Birth of an NGO

Disclaimer:

Nothing written below should be construed as legal advice. It is a description of my personal experience only. If you get into legal trouble after you read this, it’s your own fault!

Since the question comes up so often “how do you start an NGO?” it seems like the right thing to do is to give my personal experience on creating one. For those of you wondering, NGO stands for Non-Government Organization. In the adventure travel world, it is usually some kind of relief organization. There are many different factors that go into forming an NGO and they are all of great importance. One missed or messed up step and the whole process comes apart at the seams. Since my experience is in the United States, the advice and personal accounts given are based on US law. It is important to check very carefully what the laws are in your country to make sure you get it right.

Just for the basics. I am president of La Cima World Missions, Inc. This is a medical and dental relief organization that primarily functions in Honduras but we are expanding. We take teams of physicians and dentists on short-term mission trips. We also provide some funding for other medical and dental missionaries. Among our latest projects we have arranged transport and care for a little Honduran girl that needed heart surgery and we arranged shipment of pharmaceuticals to the Solomon Islands following an earthquake and tsunami.

Now with that out of the way…

The IRS form that is required to file for non-profit status is the form 1023. This form has all the instructions you will need as far as what paperwork needs to be submitted. It does not, however, give the information on how to create the documents it requires. I will get into how to do that a little bit later. The form 1023 is used to establish that a corporation fits into the guidelines under article 501(c)(3) in the official IRS code. All the forms mentioned in this article are available on the IRS website: www.irs.gov.

Before any paperwork is filed the concept, of what the NGO will be, needs to be brought to life. IRS filings require that a Board of Directors be established. Since this has to be done anyway, it only makes sense to do it first. The BOD is charged with general oversight and accountability of the NGO. It is the governing body and develops the vision and determines direction for the NGO. It is also the responsibility, in many NGOs, for the BOD to do significant fund raising as well as be significant contributors themselves.

Choosing the right BOD is important in that they must all have a common goal. The more connected they are the better, and they have to be in agreement on the general methodology that will be used to achieve the goals. I personally chose to go small. I have five people (myself included) on our BOD. By starting with a small group, it is much easier for us all to come to consensus when decisions must be made. I chose people with experience on the ground as well as experience in their own medical specialties in day-to-day work at home.

The next, quite ironic, and arguably the most important step, when it comes to planning the creation of an NGO is development of detailed plans for its dissolution. One of the first things the IRS considers, when deciding whether or not to grant 501(c)(3) status is how will the money be split up in the event of dissolution of the corporation. It will increase your chances of approval dramatically if the officers and board of directors are not to be recipients of any of the assets of the organization, should it dissolve. The most acceptable plan is to document that all assets will be given to another 501(c)(3) corporation, should it become necessary. Put it in writing and make it very clear that no individual will profit form a failed organization. If this is not clear in the original filing, you can go ahead and count on the first rejection letter to come quickly.

When I first started toying with the idea of putting together a non-profit organization, I stumbled on a technique that I have come to recommend. It saved me quite a bit of money, in the long run, and it allowed my attorney and accountant to quickly get the idea of what I was trying to do. I went to the local university law school library and got a copy of the non-profit corporation law books. I made copies of the sections that related to forming the Articles of Incorporation and the Bylaws.

I used the material that I copied from the law books as a template to make my own version of the AOI and Bylaws. I tried to follow the structure as closely as I could and I got as detailed as I could. Each member of the BOD evaluated what I had written and made additions and suggestions. Once we had documents put together that we thought met the requirements for the corporate filings, we gave them to our attorney. Our attorney then had a very detailed description of what we wanted our NGO to be.

Articles of Incorporation are filed with the Secretary of State of the state where the NGO will form. These are submitted and the State then recognizes the corporation as a legal entity. This DOES NOT give any type of non-profit status. As far as the state is concerned, you are just another business until the IRS says different. It is required, however, that the corporation exist prior to filing any type of paperwork with the IRS.

The Bylaws describe what the NGO will do, what type of projects will be undertaken, how money and other assets will be handled, etc. Bylaws should be very specific line items. In our Bylaws there are very detailed descriptions of what La Cima is allowed to, and intends to do. We put our heads together and thought about everything we wanted to do in the future, if we were able, and we included these in the Bylaws. The thinking was that we want to do it someday, so lets make sure we are allowed to do it when/if the opportunity arises. If the Bylaws do not have permission for a certain action, it is possible to get that added later, but it takes board action and is generally annoying to do it. PLUS, if the Bylaws have everything in them and the NGO is approved for 501(c)(3) status, it confirms that the activities in the Bylaws are legitimate NGO non-profit activities in the eyes of the law.

My advice is to put EVERYTHING in the draft Bylaws and let the attorney sort out what qualifies as a non-profit worthy endeavor.

The AOI and Bylaws, in their final form, should be drawn up by an attorney. I will stop right here and say get a good team together. Find an attorney and an accountant who have had success in developing NGOs in the past. If they don’t do their part correctly, you will be stuck in a quagmire trying to get the organization off the ground.

Not being lawyers, we made some significant mistakes. This is precisely why we hired a lawyer. The purpose served, by writing the preliminary AOI and Bylaws, was that he was able to take what we had written and convert them to legitimate legal documents with much less effort and with many FEWER BILLABLE HOURS than if we walked into his office and said “We want to start an NGO, would you draw up the papers please?”

It is a lot of work, yes, but if you are going to be put off by a lot of work, lets just stop where we are right now and quit the crazy talk of starting an NGO. If you do it right, it will take all you have got to give and usually a little bit more. Consider this just part of paying your dues. And fear not, there are plenty of dues to be paid after these.

Once your organization has become a legal entity, your accountant or attorney can file for a Tax ID Number (TIN) with the IRS. That is the point at which you exist and can move forward.

Now it is time to begin filling out the form 1023. This document is BIG and the difficulty rating for filling it out will depend on what type of organization is being formed. There are several different categories for non-profit corporations and the application procedure varies based on what type of organization is submitting. Read through the whole thing very carefully and begin formulating the game plan. There are many reports, written descriptions and budget issues that need to be filled out.

The narratives that explain the proposed activities of the NGO need to be carefully worded so that it is very clear all activities are charitable in nature. These can be reviewed by an attorney if desired but, in our case, we spent all our legal budget by this point in the game, so I just had to wing it.

The budget section requires three years of annual budgeting be reported. Now we didn’t exist yet, so the alternative is to put in three years projected budget. One tip that our accountant gave us was to be careful in determining expected annual revenue. Be honest, by all means, but know that anticipated or real revenue less than USD 25,000 requires an application fee of about USD 100.00. Anticipated or real revenue greater than USD 25,000 requires and application fee of about USD 500.00.

After completing all the items on the form 1023 checklist, package it all up, make a couple copies to keep and send it in to the IRS. In most cases, NGOs get rejected for non-profit status at least once. Do not be discouraged if/when this happens. In the rejection, there will also be a description of why the application was rejected so that it can be changed and re-submitted. Having the right attorney and accountant in the beginning will reduce the number of rejections an NGO must face before receiving the final “Golden Letter.” We paid a little more in legal fees, but we got approved on the first submission. In my opinion it was worth it.

The “Golden Letter” is duly named as the final acceptance for provisional 501(c)(3) status by the IRS. As my accountant stated, “he who has the letter can then get the gold.” Nobody donates unless they get a tax deduction.

Rinse and Repeat:

Note that the acceptance is for PROVISIONAL 501(c)(3) status. Since there is no history of the NGO operating, the IRS is giving a 3-5 year opportunity with provisional status. At the end of the provisional period (the date will be on the Golden Letter) then file the form 8734. At that point, the NGO must provide a description of what was actually accomplished, and how, over the period. After filing the 8734, proving that the NGO actually did what is said it was going to do, and collected money in the proper manner, the IRS will consider whether or not to permit permanent 501(c)(3) status.

Other random tidbits that don’t need a whole paragraph:

Each year, at least one meeting of the Board of Directors must be completed with minutes taken.

Each year the NGO must place an announcement in the legal section of a local newspaper making its annual report available for public review. Three days is sufficient time to meet the requirement. Keep documentation proving the announcement was placed. Most newspapers will provide a notarized affidavit attesting to this.

File an annual report with the state of origin to maintain active status of the corporation. This is done through each state’s Secretary of State. It is just to let the state know the corporation is still active.

Consult with your accountant to determine whether or not tax filings are necessary. Many times the forms need to be filed even though money does not need to be paid. Sometimes nothing has to be done.

Nothing about what I have said deals with fundraising. If you come up with a surefire technique to raise money for an NGO, please send me an email, letter, or message by carrier pigeon right away. This is the ultimate challenge for NGOs around the world. I just wanted to focus on the basics for getting started. Obviously everything will depend on the organization and its intended goals when it comes to generating interest and support from like-minded individuals.

I hope there is a pearl of wisdom or two that will aid you in your quest to change the world. If you read this and move forward with formation of an NGO, let me be the first to say “Thank You” for doing something that matters. I also bid you good luck and God speed in all you do.

David Sperow

david@lacimaworldmissions.org