Startup nonprofits should consider financial viability early on

October 25, 2013

Startup nonprofits should consider financial viability early on

It has been tough times for for-profit and nonprofit businesses alike since the recession. However, while a sluggish economy has slowed down new business growth, entrepreneurs continue to chase dreams and start new companies. This also holds true for nonprofit ventures and the two groups face many of the same obstacles.

While nonprofits and for-profits have one obvious difference in their business models, they also have many similarities. Because of this, they are met with the same successes and failures and usually flourish under similar minds.

Lizzie Bildner, founder and president of Sharitive, described the early goals of her nonprofit startup with with Forbes:

"In order to ensure Sharitive's successful transition from beta to business, I need to bring on a team that has experience in sales, growth strategy and implementation, nonprofit management, mobile payments, and design and product development. Most of all, I need people who are creative, flexible, and passionate about Sharitive's mission. A real passion for what Sharitive is doing trumps the rest because at this stage passion and commitment to the idea is what gets you out of bed in the morning."

While passion is at the core of nonprofits, it is also the case for for-profit startups. While revenue may be the driving force as opposed to a mission, it still takes dedicated people to get any startup off the ground. The early stages often require staff that can wear many hats and help to quickly grow the business.

It is no different for startup nonprofits. Founding members should surround themselves early on with employees and volunteers who believe in the mission, but also understand the business. Even with the help of volunteers and the benefit of tax exemptions, nonprofits are not impervious to failure early on. While the mission of a nonprofit may sound great, founders should prepare for as many scenarios as possible before taking their idea from beta to the real world.

Nonprofits shouldn't underestimate early financial security
Startup organizations should also familiarize themselves with the nonprofit landscape as quickly as they can. Tax exempt is a general statement and nonprofit leaders should be aware that they will incur costs they may not expect.

While nonprofits are exempt from federal unemployment taxes, that is not the case for state unemployment taxes. This is because while FUTA taxes are used to pay administrative costs, SUI are used directly to pay the cost of benefits paid to unemployed workers.

Nonprofits are required to contribute to unemployment insurance but they also have the option of becoming a reimbursing employer. There are a few options for nonprofits that choose to opt out of state UI tax pools to save money and startups should familiarize themselves with those options early on. Groups such as First Nonprofit Companies can provide nonprofits with advice and membership in an LLC to help lower UI costs.

First Nonprofit also offers financial services that can help organizations develop fundraising plans, review financial statements and develop financial data. Financial data can help nonprofits react more quickly to budgetary and funding variances. 

Like any business, nonprofits that can begin utilizing cost-saving measures early on stand a greater chance of success down the road.

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