February 28, 2021

start the future: understanding 501(c)(3)

a photo of a canal in a neighborhood in Venice, California. the canal is in the middle third of the picture, stretching vertically from the bottom to the center of the photo. the blue sky with streaks of clouds is reflected in the still surface of the water. a few palm trees and hedge rows line the right side of the canal. on the left is an apartment building separated from the water by a medium-sized tree. small boats are moored to the sidewalk in the distance. you can barely see a metal bridge just beyond that. it's nice that there are so many different ways to get to the same place.
a photo of a canal in a neighborhood in Venice, California. the canal is in the middle third of the picture, stretching vertically from the bottom to the center of the photo. the blue sky with streaks of clouds is reflected in the still surface of the water. a few palm trees and hedge rows line the right side of the canal. on the left is an apartment building separated from the water by a medium-sized tree. small boats are moored to the sidewalk in the distance. you can barely see a metal bridge just beyond that. it’s nice that there are so many different ways to get to the same place.

Organizations built in systems of racism are difficult to transform into something anti-racist. It’s so easy to remain stuck in what’s come before. Some systems are so dysfunctional that they won’t reform without dedication and resources. The ideal organization might not exist yet. Chances are that I won’t be able to create one, either. I carry with me all the lessons I’ve learned throughout my life and career. The same would be true for all my colleagues, co-founders, advisors. That awareness can help us spot easy patterns and avoid them whenever possible.

With all that in mind, I want to try creating a new organization that serves a public good. I can be intentional about my goals and work with people who align with these intentions. I’ll start by researching different organization types in the united states. Each type I’ll review ostensibly exists to serve the public good.

Caveat: I’m doing the research but I’m not a lawyer (my first draft misspelled “lawyer”). This is a post about starting a 501(c)(3) written by someone who has never started one. It’s important to me to state this caveat up front.

my organization goals

Here are a few thoughts I have about the type of organization I want to create.

  • I want the organization to be worker-led or employee owned
  • I want the organization to exist within the community it wants to support
  • We’ll use many Teal Organization principles at startup. We’ll be free to adapt our approaches considering a pretty basic “do no harm” principle
  • I want the people or teams to function in cooperation or collaboration
  • The organization will run without a hierarchy. This does not mean flat or directionless! Everyone has distributed decision-making authority within their area of work. We’d discuss larger decisions as a collective and choose a person to make the decision.
  • We’ll use the advice process for all decisions. That means anyone can identify a problem and come together with others to solve it. Consensus is not necessary
  • The organization will be explicitly anti-racist

That’s a good start for now.

501(c)(3)—what is it?

Most organizations in the united states that serve the public good do so as a non-profit. The IRS designated these organizations as a 501(c)(3) in their tax code. Most 501(c)(3)s operate as a public charity or private foundation. There are a handful of other options that don’t apply to this exercise.

Charities with a religious affiliation are exempt from filing here. The same goes for charities that receive less than $5K per year.

how do you do it?

Starting a 501(c)(3) means completing IRS form 1023, plus related paperwork. The steps below come from that massive form and from a page on donorbox.

1. Organize – establish as a corporation. Register with the secretary of state as a non-profit. File the IRS paperwork. Establish a board of directors. Create bylaws for how the board will operate. Write a narrative of the activities the 501(c)(3) will perform.

During the process of incorporation, these sources recommend a few other steps. These steps are not required at first but will be good to document. Define the organization’s mission and purpose. How will you generate revenue?

2. Operate – once you’re up and running. You can’t intervene for or against a referendum, initiative, or political candidate. Routine reviews and audits could happen throughout the life of the non-profit. This depends on the size of the organization, the activities, and any financials.

what’s good

The 501(c)(3) is a common approach to a non-governmental organization. The startup costs are nominal and the application is 28 pages long. The most common sources of revenue for a 501(c)(3) are grants and donors. Solving a well-understood problem or doing good work can help drive donors to you. There are plenty of grants offered by the government, foundations, or other non-profits. Grant funding usually requires a skilled grant writer or prior connections to the funder.

what’s good to avoid

Non-profit organizations are a capitalist approach to good works. Even though profit isn’t their goal, they need large and recurring sums of money to operate. This can create an unhealthy relationship between the 501(c)(3) and their donor class. Philanthropists can hide their money in a pet project instead of paying taxes.

Non-profits often replace functions that the government should be doing. This phenomenon is sometimes called the non-profit industrial complex. In the world of food access, food banks and SNAP perform similar roles. But even with multi-billion dollar food bank networks, SNAP helps 9 times as many people. It’s also much more convenient. With more funding, a system that people already use could be made more useful. I’ve heard of legislators try to pass SNAP cuts by sending some of the cuts to food banks. They might pose at a food bank to pretend they aren’t heartless.

Conventional wisdom on good governance means recruiting board members from related for-profit industries. Their guidance may not apply, but they fit the goal of running a non-profit “like a business.”

Another area of criticism is the outdated focus on overhead. These are costs like staffing, supplies, and other resources. Intuit recommends a 501(c)(3) spend less than 10% of their revenue on overhead and no more than 35% of their receipts. Donors shopping for a good cause might find themselves comparing charities. They may assume our high overhead means we spend their donations on bloated salaries. Community-Centric fundraising described this in a recent article that I liked.

Finally, 501(c)(3)s can’t advocate for or against a referendum,  initiative, or political candidate. Doing so could jeopardize their tax status and make all donations non-tax deductible. This seems easy enough to follow, but support for people with low or no income is now a political issue. I don’t want to limit strong positions as a policy briefing or neutral press release.

closing thoughts

When most people think of public service, they’re thinking of a non-profit 501(c)(3). The donor and board centered approaches I described are pretty common. This is especially true among well-established or long-running organizations. It will be easy to happen into those traps.

As I get started I will have to custom-build every policy and approach. When the organization grows, we may hire workers from other non-profits. That means they might infuse outdated practices or approaches from white-dominant culture into this new system. We would need to create strong foundations and clear values to nudge staff away from these practices.

josh

my name is josh martinez. i have always loved trying to understand systems, and the systems that built those systems. i spend a lot of time thinking about how to get there from here. say hello: josh[at]bethefuture[dot]space

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