Should your organization continue to operate as a nonprofit?
Operating a nonprofit is a means to an end, but not an end in and of itself
According to www.philanthropy.com, the United States has over 1.6 million organizations registered as tax-exempt with the Internal Revenue Service. The New Hampshire Department of Justice website lists about 8,700 registered charitable trusts in New Hampshire alone. And while a great many of these organizations are vital contributors to our social welfare, truth be told, a great many are not.
In an earlier article (“Nonprofit boards and effective governance,” Nov. 30-Dec. 13, 2012 NHBR), I outlined 10 questions every nonprofit trustee should ask about effective corporate governance. Here is an eleventh: Should my organization continue to exist as a nonprofit? Leadership should not assume that the answer to this question is yes.
Unlike for-profit business entities – which exist primarily to serve the financial interests of their equity owners – charitable organizations exist to serve others. Nonprofit trustees are charged with the responsibility of overseeing not only mission fulfillment, but also ensuring that charitable resources are efficiently and appropriately used and preserved.
Here are some issues to consider on this important topic:
• Is the charity competing with other charities for scarce resources? Ultimately the public interest is best served when that maximum amount of charitable resource are benefitting the most people. Competing charities can mean duplicate overhead and less efficient delivery of services.
Under these circumstances, it is the job of the governing board to consider whether the public good would be better served through some type of merger or affiliation with its ostensible competitor. This is especially true during economic times when charitable dollars are harder to come by. Public service is the objective. Perpetual existence is not.
• Is nonprofit status necessary and appropriate? The fact that an entity was organized as a nonprofit is not sufficient grounds alone for it to continue to operate as one. Is the mission truly charitable? Does the business plan require tax-exempt status? Is a community-based governance structure truly appropriate for the organization?
A governing board should evaluate these questions and not blindly perpetuate the status quo. Where the answer to these questions is “no,” the law affords a process under which a nonprofit entity may petition to convert its operations to a for-profit organization.
• Does the organization have a viable business plan? Equally important to mission fulfillment is the stewardship of charitable resources. Organizations operating at a deficit run the risk of dissipating charitable resources and, eventually, having to shut their doors due to lack of funds. Long before the latter happens, governing boards need to evaluate whether the organization’s charitable assets would be put to better use elsewhere.
All industries have business cycles, and nonprofits are no exception. There is no shame in concluding that the operation is no longer viable. Where this is the case, charitable assets may be best protected by engaging the legal process necessary to wind down the organization and redeploying remaining assets to other purposes.
• Is the organization playing by all of the rules? Nonprofit organizations are subject to a myriad of obligations, to regulators and the public, that for-profit organizations do not face. If a nonprofit organization cannot meet these obligations, it may be a signal that the organization needs to consider a change.
Running a nonprofit organization is neither simple nor easy. If an organization’s governing board is not prepared to comply with all of its legal obligations, it may want to reconsider its nonprofit status.
Operating a nonprofit organization is a means to an end, but not an end in and of itself. Governing boards should be careful not to lose sight of the distinction.
Attorney Donald Crandlemire of the law firm of Shaheen & Gordon can be reached at 603-225-7262 or DCrandlemire@ShaheenGordon.com.