What journalists need to know about starting a nonprofit business

There is a misconception among many would-be entrepreneurs, especially in journalism, that starting a nonprofit business will mean relief from the pressure of making money. Not so. Any business, whether nonprofit or not, must bring money in to survive. Nonprofits simply go about it differently.

The advantages of a nonprofit are tax exemption and the ability to accept grants from foundations, while also allowing individuals to make tax-exempt donations.

It sounds enticing to ask a big foundation to write a big check once a year and then spend the rest of the time doing journalism. It’s just not that easy. Simply becoming a nonprofit requires you to master the time-consuming rules and policies under which nonprofits operate, or the regulations and bureaucracy of a university (if you partner with one). Once you are “official,” writing grant proposals and schmoozing potential funders is no less taxing than trying sell advertising.

There are advantages, of course. Andy Hall and Brant Houston, co-authors of the “Launching a nonprofit news site” Web module for the Knight Citizen News Network, suggest you find a pro bono lawyer to help you navigate the complex business and journalism issues that can stem from starting and running a nonprofit. They also encourage you to seek help from others, saying the “the nonprofit world is a unique community that often helps others who aspire to join it.”

Options for running a nonprofit

There are several different ways to raise funds as a nonprofit and structure your operation:

501(c)(3): A reference to a section of the federal tax code, this is the most common form of nonprofit business. To qualify, you must have a charitable or service-driven mission that’s not tied to politics. (For more information, click here). Realize, though, that this is not an easy or fast process.

Partnering with a university or college to piggyback on that institution’s nonprofit status. This has become more common in recent years but requires clearing tall hurdles in the world of academia.

Find a “fiscal agent” for the purpose of obtaining grants. This allows you to accept grant funding without being a 501(c)(3). Look for an organization that shares the same mission.

The goal is to accept funding in the form of grants from foundations and other charitable organizations. The structure you choose will probably not affect your ability to attract those grants, but the vision and execution of your plan will.

Filing to become a 501(c)(3) is the cleanest path to nonprofit funds, but it’s not easy or quick. To apply, you will need to include a tax identification number, articles of incorporation, bylaws and a conflict of interest policy in your application. Once you submit all the required documents, it can take six months — or longer — for the IRS to approve your application.

For a case study on forming a nonprofit in California, visit the Citizen Media Law Project’s website. Your state may have some different requirements, but most of the basic steps should still be applicable.

Revenue models for nonprofits

Accepting grant money as a nonprofit does not legally prevent you from experimenting with and using other business models, including advertising. Additionally, as a nonprofit you don’t have to pay federal income taxes. If, however, your revenue through advertising or other business models exceeds the expenses it takes to run the business, you will be forced to pay taxes on the difference.

The difference for a nonprofit, of course, is the ability to ask for money from other nonprofits, usually foundations. Finding grant opportunities is time-consuming, and many foundations have strict application deadlines and may only award grant money once or twice a year. One place to start is by finding other nonprofit journalism startups online and determining where their money came from. Knight, Ford and McCormick are some of the more prolific funders for journalism projects. New sources seem to be appearing more frequently during this time of upheaval for journalism, though. Do your homework and search for organizations with money to give.

Once you have identified a potential source of grant money, you will need to submit a grant proposal. This can be a lengthy process that requires advanced planning and preparation, so do not delay until the day before the deadline to start. (Maybe you know a few journalists who procrastinate until the last minute?) Various books and websites, including Nonprofit Guides, will help guide you through this arduous process.

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  • Anonymous

    To be clear: unrelated business income is taxable; revenue, even surplus, made under the primary work of the organization for which the non-profit status was granted, is not. It can be rolled into the following year’s operating budget with no penalties. Now, the funds might have time or other limits placed on it by a donor. But that’s getting into restricted and unrestricted income, which is a whole different ball of wax.

  • http://twitter.com/markbriggs Mark Briggs

    Scott is correct. The point is that a nonprofit only enjoys tax exempt status for the amount of revenue it takes in that covers expenses. Any net income is taxable.

    I think you could file this under “a good problem to have.”

  • http://www.facebook.com/profile.php?id=572986471 Scott Leadingham

    Addressing the comment from bsaunders, Mark was (I believe) getting at Unrelated Business Income. If that’s the case, he’s correct in saying that there are penalties (taxes) that nonprofits must pay if advertising income exceeds a certain threshold. Basically the revenue streams for a 501(c)(3) charity can be diverse and include advertising (or other “commercial” activities such as selling merchandise). But it can’t be “too much”or exceed income related to the nonprofit’s tax-exempt purpose – or else that UBI is taxable.

  • Anonymous

    “If, however, your revenue through advertising or other business models exceeds the expenses it takes to run the business, you will be forced to pay taxes on the difference.”

    That sentence is a bit confusing. Nonprofits may run a surplus; it just can’t be distributed to shareholders or owners. The purpose of making money through advertising or other business models would be to generate such surpluses, which could then be used for work in line with the mission of the organization (for example, creating a journalism internship program.)