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Chapter Eight

From the moment you begin envisioning founding a nonprofit, you must think about developing a board of directors. As you go out and talk to the community about your plans, you will find out who shares your sense of mission and also is well-connected and capable of serving on a board. Before you register a 501(c)(3) nonprofit, you do not need a formal board, but organizations sometimes form an advisory board to get them through the launch phase, then switch out to a formal board.

The pages ahead will explain the role of the board in your governance: how you recruit people onto an advisory board who help you draft bylaws, which establishes and is approved by the board of directors that then holds financial and legal responsibility for the organization.

How to get tax-exempt status is covered in the next chapter.

The board is not a nicety or an auxiliary thing — it is the both the soul and the backbone of your nonprofit, and absolutely critical to its success. It is more central to the operation of a nonprofit than boards are for most for-profit companies.

The functions of the board: A board is an ensemble, and boards vary quite a bit in their function. In most nonprofits, board members are critical fundraisers. They typically are expected to “give or get” — to directly donate or get others to donate to the cause. Other boards may have more policy orientation, guiding the direction of an organization.

Check state requirements: State law may set a minimum number of board members, often three people, and we recommend that number not include the executive director. Some states do not even allow the executive director to be an ex-officio board member. Regardless of the requirements, it is useful to have more than three board members because you need the expertise, guidance, financial support and connections of a larger group. In a nonprofit, the founder is not the owner because the organization is responsible to the public, and the board serves as the trustees for the public. The founder, executive director or CEO is the leader but the board ultimately holds the legal and financial responsibility for the nonprofit. The buck stops with the board if the nonprofit fails to meet its social purpose or misuses its funding.

Mapping what you need on your board: Journalism boards have traditionally included strong journalists, leaders of whatever community the publication is serving, individual philanthropists and representatives of partner organizations. News organization boards typically have conflict-of-interest policy statements that include the understanding that board members do not and cannot have any input on editorial decisions. Some boards also have guidelines on whether board members can be politically active as individuals; they should not be active in partisan politics in any way connected to their nonprofit roles.

Give and get: Most board members either are giving financially or getting money for the organization by enlisting other financial supporters. Board members are your strategic partners in helping guide you to meet and execute your mission, helping you think about your field and where your mission fits into it. They make introductions to help you scale up and form partnerships. They drive the overall arc of the organization but should not be involved operationally especially as time goes on. Early in an operation, board members may be volunteers who provide services, but as the organization grows they become less hands-on.

RESOURCES:

More general information on setting up your nonprofit board of directors is available from the Foundation Group, which provides tax and compliance services to nonprofits: Setting up your nonprofit board of directors: Foundation Group.

Management Help offers resources about how boards operate, best practices, defining board member roles and more.

Fiduciary Responsibilities of a Nonprofit Board (Chazin & Company, 2021)

BoardSource offers tools for mapping your board’s role and functional needs, and recruitment, and on building a diverse and inclusive board.

How Can I Find Board Members for My Nonprofit? (Candid)

Five Fast Ways to Recruit New Board Members (Compass Point)

Bylaws: The initial advisory board that helps a founder start a nonprofit should create bylaws, which address how the board is set up, how the organization operates and how it regulates itself. The organization should post these bylaws publicly. As a result, you have many fine examples of bylaws of similar organizations to study and draw from. More information is available from Candid.org.

Funders will look at the bylaws, and conforming to the bylaws is the organization’s legal responsibility.

The executive director relationship with the board: If you are founding a nonprofit organization, you are the one who recruits and builds the initial board, but after a transition period, you report to that board or to a more permanent successor board. BoardSource, a foundation-supported resource for nonprofits, provides this explanation: Forming the Nonprofit’s First Board. Much more detail on board roles and responsibilities is available from the National Council of Nonprofits.

Community connector: In addition to its legal responsibility for overseeing the organization’s budget and operations, the board represents the public’s interest in ensuring the nonprofit is serving the role it was formed to serve. Having the board include people who understand your community and mission will help you think through how to apply that mission throughout your operations. For example, if the nonprofit’s mission is to cover city government, what happens if a potential funder comes along and offers to pay for an expansion of coverage to the county or the rest of the state? Would that strategic shift be mission-aligned or would the expansion dilute the mission that other funders have supported? Thinking through such a decision is really hard to do alone and becomes easier with the help of a board rooted in your community.

Chip Potts is INN’s director of finance and operations and oversees our fiscal sponsorship program and business services for members. He offers this advice based on his more than 30 years of accounting experience:

Nonprofit founders must deal with the reality that they will have to pay some professional expenses and filing fees to gain legal status to solicit charitable donations. Before you can apply for nonprofit status from the IRS, you should consult with a lawyer or a very good accountant who is familiar with nonprofit incorporation in your jurisdiction.

Laws vary by state (or province, country, etc., but the material below applies mainly to the United States). Some jurisdictions, such as Delaware, provide favorable regulations that attract for-profit business incorporations, but these tax benefits don’t affect nonprofits. Incorporating where you live and work will most likely save you an extra layer of complications.

What do you need to begin?

You must name your entity, keeping in mind that changing the name later would entail refiling with the state and IRS. The name will apply to the corporate parent of whatever publications or websites you will be doing business as (DBA) — should this apply.

Depending on your state requirements, you may incorporate with as few as one person, known as the incorporator (most probably the founder). Remember, nonprofits have no owners or shareholders. The incorporator(s) file the Articles of Incorporation with the state along with the appropriate filing fees. Once incorporated, the incorporator(s) appoint an initial board of directors, as defined by state law.

The first act of the board should be to approve a set of bylaws by which the corporation will operate. The board should also approve a mission statement that will ensure your entity is clearly defined to support your educational purpose to qualify for tax-exempt status.

What happens next?

Your next order of business is to obtain an Employer Identification Number (EIN) with the IRS and to file any other licenses or permits you will need to operate in your state and local jurisdictions. Your accountant or lawyer should advise you on what next filings/steps you should undertake. An EIN can be filed online with the IRS by you or your accountant or lawyer. You’ll need that federal tax number to establish a checking account.

A new nonprofit corporation can start accepting donations immediately, but if it does not receive fiscal sponsorship or its 501(c)(3) application is not approved by the IRS, it would either have to return the money to the donors or those donors would lose any tax deductions from those donations. Depending upon your available resources, you can go one of two routes toward gaining tax-exempt status:

You can file IRS Form 1023, and any applicable state forms, to seek recognition as a tax-exempt corporation, under section 501(c)(3) of the Internal Revenue Code (IRC). This application process can become complicated and expensive. Additionally, 41 states and the District of Columbia require nonprofits to register if soliciting charitable donations from residents of their state. Registration fees and procedures vary from state to state and could be a drain on resources for a new organization.

Alternatively, startups can seek fiscal sponsorship, meaning they embark on their fundraising under the wing of an established 501(c)(3) organization. INN’s program of fiscal sponsorship for members is explained here. INN is registered to accept donations in all jurisdictions (states and D.C.) that require registration, which in turn covers organizations accepted into INN’s fiscal sponsorship program.

It is possible for startup founders to get fiscal sponsorship without incorporating first. Some members started as programs or projects of local foundations, for example. Some nonprofit organizations specialize in assisting freelancers with raising money for educational projects, such as Film Independent for documentary producers. While most INN members start as nonprofit corporations, some for-profit news organizations have launched projects that would qualify for INN fiscal sponsorship at least for a set period of time.

New nonprofit corporations can start the process of seeking 501(c)(3) status while under fiscal sponsorship. A good rule of thumb is that once yearly revenue reaches $500,000, a nonprofit can afford the various expenses of maintaining tax-exempt status — state registrations, audits and other professional fees. Even with a fiscal sponsor, you will have reporting requirements, confirming your information online annually or biennially and filing tax forms showing where your revenue came from and went to.

Less common situations

INN often gets questions from members who have some unusual situation that affects their incorporation. Because laws vary so widely in different jurisdictions, we generally must refer you to local authorities for those questions.

RESOURCES:

The INN member website has information about legal services.

The next chapter covers how to get tax-exempt status.

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