NONPROFIT Costs
Nonprofits can access pro-bono and donated resources.
The spending culture of nonprofit organizations is traditionally cost-sensitive. Some nonprofits successfully develop the ability to pay market rates for staff and services. Ultimately, your cost culture must be developed thoughtfully within the boundaries of your existing resources.
The pro-bono opportunity
Nonprofits have the opportunity to utilize pro-bono and reduced fee services when available. Lawyers and other professionals will often provide pro-bono services to nonprofit organizations and some will, less frequently, provide pro bono services to for-profit social enterprises as well. Volunteers often work to support nonprofit staff and programs, something that wage and hour laws generally prohibit in the for-profit sphere. Such volunteer labor and donated products and services can help stretch resources and reduce costs.
However, volunteers and in-kind donations take time and energy to manage and can be less responsive and reliable than paid services, or worse, can be lacking in quality, adding a different type of cost.
Questions of Employee Compensation
The IRS requires compensation packages for nonprofit executives and employees to be reasonable, however it doesn’t set a cap on salaries, instead referencing factors such as job description, required level of education or experience, compensation averages in your area, and the overall budget of the charity. If there is a real concern surrounding employee compensation, a board should consider engaging an outside expert to determine reasonable salary levels. Getting this wrong can potentially explose individuals, including individual directors, to excise tax penalties.
Reporting and Compliance Costs
In addition to the initial Form 1023 filed by an organization seeking exempt status, tax-exempt nonprofits must annually file a Form 990, which is a public document that details operational and financial details of the organization. Entrepreneurs should be aware of this up front, particularly if they are deploying a proprietary scheme or have concern about such transparency about their business model. (In contrast, a taxable entity files a form 1120 or possibly a partnership return, which are confidential, but carry the cost of taxation.) A nonprofit will also be required to register in various states to raise funds if it intends to have fundraising contacts in those states. Both types of entities will have to register as a foreign entity in states other than the state of formation.