If you and your neighbors have been working on a project to improve your community, the idea that you should file for nonprofit status has likely come up. That’s understandable, since there are good reasons for some groups to do so.
But for other groups—especially small ones just starting out—incorporating can be an unnecessary, and even counterproductive, expenditure of time and money. In some cases, it can be such a drain that it actually deprives communities of the very services the group is working to provide!
Planning for your project’s future is a complex decision, and no one blog post can tell you everything there is to consider about it (though some will say they can). While we fully acknowledge this, we’ve spent the last decade in the community crowdfunding biz. In that time, hundreds of the grassroots groups we’ve supported have helped us understand why incorporating is not always the best way to grow, achieve goals, or serve the community—despite its legitimizing allure.
That’s why we’d like to offer the following roundup of realities and resources around the topic of nonprofit incorporation. A lot of it is focused on fundraising, because that’s a big part of what we (and all community groups, incorporated or not) do! We hope the points we’ve collected will help you think critically about how to maximize the benefits of your hard work, now and in the future, in whatever ways work best for you.
Why nonprofit incorporation is not always good for grassroots groups—or the communities they serve
Incorporating is a great idea for some, but not all, community initiatives
There are very sensible reasons some neighborhood groups might eventually want to go full-on 501(c)3. If you’re venturing into territory like buying property or earning income, or if you’re engaging in advocacy that might draw legal attention, you’ll certainly want to look into incorporating. It could bring you certain tax exemptions and personal liability protections, among other benefits. But if you’re a small cohort with a modest budget and simple goals, you’re likely better off focusing your efforts exclusively on the work of your mission—at least for now.
Staying lean can help you make the most of your resources
Incorporating is a big lift. Doing it right usually involves developing a business plan, recruiting a board of directors, and doing alllll the paperwork involved with incorporating and filing for tax-exempt status. (The filing fees for this paperwork vary by state, but altogether you can expect to pay some hundreds of dollars.) Then, there are ongoing compliance tasks like annual reporting that need to be tended to. All the time and money you and your group spend becoming a 501(c)3 could be spent on the actual work you’re setting out to do. Think carefully about how best to allocate your resources.
Going nonprofit to get grants is not a no-brainer
Gaining access to traditional philanthropy (aka grants) is a major reason many grassroots groups incorporate as nonprofits. This is understandable, in part because grant money is so often cast as funding’s holy grail. But the reality is more nuanced.
For one, you don’t have to be a 501(c)3 to accept grants from a funder. You can partner with a fiscal sponsor who can receive the funds on your behalf, then disperse them to you. (If you crowdfund with us, we can act as your fiscal sponsor for any grants you receive during your campaign!)
In addition, one nonprofit sector rule of thumb says nonprofits should rely on grants for no more than 20 percent of their total funding picture. This keeps organizations from relying too much on a funding source that isn’t known for being terribly reliable.
If you don’t have other good reasons to incorporate, consider how else your group could receive grants—and whether you really even need them to succeed.
Getting grants can be like herding cats
While grants can be a great shot in a group’s fiscal arm, they can also be:
- time-consuming to research and apply for
- slow (there can be months between an application deadline and a funding decision)
- restricted to certain uses or dependent on certain conditions (more on this below)
In addition, many donors prefer to give to organizations they already know, meaning that new groups can have a hard time breaking in.
Achieving your goals takes focus—so stay focused!
Just as in fashion, there are trends in philanthropy. In some years, urban-focused giving will be all the rage; in others, funding for climate change initiatives, girls’ education, or criminal justice reform will spike.
Similarly, many foundation grants are restricted—meaning they can only go toward certain types of costs, such as a specific project or program, a scholarship fund, or particular tools or materials. One of our heroes, Vu Le of Nonprofit AF, writes well and often about the perils of restricted funding.
Trying to ride, or anticipate, these whims and conditions can put pressure on nonprofits to mission drift away from the founding purpose of their work. By extension, this often shortchanges the communities they serve. For example, if you identify several foundations who want to fund arts programs but you run a community garden, you might be tempted to launch a new art program there to appeal to them. But is running an art program really what you set out to do? Do you have the capacity to sustain it, along with your original garden goals? Does your community even want it?
Competing more can mean collaborating less
By its nature, grant funding is competitive: there’s a set amount of money to go around, and lots of people who want it. This competition mindset can lead nonprofits to become territorial about the services they provide, push them into doing what they think donors want (see above), or encourage them to try besting one another—instead of collaborating with, learning from, and building on each other’s successes. Which camp would you rather be in?
Diversifying funding streams is a best practice—for all kinds of groups
There are many ways unincorporated community groups and registered 501(c)3 nonprofits can generate the funding they need to keep doing their work. Aside from grants, you can consider avenues like consulting, selling products or services, organizing ticketed events, or crowdfunding. While different combinations of activities work for different groups, we’re (naturally) huge fans of the latter.
We’ve written a lot about the benefits of community crowdfunding as a way to diversify your group’s financial makeup. Plus, beyond the money it can raise, crowdfunding encourages your neighbors to feel more invested in the success of your project, helps you refine your ideas by inviting input from more people, and can leave you and your community free to do the project you want to do—not whatever’s currently catching a funder’s fancy. In addition, if your project is a smashing success, you can leverage the cred you built up in the crowdfunding process to attract further funding down the road.
To learn more about how crowdfunding with ioby can support your community initiative—whether you’re an informal group of neighbors or a national nonprofit organization—check out these articles: