff. As mentioned, we have limited time and resources. This leads to picking the wrong person/people for your team and as the saying goes “if you think hiring a professional is expensive, you should see how expensive it is to hire a rookie or even a criminal” which I actually have paid heavy consequences more then once for doing. I even thought “the person has passion for the mission therefore I can teach them the ropes”. Nope messed that up too. Remember my words and live by them, “hire slow. Fire fast”! (get rid of that trash and fast before it contaminates the rest of the team or even the board and other volunteers with lies & propaganda).
I have also noticed that many nonprofits do not establish KPIs and metrics for the staff members and board members. Big mistake! If you need help starting this process, call your friend Jen. Glad to help.
Volunteer Commitment. Volunteers or non-paid staff members are essential for nonprofits. I will say that it is almost unbelievable the level of commitment that some of these folks have. I actually started out as one of these folks for GBF. I was the COO full-time for almost two years for the GBF before we had enough to start paying me (way under a marketable salary but nonetheless). With that being said, volunteers and non-paid staff members can unvolunteer just as easily as they volunteer. This can be catastrophic when it comes to event planning and execution or even having these types of folks in positions that are pivotal to the organization such as bookkeeping, budget development or operations. I do NOT advise doing this. Board members are volunteers 99.9% of the time as well. Boards are very frustrating. As an Executive Director or even a Chairperson of a board, you will more than likely find yourself very disappointed and frustrated in the lack of actual involvement, contribution in both labor hours and funds and it’s really interesting dealing with the arrogance and ego that is usually present on NPO boards. How do we manage these two buckets of volunteers? 1. Incentives for the first group; and 2. Performance reviews for the second group. That is an entirely separate article that I have started and will publish soon. I actually give a class on the topic because it is so important to the organization.
Unethical Behavior & Corruption. The very great things about nonprofits—-their ability to expeditiously move and react to very real situations and their freedom to operate in the grey free of government bureaucracies and red-tape- are the very same things that allow for corruption and unethical behavior. Millions upon millions of dollars are embezzled and laundered through nonprofits every year. We can’t open an internet browser without an article about the Clinton Foundation or some even smaller no name foundation being investigated for this type of nefarious activity. I’ve known NPOs to allocate spending for huge legal fees under programs and services to pad their PSE (programs and services expense ratio) when they do not provide legal support or financial support for legal fees as a program at their NPO. They are only fooling themselves and I bet you anything they are starting to see the reserves continue to chip away because of these very bad decisions and fraudulent allocations. Because NPO’s have a culture that lacks constructive self-criticism likened to a self-licking ice-cream cone; a lacking of true transparency and objectivity for a number of reasons; and boards with huge egos and arrogance, we have yet to embed these very important business ethics and practices in most nonprofits, the staff leadership, and their boards of directors.
Politics. I notice this most in the military NPO space but it’s also very apparent wherever there are medical professionals and very large donors- I like to refer to these donors as investors because they are investing large sums of money into your org. When you have an US ambassador or a CEO of a fortune 100 company donating, you bet your ass that you will be doing pony tricks for them or even cleaning their fridge as the ED of your NPO; furthermore, if these folks end up on your board, you WILL bend to their desire to either support who they want to support over some even more deserving or you may even find yourself running after a new program that has very little to do with your mission because they want to establish their own legacy.
Legal Risks. Although 501c3s are limited liability corporations, it doesn’t mean that board members cannot be individually sued for their behavior. They certainly can which is why your NPO needs insurance and even then individuals can be sued. Even if individuals are not sued individually, once the insurance policy is burned through during a legal situation, the money will need to come from somewhere and generally, you should never take it from donor funds (but I know of a foundation that has and then denied program recipients support and they are not the only ones either). The board should start ponying up the outstanding legal debts. If they are worth their weight they will but knowing how arrogant most boards are, they are too entitled to do it and would rather make the staff and program recipients suffer even if they were the cause of the legal crisis.
Lack of Diversity. Whether the lack of diversity is gender or race specific, it doesn’t take a rocket scientist to quickly identify that there are fewer persons of color and females on boards whether for profit or NPOs and I am willing to bet there are even less women and persons of color holding the chairperson position in both for profits and NPOs. Why is that? Because apparently, white men can lead better (sense my sarcasm).