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Governance and Organization, Nonprofit Fundamentals

Weighing The Costs And Benefits Of Nonprofit Status

Julia Magnus

October 13, 2022

An image of an off-white scale with measuring cups on either side. — Should your animal organization go nonprofitA non-governmental organization whose primary purpose is something other than selling goods or services. or grassroots? There are costs and benefits on both sides of the equation! Read more to learn all about it! *Photo by* *Piret Ilver* on Unsplash

Resource Goals

To understand the differences between grassroots and nonprofit organizations.
To learn about eight different questions you will want to think about if you are thinking about starting a nonprofit.
To learn about the costs and benefits associated with each question for both nonprofitsNon-governmental organizations whose primary purpose is something other than selling goods or services. and grassroots organizations.

Introduction

Reminder: We Aren’t Your Lawyer!
The Open Sanctuary Project is not a law firm and this resource is not a substitute for the services of an attorney. Accordingly, you should not construe any of the information presented as legal advice that is suitable to meet your particular situation or needs. If you want to start a nonprofit, we highly recommend that you consult with an experienced nonprofit attorney in your jurisdiction. Please review our disclaimer if you haven’t yet.

If you are interested in, or currently work in the realm of rescue, or have worked in a sanctuary context, chances are you have considered starting your own nonprofit. Because the endless amount of animals in need means that there is an endless need for more animal rescuers and for more animal sanctuaries, it is understandable to want to get involved! The Open Sanctuary Project exists to support those who answer this call. We believe that it is very important to go into rescue first with a full understanding of both what responsible rescue is and what sanctuary is.

We also believe that it’s important to keep your eyes open about the costs and benefits (both apparent and hidden) of seeking and maintaining nonprofit status. Many folks in the rescue and sanctuary world assume that forming a nonprofit organization is an uncomplicated solution to a lot of issues, especially fundraising. Some may assume that having nonprofit status will automatically attract donors, making fundraising easier. Unfortunately, nonprofit organizations also face ongoing issues with fundraising. Any organization looking for public support will need to cultivate public trust by maintaining accuracy and transparency in their internal operations as well as in their external communications to the public.

Additionally, unless you choose to fund your work by yourself (which some people do, especially in a microsanctuaryA microsanctuary is a small scale community of human and nonhuman (generally “unconventional or farmed”) animal companions, who live together in a chosen shared lifestyle and in commitment to ending the oppression of all beings. Microsanctuaries adhere to the notion that no nonhuman member of the community should “serve a purpose.” Microsanctuaries can exist in any context: rural, suburban, or urban. A microsanctuary can consist of as small a community as one animal and one human caregiver. For more information on microsanctuary please refer to the Microsanctuary Resource Center. context), all organizations also need to develop fundraising plans, depending on their individual circumstances and community contexts. And no organization of any type is immune from external concerns, like inflation, or impacts from crises like the Covid-19 pandemic and highly pathogenic avian influenza. Regardless of your organizational status, you will need to address these things, and sometimes having nonprofit status can impose unexpected burdens of its own!

This resource is meant to help guide folks who are thinking about starting a nonprofit to more fully understand and navigate the associated costs and benefits. Whether or not to start a nonprofit, whether you have an existing organization or not, is not an easy question! Sometimes, what may be a burdensome cost to one organization may actually be a benefit to another organization. For this reason, we will break down several categories of questions you will want to consider concerning seeking nonprofit status for your animal organization. These include:

Tax Exemption And Deduction
Eligibility For Public And Private Grants
Formal Structure
Limited Liability
Financial Costs
Administrative Costs And Paperwork
Shared Control
Public Perception And Scrutiny

We hope that discussing these factors through the lens of the nonprofit incorporation question will help you navigate this decision! We will also offer some hypothetical examples at the end to help you understand the nuances in practice. But first, let’s talk about what it actually means to be a nonprofit!

A Note On Jurisdiction.
While many of the considerations addressed in this resource will be applicable to organizations throughout the world, our focus has largely been on questions relevant to U.S.-based organizations. As always, we suggest that you consult with local counsel experienced with nonprofit law in your jurisdiction to get the fullest picture of concerns that may apply to your organization.

What Does It Mean To Be A Grassroots Organization, And What Does It Mean To Be A Nonprofit?

To start this discussion, let’s work through some definitions. First, think about how you may have seen the term “sanctuary,” “shelter,” or “rescue” used in multiple ways and contexts. They may be used in ways that do not make sense to you, so defining these terms for yourself can help navigate these spaces!

In the same way, the term “nonprofit” can be and is used in multiple contexts and multiple ways! You might also have heard terms like “not-for-profit,” “tax-exempt,” “charity,” and “501(c)(3).” For the sake of clarity in this resource, we will use two terms: grassroots and nonprofit, and define them below.

Grassroots Organizations

Many groups, including grassroots collectives of volunteers, may consider themselves “nonprofits” because they operate without expecting any personal gain. You might see a group of volunteer rescuers, for example, calling themselves “a nonprofit” on social media. From a layperson’s perspective, they aren’t wrong! Grassroots organizations do a lot of incredibly selfless and important work all the time! From a legal standpoint, however, there is more to being a nonprofit under the Internal Revenue Code and state laws than simply not being profit driven. Therefore, in this resource, we will call groups with no formal status conferred on them by either state or federal government “grassroots organizations.”

What’s The Difference Between A Grassroots Organization and An Unincorporated Association?
Two or more people coming together under a common name in support of a common goal are considered an unincorporated association. Some unincorporated associations are for-profit associations (such as a food truck or a lemonade stand). When the purpose of the association is to support a social cause or a public good, and where all of the net income generated by the association is reinvested back into the association and its missionThe stated goals and activities of an organization. An animal sanctuary’s mission is commonly focused on objectives such as animal rescue and public advocacy., the association is considered an unincorporated nonprofit association, and this is what we are referring to when we are talking about a grassroots organization in this resource. For example, in an animal sanctuary context, two people raising money to rescue an animal and move them to a sanctuary are likely an unincorporated nonprofit association.

There are important distinctions between grassroots organizations and the kind of organizations that most people (and often donors) think of when it comes to the phrase “nonprofit.” For example, many times when donors think of a nonprofit, they are thinking of a tax-exempt organization, to which donations can be made that are deductible from the donor’s income tax.

A Note On Language Use For Grassroots Organizations!
If you are soliciting donations, it’s important to be transparent with donors with regards to your status. Donors may wrongly assume that donations that they make to your organization are tax deductible. However, in the absence of meeting the conditions and requirements of the Internal Revenue Code, an organization cannot claim that donations are deductible. Even if all funds raised for your animal organization go straight to direct care, we strongly recommend you use the term “nonprofit” carefully and alert donors that their donations may not be tax deductible if you are not a qualified organization to receive tax-deductible donations. It is particularly important to take caution with what language you use on social media! You do not want to inadvertently end up being accused of operating as a formal nonprofit without going through the requisite process of becoming one! Doing so could lead to undesired consequences like tax audits or other investigations!

501(c)(3) Nonprofit Organizations

How do we define a nonprofit organization? In this resource, the organizations we’re calling “nonprofits” are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. This section provides federal income tax exemption for:

“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

This provision is by far the most common way in which animal rescuesOrganizations that help secure animals from dangerous or unacceptable situations. As organizations, rescues may or may not have dedicated permanent infrastructure for housing animals. and sanctuaries obtain tax exemption. Organizations with this kind of exemption are generally known as “nonprofits” and serve the public at large by either providing goods or services. And again, there are two forms that an organization can take after getting this kind of exemption. An organization can be:

A public charity (also known as a charitable nonprofit);
Or a private foundation (which can be either a private foundation or a private operating foundation.)

These organizations are often collectively referred to as 501(c)(3)s, but there are differences in the rules that govern public charities and private foundations. For example, they are treated differently when it comes to rules about investment income as well as concerning lobbying activity. Donation deductibility may also be impacted if a nonprofit is a private foundation versus a private operating foundation. To learn more about the differences, you can check out our resource on the subject here!

Finally, when it comes to definitions, there are other sections of the tax code in which Congress has created other kinds of tax-exempt organizations. These include social welfare organizations, homeowners associations, volunteer fire companies, labor unions, chambers of commerce, and childcare organizations. Each section of the code on such organizations identifies conditions that the organization must meet to be exempt from paying federal income taxes. These kinds of organizations are often (confusingly) known as “not-for-profit organizations.” In contrast to 501(c)(3)s, they may not serve the general public as a whole but instead serve a smaller subset of people or even a private group of members.

The one thing that all of these organizations have in common is that “no part of the organization’s net earnings can inure to the benefit of any private shareholder or individual.” In other words, nonprofits and not-for-profits can make profits – but all of this profit must be put back into the organization and serve its mission!

A Note To Donors
Not all “nonprofit” organizations are tax-exempt. And not all donations to nonprofit organizations are tax-deductible to the donors. Federal tax exemption requires formal recognition from the Internal Revenue Service after an application process governed by the Internal Revenue Code. State tax exemption is a separate process managed at the state level in each state. If you want to know whether your donation to an organization is tax deductible, you can ask them specifically, or even better, do your own research by looking the organization up through the agency that administers nonprofit organizations in your state (generally the Secretary of State) as well as on the Internal Revenue Service’s site through this search engine. You can also consult with your tax advisor to have them check about the eligibility of donations.

Starting a nonprofit organization in the United States is a fairly involved process and is addressed in some detail in our resource on the subject found here. You can also review a series of workshops that the Internal Revenue Service has made available for small to mid-sized nonprofits here. For now, let’s consider the various factors that an organization may want to think about in deciding whether or not they want to get 501(c)(3) status, and then take a look at the costs and benefits from both a nonprofit and a grassroots lens.

Tax Exemption And Deduction

Tax exemption and the ability of donors to deduct donations from their taxable income are probably the main considerations in mind for those considering seeking nonprofit status. In this case, costs and benefits are fairly straightforward to analyze.

Benefits And Costs To Nonprofits

Benefits

It is undeniable that exemption from federal and state taxation is a benefit! Organizations that qualify as 501(c)(3)s under the Internal Revenue Code are eligible for federal exemption from payment of corporate income tax. Once they are exempt from this tax, the organization is generally exempt from similar state and local taxes, though this varies by state. Also, many states allow 501(c)(3) organizations to be exempt from sales tax on purchases, as well as exemption from property taxes. Special nonprofit bulk-rate postage discounts are available from the Post Office to qualifying organizations. (It’s important to note that most of these perks will depend on your jurisdiction, and you will need to check in with an attorney experienced in nonprofit work to see if you are eligible for state, local, and other kinds of tax exemptions.)

Additionally, with 501(c)(3) status, if an individual or corporation donates to the organization, their donation is generally tax-deductible as a qualified charitable contribution, provided that they have received nothing in return for their gift, although deductibility of donations may vary depending on an organization’s status as a public charity, a private foundation, or a private operating foundation. This is a big benefit because certain donors, especially large donors, do tend to have a preference for donating to organizations who meet eligibility requirements with regards to donations being deductible to the donors.

Costs

501(c)(3) organizations are highly regulated entities. Strict rules will apply to both your activities and your governance of the organizations. Most of these revolve around the requirement that no part of the activities or the net earnings can unfairly benefit any director, officer, or private individual.

In addition, all of the assets of your organization are permanently dedicated to a charitable purpose. If your nonprofit must close down, all assets remaining after debts are paid must be distributed for a charitable purpose, in a process that is known as “winding down.”

Also, you will be limited in your ability to do any kind of “lobbying” or distributing information meant to influence legislative activity. The restrictions again depend on what kind of nonprofit you are – a public charity, foundation, or private operating foundation – but in general, the rule is that lobbying, propaganda, and other legislative activity must be kept relatively insubstantial. You will be prohibited from intervening in political campaigns and endorsing (or opposing) candidates running for public office.

Benefits And Costs To Grassroots Organizations

Benefits

Choosing to remain grassroots frees your organization from needing to adhere to the regulations that apply to 501(c)(3)s. You will not have to structure yourself to comply with those regulations, and you will be subject to far fewer administrative burdens. Further, you will also be free to participate in politics as you see fit, whether that means actively participating in campaigns to elect candidates or doing work to support legislative efforts.

Costs

Not having 501(c)(3) status can cost you donors who wish to make tax-deductible donations only. Again, it is always important to be transparent to your donors if you operate as a grassroots organization that their donations are not deductible. You don’t want to create misunderstandings with your supporters in this respect, which can cost you future support!

Another “cost” of not having 501(c)(3) status for grassroots organizations is that you may, at times, face questions about your “legitimacy” as an organization, which can be frustrating. Even “established rescuers” at times may not consider grassroots organizations to be legitimate simply because they lack 501(c)(3) status. As aggravating as this can be when you know you are putting in the hard work, it is important to remember that it is the quality of your work that counts, not the label that your organization has. Nonprofit or grassroots, your reputation is critical. The most important thing you can do to “legitimize” your work and gain public trust is to maintain openness, transparency, and accountability to your supporters, regardless of your status.

A Note On Fiscal Sponsorship
There is one way that grassroots can create a workaround when it comes to the question of the deductibility of donations. Fiscal sponsorship means that your grassroots organization will become a “program” of another established 501(c)(3) nonprofit (your “fiscal sponsor”) that provides administrative support in exchange for a percentage of your donations. You can have your own name, and for the most part, you’re running your operations. However, you will be required to sign an agreement with your fiscal sponsor that lays down some rules about working together. In exchange, you are covered under the 501(c)(3) status provided by your sponsor, and your sponsor may provide accounting and legal services, HR services, fundraising support, etc. You may also gain access to organizations such as shelters if your fiscal sponsor has a relationship with them that they are willing to involve you in. A note of caution, though! It is always important to make sure your grassroots organization’s mission is in line with that of your sponsor to prevent any potential conflicts!

Eligibility For Public And Private Grants

Many organizations, both nonprofit and grassroots, seek public and private grants to help fund their work. Public grants come from federal, state, or other publicly funded agencies. Private grants do not involve public funds and can include grants and gifts from individuals, foundations, corporations, or other nonpublic sources. Whether your organization is a nonprofit or not can impact your eligibility to receive both kinds of grants.

Benefits And Costs To Nonprofits

Benefits

Many foundations and government agencies limit their grant giving to public charities only. Therefore, having nonprofit status can help make you eligible for many more grant opportunities and thus help make funding your work much easier!

Costs

While having access to additional funding sources seems like an unmitigated benefit, keep in mind when you are seeking either public or private grant funding for your organization, that you need to consider what “strings” may be attached to the funding should you receive it. Also, it can be very easy for organizations to become heavily reliant on funding their work through securing grants, which can cause heavy impacts should that funding cease. Organizations should always analyze the advantages and disadvantages of any potential funding source and make certain that their mission is congruent with that of the funding organization to avoid damaging misunderstandings down the road. Further, they should work to maintain a diversity of funding sources to ensure their sustainability should one source “dry up.”

Benefits And Costs To Grassroots Organizations

Benefits

While it can be hard to see the upside of not having access to certain funding sources, grassroots organizations can be deeply creative when it comes to fundraising! In the face of less access to traditional funding sources, grassroots organizations are more likely to spread their message and feelers wider and can actually build a broader and more sustainable base of support as a result!

Costs

Grassroots organizations are far less likely to be eligible for public or private grants, although there may be some flexibility in the realm of private grants. This can limit their access to funding. Securing fiscal sponsorship (described in the text box above) is one way that a grassroots may be able to become eligible for consideration for certain grants.

Formal Structure

While nonprofits can be organized in various ways, the most typical ways that animal organizations will structure themselves are as unincorporated associations or nonprofit corporations. What kind of structure your organization must adopt depends on which form you take.

In terms of unincorporated associations, no legal paperwork is required to form them, and generally, they are not recognized as legal entities. However, many states will recognize unincorporated associations and provide them with some rights (for example, the right to execute a contract) and protections (for example, limited liability protections) if they abide by specific requirements. These requirements vary from state to state and may include registration requirements, tax requirements, rules regarding the administration of the association, charitable solicitation (fundraising) registration requirements, and local business regulations. Therefore, even if you are an unincorporated association, there are formalities that you will need to observe in your operations. As always, we would highly recommend you consult with a qualified attorney in your jurisdiction to guide you concerning these requirements.

Formal structure becomes an even bigger consideration when a nonprofit takes the form of a nonprofit corporation. This is a legally recognized corporate entity with a public purpose that cycles all of its net income back into its mission. Operating as a nonprofit corporation generally involves filing paperwork in your state and managing ongoing reporting requirements to comply with the regulations that govern corporations in your state. Additionally, you will need to select and create a board to govern your organization, as well as create and adopt by-laws.

Benefits And Costs To Nonprofits

Benefits

With a formal structure, it can be easier to create an organizational culture of accountability, particularly if your nonprofit is a nonprofit corporation with a board. A strong board helps provide a strong foundation for all of the vital work you are doing, bringing to bear additional skills, resources, and viewpoints in support of your efforts and helping you monitor and navigate governance and compliance issues that can otherwise easily fall through the cracks. It can also help clarify the responsibilities of the people who work in your organization if you have a clear structure and a chain of accountability.

Another major benefit of having a formal structure with the legal status of its own is that nonprofits can enter into contracts as an organization and can have organizational accounts with institutions like banks. This can definitely ease the administration of finances and in facilitating the creation of legal relationships with entities ranging from independent contractors to other nonprofits.

Costs

With formal structure also comes additional work. You will need to:

-Recruit a board;
-Clearly articulate the rights and responsibilities of parties within the organization;
-And create protocols for decision-making, including developing things like by-laws and codes of conduct.

This requires significant time and consideration to ensure you are setting your organization up for success. We have a list of resources to help with this kind of work here, but your organization must undertake this thoughtfully, keeping in mind your mission, vision, specific context, and unique requirements.

Benefits And Costs To Grassroots Organizations

Benefits

There are no rules regarding how a grassroots organization chooses to structure itself. You can operate with one organizer or many. You can adopt a formal hierarchical decision-making process if you want, or you can make decisions collectively. This flexibility means that grassroots organizations can implement new and creative strategies that make them nimble, fast responders to situations where animals may require quick action and assistance. Grassroots organizations can also adapt their structure and strategies with far less protocol and procedure than nonprofit organizations, which can make it easier for them to adjust to unexpected changes in circumstances.

Costs

A lack of formal structure can cause a lack of predictability and shared understanding in an organization. It can be difficult even to arrange a bank account for a grassroots organization with no formal structure! Without baseline protocols, there can be confusion when it comes to crises. Without clear leadership or universal knowledge of how decisions are taken, miscommunication can happen and potentially wreak havoc in a grassroots organization. To prevent these issues and promote a culture of accountability within your grassroots organization, clear communication is essential. While you may choose to reject adopting a fully formal structure, having shared understandings in writing can be helpful. This can be particularly important when it comes to finances. It is easy to imagine how a grassroots organization with no formal status or bank account can get into trouble if they rely upon an individual within the group to handle banking donations and make payments for the group without an agreement with that individual in writing.

There are a couple of methods that grassroots organizations have found helpful in terms of managing finances without a formal structure. Keeping a single fundraising platform, such as a GoFundMe, for soliciting donations can help keep all funds in “one pot.” You can generally arrange to have funds disbursed regularly to a trusted individual in your organization, who will then provide them as needed for your expenses. To prove to your supporters that funds are being appropriately used, you can share receipts for payments on your fundraising platform. This tactic is not entirely cost-free, as many fundraising platforms will deduct a “handling fee” from fundraising done for groups other than nonprofit organizations.

One other way to manage donations and build accountability with supporters without having a formal structure is to have donors directly pay goods or service providers for you or to ask for things like gift cards for animal food and supplies for vendors. This way, your donors can know their funds are going directly to animal care. If, for example (as is so often the case), your grassroots organization’s primary expense is veterinary bills, you can arrange in advance with your veterinarian to have donors call them directly to contribute to your bill. This kind of fundraising can help build trust from your supporters that their contributions to your cause go directly to care.

Limited Liability

Limited liability is a legal status and is typically associated with corporations. It means that the only risk that investors have in the corporation is the potential loss of their investment in it. In most cases, this means that if a corporation fails, the personal possessions, assets, and funds are not subject to the claims of creditors who have claims against the corporation. Limiting liability is the primary reason that most business owners choose to incorporate.

A Note On Fiduciary Duty.
Please note that one liability that nonprofit directors and officers can still face relates to their fiduciary duties. Directors and officers of nonprofits owe three fiduciary duties to the organizations that they serve, which include: the duties of care, loyalty, and obedience. If directors and officers violate these duties and take actions that harmThe infliction of mental, emotional, and/or physical pain, suffering, or loss. Harm can occur intentionally or unintentionally and directly or indirectly. Someone can intentionally cause direct harm (e.g., punitively cutting a sheep's skin while shearing them) or unintentionally cause direct harm (e.g., your hand slips while shearing a sheep, causing an accidental wound on their skin). Likewise, someone can intentionally cause indirect harm (e.g., selling socks made from a sanctuary resident's wool and encouraging folks who purchase them to buy more products made from the wool of farmed sheep) or unintentionally cause indirect harm (e.g., selling socks made from a sanctuary resident's wool, which inadvertently perpetuates the idea that it is ok to commodify sheep for their wool). the nonprofit through illegal and irresponsible acts, they can be held liable for such acts.

Benefits And Costs To Nonprofits

Benefits

Limiting liability for everyone involved in operating your organization is an important priority. Animal organizations may face special risks regarding liability due to the nature of working with animals. In high-stress situations such as seizures and busts, liability risks may be heightened. Having a nonprofit corporation status can help with this.

Because a corporation is recognized as a separate legal entity from its officers and directors, they are generally not exposed to personal liability for the corporation’s debts and liabilities. Liabilities an animal organization can face include personal injury claims, property damage, tax liability, and contractual liability, among other things. If your nonprofit organization is not a nonprofit corporation but is instead an unincorporated association, members of the organization may not have the same protections, and the protections will vary by state. Again, you should consult with a qualified attorney in your jurisdiction to determine the extent of your liability protection as an unincorporated association.

Costs

Becoming a nonprofit corporation comes with additional costs and administrative burdens, which will be discussed further below. You should also know that having limited liability status is not a perfect solution to make all claims against your organization disappear. Therefore, nonprofit organizations should consider seeking out officers and directors insurance.

This insurance coverage protects the director and board members from financial damages, typically resulting from employment disputes, though there are many other scenarios where this insurance is valuable. As a nonprofit corporation, it may be tempting to disregard this coverage, but it can be financially disastrous for a board to sort out legal accusations against them without protection.

Benefits And Costs To Grassroots Organizations

Benefits

There aren’t a lot of benefits for grassroots organizations when it comes to their risk of liability exposure – largely, it is a real risk. However, one way to mitigate this risk is for the individuals involved to explore seeking out additional insurance that may help cover them in the case that the organization becomes subject to liability. One kind of insurance that can help is known as personal liability insurance. Depending on the kind of coverage you get, you may get additional insulation from liabilities such as someone else’s injury taking place on your property, damage that you might inflict on another’s property, and lawsuits and legal fees associated with being sued by someone else. If you participate in grassroots rescue and sanctuary work, it is definitely worth consulting with your insurance vendors to see what kind of coverage you can get to help protect you from the liabilities associated with it.

Costs

Members of grassroots organizations face a real risk of exposure to personal liability associated with their activity. As a result, they may find it challenging to recruit external board members as an unincorporated association because of the limited liability protections afforded.

Financial Costs

An image of a pile of change, with a sprout of a plant. growing out of it. — tlAll organizations need to cope with questions of cost. Read on to learn about the different kinds of costs that nonprofits and grassroots might encounter. Photo by micheile dot com on Unsplash

Cost is always a primary consideration for those who work in animal sanctuary or rescue! In this section, we’ll discuss the financial costs of maintaining nonprofit status and those associated with operating a grassroots organization.

Benefits And Costs To Nonprofits

Benefits

In addition to federal tax exemption, having nonprofit status also includes potential state and local benefits, in addition to other potential helpful perks. You may gain discounts from vendors and service providers such as veterinarians, , and shearers who are willing to provide services at a reduced cost to nonprofits. You may be able to solicit donations of food from grocery stores to supplement your residents’ diet. You may even be able to get reduced rates from service providers like lawyers and accountants, as well as from contractors you hire to do work at your sanctuary or facility, or even from businesses who create merchandise for your organization. Nonprofit status may help you cut down on quite a few expenses!

Costs

Multiple expenses are associated both with obtaining nonprofit status and maintaining it. If you choose to incorporate as a nonprofit corporation, state fees will vary. You will also likely have to pay an additional annual fee when you file your annual reports with your state.

When it comes to getting 501(c)(3) status from the IRS, there are also associated fees. Depending on your organization’s budget you will need to complete a Form 1023 or a 1023-EZ. Fees for each application can be found here.

Again, we always recommend that any organization that is seeking nonprofit status consult with a qualified attorney who can help you navigate the process appropriately. Making mistakes can potentially result in your application being rejected and having to pay more fees to reapply. Of course, getting professional assistance will also cost you unless you are friends with an experienced nonprofit attorney! Considering the costs of having ongoing professional assistance when it comes to your initial filings and in preparing ongoing filings associated with maintaining your nonprofit status is an important aspect of deciding whether nonprofit status is worth it for your organization!

Benefits And Costs To Grassroots Organizations

Benefits

Theoretically, creating a grassroots organization of volunteers interested in collaborating to help animals costs nothing financially. However, it goes without saying that any organization engaged in the compassionate care of animals will encounter expenses.

Costs

Without formal nonprofit status, you may have a hard time getting the same access to discounts for goods or services that a nonprofit might have. That being said, if your grassroots organization does a good job networking, sharing your narratives and community building, you may be able to build a reputation that could inspire others to assist you in this way.

Also, just because your organization is grassroots does not mean that you will not potentially need to consult with professionals like lawyers at times! It’s always a good idea to have an emergency fund not just for animal emergencies but also in case you encounter a sticky situation and need to consult with an attorney.

Administrative Costs And Paperwork

Costs and benefits do not always boil down to just dollars and cents. Making an informed decision about whether or not you want to be a nonprofit or grassroots organization also involves weighing more intangible costs, like the level of time that you want to invest in things that may not involve direct animal care. Most would-be rescuers and sanctuary operators don’t immediately think of paperwork as part of the burden they have to bear, but it’s often a reality. Paperwork is important for maintaining compliance should you choose to go the nonprofit route, but is also critical for any organization in terms of record keeping and maintaining accuracy and transparency to supporters!

Benefits And Costs To Nonprofits

Benefits

Nonprofits will absolutely have to do more paperwork than grassroots organizations. However, having to do this work doesn’t strictly fall into the “costs” category! For example, consider budgeting. No one likes to think about budgeting, but compliance requirements when it comes to nonprofits will require that you do it, and this can benefit your organization and its sustainability in the long run. While it isn’t strictly a requirement for nonprofit compliance, organizations with nonprofit status should generally be careful with all kinds of recordkeeping, including resident recordkeeping, donor tracking and stewardship, and keeping track of volunteer involvement. Not only does this enhance your effectiveness as an organization, but it also serves as an organizational history, which can help you keep track of lessons learned and plan to do even better in the future.

Costs

Having 501(c)(3) status comes with compliance requirements at both the state and federal levels. Annual filing requirements include a corporate annual report, Internal Revenue Service Form 990 or Form 990-EZ (the equivalent of a nonprofit’s tax return) as well as state tax returns.

Regarding federal filings, Form 990 is the primary way that the Internal Revenue Service gathers information about your nonprofit and monitors it for compliance with the law. Therefore it is extremely important to prepare it carefully. Your 990s will be publicly available on the IRS website, so you should be extremely careful to be accurate and transparent. Some organizations (such as we here at The Open Sanctuary Project) choose to publicly post their 990s on their website just to provide extra assurance to the public that they are operating in an above-the-board fashion. The Internal Revenue Service does offer a page full of tools and resources for nonprofits to help them navigate Form 990, as well as interactive training, which can be found here. They also offer another page with guidance on how existing organizations can maintain their exempt status here. Reviewing these resources is a very good idea to stay on top of your compliance requirements.

When it comes to compliance with your state’s regulations, you should know that many states rely on Form 990 as well to conduct their oversight, and may use it to satisfy state income tax filing requirements for organizations who want exemption from state income tax. However, state filing requirements will vary by state, and you should consult with a qualified professional to understand how to fulfill all of your state’s requirements.

Most states also require registration when it comes to fundraising solicitation. These rules vary wildly by state. Because of the complexity involved, if you solicit donations from out of state, you should strongly consider speaking to a qualified professional to figure out the rules that apply to your organization. We have a resource discussing state fundraising requirements here. You can also find additional information on requirements from The Foundation Group here.

As a nonprofit, you also have additional requirements for acknowledging donations made to you. When you receive a donation of $250 or more, in order for the donor to take a deduction for it, the IRS requires a written acknowledgment of the donation written by the nonprofit. As a matter of best practice, your nonprofit should acknowledge all contributions if possible. Legally, the IRS requires that these letters contain specific information. Those requirements can be found here.

If you receive fundraising from grants, you will often (if not always) be required to report to your grantors regarding the use of the funds, as well as the state of the programs they support. This is an important practice to honor to maintain accountability to your donors, in addition to being a valuable internal practice.

All of these requirements may mean that your organization needs to establish a double-entry system for bookkeeping that records business dealings, including daily reports and general pay tracking. You may need to consider hiring someone qualified to do this work as an employee or engage an accounting professional with experience in nonprofit work to do this for you, which does mean additional expense.

Benefits And Costs To Grassroots Organizations

Benefits

In any kind of organization, paperwork will be inevitable, but it is undeniable that grassroots organizations will have significantly less paperwork than nonprofits. The lack of need to conform to registration requirements and nonprofit best practices can make grassroots organizations much more nimble and flexible, and heighten their ability to focus on and direct care exclusively without the added administrative burden of paperwork.

Costs

Sometimes, the lack of requirements for ongoing and consistent documentation can make grassroots organizations sloppy in their accounting and their accountability, both internally and externally. As we have said, any group that solicits donations, whether they are nonprofit or grassroots, needs to be transparent and accountable to its supporters. Without the pressure of meeting documentation requirements imposed by law, it can be easy for grassroots organizations to push this work aside and neglect it. Again, good communication and some written understanding among members of grassroots organizations can prevent this kind of headache.

Shared Control

An image of an industrial meter, which has settings reading "Full, Half, Slow, Stand By, Stop, Finished With Engine, Slow, Half, Full" — Control is a tricky issue to navigate for any kind of organization! Nonprofits and grassroots organizations alike can cope with conflicts around control. Read on to learn about the questions you may encounter, and ways that you might address them! Photo by *Gustavo Sánchez* on *Unsplash*

A key element that any organization needs to address is the question of control. Regardless of the form that an organization takes, power and control issues are very common and can play out in a number of ways. One common place you will see them arise is when it comes to decision-making. For animal sanctuaries and rescues, this can involve things like philosophy of care decisions for the organization generally, calls on when and how to intake new residents, and who to cultivate as volunteers and donors. Questions of financial control can also be an issue for any kind ofr organization as well.

Also a common theme that can arise with either a nonprofit or a grassroots organization are the experiences of founders as their organization changes over time. Many founders have been in the position of having built something from nothing, using all the skills and passion at their disposal, and many of those same founders also experience emotional challenges and difficulty drawing healthy boundaries for themselves when it comes to their labor of love. To learn more about some of the issues founders may face in this regard, you can read our detailed resource here!

Related to questions of control and the issues that founders may face is the question of succession planning. Power dynamics often come into play when it comes time for transitions of control in an organization. For more information on succession planning for your animal organization, you can check out our resource on the subject here!

Benefits And Costs To Nonprofits

Benefits

Because nonprofits tend to have a more formal structure than grassroots organizations, that structure can be helpful when it comes to questions of control. Regarding how power tends to be distributed in such structures, your board of directors is generally responsible for ensuring that your organization is making decisions that further your mission, and that decisions are made following applicable law, your bylaws, and ethical standards. With that said, many day-to-day decisions may come down to the discretion of your and organizational staff. How you balance board oversight with day-to-day decision-making is something that you should consider carefully, but is something that can be facilitated by the more formal structure of a nonprofit.

For example, when you become a nonprofit, one of the things that you will have to do is develop organizational by-laws, which can help you set parameters around what decisions are up to your organization’s staff and what falls into the hands of your board of directors. If you take this work seriously and consider it carefully from the start of your organization, it can significantly ease your journey by clearly establishing what parts of your organization are responsible for what kinds of decision-making, and help create a roadmap for your operations going forward. It is also possible to change your by-laws to accommodate changes and growth in your organization over time.

In some cases where nonprofits encounter insurmountable obstacles regarding control, or encounter situations that may make their continued operation unfeasible, there may be organizational anxiety and power struggles over what will happen to remaining assets. While this certainly may be a fraught process for an organization, some of the angst may be alleviated by the federal requirement that a dissolving tax-exempt organization may only distribute its remaining assets to another tax-exempt organization. This requirement can help ease fears and anxieties that a nonprofit’s assets might be misappropriated. State laws govern the process of nonprofit dissolution. If you find yourself in this situation, we would strongly recommend you discuss the situation with a qualified attorney in your jurisdiction who can help you follow the necessary steps as well as notify the IRS appropriately that your nonprofit is no longer operating.

Costs

For organizations that have been largely run by a single , or small group of founders, adopting the structure imposed by starting a nonprofit can be challenging. For individuals who are used to making all the calls on their own, it can be difficult to have to report to and be answerable to a board of directors. They can also find it difficult to figure out how to negotiate tough decisions with a pressing timeframe, such as those associated with urgent rescues, when they have to check in and get approvals in ways they didn’t have to before. One way that groups like this have traditionally tried to navigate such situations is by keeping a small and closely held board to keep control in a small group of hands. However, this isn’t always the best solution.

Remember that nonprofits are mandated to serve a public benefit, which is why you are given special privileges such as tax exemption and why your donors can make tax-deductible donations. If the IRS believes that one person, one family, or one business controls your board – i.e., that your board is “closely held” – there is an implication that can be difficult to overcome that your nonprofit has been formed primarily to serve the interests of a small group of founders rather than the general public good. In these situations, the IRS may insist on board membership changes before granting tax-exemption, or they may deny 501(c)(3) recognition on the grounds of a substantial risk of personal benefit or “private inurement.” In addition, it is widely believed that organizations viewed as “closely held” are often subject to increased risk of IRS audit.

Benefits And Costs To Grassroots Organizations

Benefits

Because grassroots organizations can structure themselves however they see fit, they can delegate control within the group as they find it appropriate and convenient. Without requiring board input, they can operate with a single person making decisions for the group or with collective decision-making practices. Control can easily be shifted among group members as is necessary – for example, if a particular individual may not happen to be available in an emergency situation, other members of the group can make decisions as they see fit. Again, this grants grassroots organizations a special kind of agility and ability to respond that may be harder to achieve than in a nonprofit organization, where structure and power are necessarily much more articulated and constrained.

Costs

Without formalities around decision-making and power, things can go awry in grassroots organizations when members disagree on a decision or in times of emergency. If one member who is accustomed to making or having significant input into decisions happens to be absent, then they may feel slighted or upset over decisions that were made without them. This can lead to significant conflict in grassroots groups, and without a formal mechanism for dissolution as is mandated by law for nonprofits, there can be a great deal of uncertainty as to what may happen to the organization’s assets should the conflict prove to be unresolvable. One way that grassroots organizations can mitigate these risks is by developing written internal agreements on what to do in such situations.

A Note On Internal Financial Controls.
One way that both nonprofit and grassroots organizations can help prevent financial losses, financial mistakes, or even financial malfeasance by members of the organization is by separating financial duties within the organization. Internal controls can limit any single individual from having control over two or more phases of a financial transaction. The different kinds of access and control within an organization that can impact finances can be separated into four realms:
Access to assets
Access to accounting systems and records;
Control of organizational management;
The power to conduct independent organizational oversight.
By making sure that any given individual within the organization only can access and/or control two of the four realms listed, you can limit the ability of any single individual to make decisions that might harm your organization without their actions being detected and stopped.

Public Perception And Scrutiny

Nonprofit or grassroots, every group has its own individual preferences when it comes to public visibility. Some rescues and sanctuaries may very much want to engage actively with the public – either via media coverage or through public education programs. Others may wish to restrict their work to direct caregiving. Either path is a legitimate choice, provided that organizations stay true to their larger mission and vision. However your organizational status may have impacts on your public visibility and the public’s perception of you.

Benefits And Costs To Nonprofits

Benefits

Nonprofit status does tend to confer upon an organization a certain public perception of legitimacy, due to their being regulated and overseen by the Internal Reveue Service and state regulatory agencies. Additionally, if nonprofits are interested in collaborating with governmental agencies or other organizations, their nonprofit status will make collaboration easier. Finally, it may be easier for nonprofits to garner media attention if they are interested in doing so.

Costs

Because a nonprofit is dedicated to the public interest, its finances are open to public inspection. Any member of the public can obtain copies of a nonprofit organization’s state and Federal filings, and can then learn about the salaries of paid staff, as well as other expenditures made by the organization.

Also at times, members of the public may have the perception that because a nonprofit is meant to serve a public purpose, they therefore are “obligated” to do certain things. One way that this can come up is with regard to owner surrenders. Many sanctuaries and rescues have interacted with members of the public desiring to an animal, who feel that the organization “must” take the animal because the organization is a nonprofit. Of course, this isn’t true, but would be surrenderers can get very upset and irate at times, particularly if they are already stressed about placing an animal.

Another way that a nonprofit’s status can create problematic situations with the public is in terms of public access. Multiple organizations report that they have had problems at times with members of the public not understanding that the sanctuary does not allow public access to its site at all times. Sometimes members of the public will simply enter a sanctuary assuming that they are always open for visits. Nonprofit status does not require a sanctuary or rescue to provide public access to their property at all, let alone at all times, so it can be helpful for sanctuaries to be very clear in their social media and on their website about when and how the public is allowed to visit in order to avoid issues around this.

Benefits And Costs To Grassroots Organizations

Benefits

Generally speaking, the internal operations of grassroots organizations are not subject to public visibility to the same extent that a nonprofit’s will be. Grassroots organizations can maintain as much privacy as they wish, and the public is less likely to have inflated expectations of what they can do on your property. Further, if certain organizers wish to maintain a lower profile, they can. Please keep in mind, however, that in the event that a grassroots organization becomes involved in any kind of litigation, their relevant internal correspondence and documentation may be discoverable, and thus be made public. All this being said, transparency with regards to donations is always a good idea to foster public trust and confidence in your organization and its work.

Costs

Grassroots organizations may have greater difficulty in convincing the public that they are a legitimate organization and are doing legitimate work. As a function of this, again, it can be harder to attract donations, to forge collaborations with other organizations and especially government agencies, and to attract media attention to their work, should they desire it.

Hypotheticals

Now that we’ve gone through all these different considerations in detail, let’s consider how they play out in practice! Using hypotheticals can help you see how all the moving parts of this decision-making process intersect and mesh, and how a decision that is right for one organization may not be right for another. Ultimately, every organization will have to reflect and weigh all these factors for themselves, so we hope that providing you with a couple of examples will help guide your own organization’s process and journey.

These Really Are Hypothetical!
All hypothetical scenarios offered in this resource are indeed hypothetical: they are not based on any “real-life situation.” They were created to illustrate how different organizations juggle the many considerations that go into deciding whether to seek nonprofit status or not, and are meant for educational purposes only.

Running For Rabbits Goes Grassroots

Zenith is the largest city in the state of Winnemac, and it has quite a few animal organizations in operation, ranging from nonprofits to grassroots organizations. Recently, the state of Winnemac passed a law that prohibits petAn animal who spends regular time with humans in their home and life for companionship or human pleasure. Typically a small subset of animal species are considered to be pets by the general public. stores from selling cats or dogs from animal breeders, called the “Adopt Don’t Shop Law.” If pet stores wish to offer dogs or cats to the public, they must work with licensed shelters to host and adopt out shelter animals. Animal groups in the state are very pleased with this victory, and anticipate that it will lead to a much higher rate of animal adoption for dogs and cats, as well as a loss of business for breeders who used to sell animals to Winnemac pet stores.

Seeing this victory has given animal advocates even more ideas! Specifically, there is a small group of people who are rabbitUnless explicitly mentioned, we are referring to domesticated rabbit breeds, not wild rabbits, who may have unique needs not covered by this resource. rescuers in the city of Zenith. They have an informal group of organizers, some of whom volunteered their time to get the state Adopt Don’t Shop Law passed. They adopted the name “Running For RabbitsUnless explicitly mentioned, we are referring to domesticated rabbit breeds, not wild rabbits, who may have unique needs not covered by this resource.” for themselves, since aside from their full time jobs, they seem to spend most of their time chasing loose rabbits!

They are deeply frustrated every spring when members of the public buy “Easter bunnies” from pet stores, and inevitably many of these rabbits end up either being surrendered to local shelters, or dumped when their purchasers either grow tired of them, or realize that they are not equipped to care for rabbits properly. As a result, Running For Rabbits created presences on social media as well as an online chat group of all its members. They are frequently contacted by members of the Zenith public when loose dumped rabbits are spotted. They then work through their group chat to coordinate rescue. They have great relationships with both the Zenith municipal shelter, and private nonprofit shelters and rescues. When they secure a rabbit, after getting them vet care, they either place them with the shelters and rescues if there is space, or if shelters are full, foster them until those organizations have space to take them in. They also place rabbits themselves in their own microsanctuariesMicrosanctuaries are small scale communities of human and nonhuman (generally “unconventional or farmed”) animal companions, who live together in a chosen shared lifestyle and in commitment to ending the oppression of all beings. Microsanctuaries adhere to the notion that no nonhuman member of the community should “serve a purpose.” Microsanctuaries can exist in any context: rural, suburban, or urban. A microsanctuary can consist of as small a community as one animal and one human caregiver. For more information on microsanctuary please refer to the Microsanctuary Resource Center. or in private homes.

Running For Rabbits has no formal structure, with all members making decisions collaboratively and collectively. They have been pretty successful in raising funds on an online fundraising platform, and all funds raised go directly to their veterinarians. They have funds disbursed to one of their trusted members monthly, who then directly pays their vet and posts the receipts on the social media platform. They also tell rescued rabbit stories on their social media platforms and so have successfully cultivated a great public perception in the Zenith animal rescue community. Since all of its members work full time, Running For Rabbits has never gotten around to pursuing formal nonprofit status, but it has occurred to them in the past. They just aren’t sure they’re fully equipped to do all of the formalities in terms of recordkeeping, and they aren’t sure how they would organize their team into a formal nonprofit structure, given that everyone has varying demands depending on what is going on with their work and their personal lives.

However, they start to think that now might be the time to consider nonprofit status, especially since they think that rabbits in Zenith could really benefit from the enactment of local legislation that would work similarly to the state Adopt Don’t Shop Law. They think that if Zenith pet stores are prohibited from selling rabbits from breeders and instead must host shelter or rescued rabbits for adoption, there would be much less of a crisis regarding rabbit dumping. They approach their favorite nonprofit partner, Hoppy Home, to talk to them about this.

Hoppy Home thinks that this is a great idea, but they are constrained from lobbying due to their status as a private foundation. They connect Running For Rabbits with their nonprofit attorney so that they can get his opinion on their idea. When Running For Rabbits does some research, they understand the problem. They also realize that as a grassroots organization, they are not restricted in any way from lobbying to push for the new legislation, and they can already directly talk to city aldermen and campaign for those who support laws like Adopt Don’t Shop.

They decide that they will embrace their status as a grassroots organization and add active campaigning for an Adopt Don’t Shop law for Zenith regarding rabbits to their mission. This decision allows them to fill in the gaps for rabbit advocacy in Zenith – continuing to operate on the front line as rescuers and collaborating with municipal and nonprofit shelters, and keeping them free to work on implementing humane legislation on behalf of rabbits.

Lizard Lovers Start A Nonprofit

As we all know, sometimes reptiles need rescue too! A few lizard fans in Zenith have worked with the Zenith municipal shelter, as well as other private shelters, when those organizations have received rescued or surrendered lizards. Over time, these lizard advocates get to know each other and start talking. There is no existing organization in Zenith that is dedicated specifically for reptile care, so the lizard rescuers put their heads together. They see a real gap in the rescue community regarding reptiles and decide to explore whether they can fill it together.

The first thing that they do is talk to other rescues and get a recommendation for a skilled attorney who works with nonprofit animal rescues. When they meet with him, they learn that they will need to find a board, that they will need to file paperwork with the state of Zenith as well as with the Internal Revenue Service, and that they will be responsible for ongoing continued compliance with state and federal nonprofit regulations, which include filing 990s as well as state annual reports. Luckily, one of the rescuers is an accountant and is happy to volunteer to handle that paperwork.

They haven’t really ever fundraised in the past for their work, so they talk to the organizers of another nonprofit reptile rescue in a neighboring state, Save The Snakes. Save The Snakes says that they have largely been funded by a national private foundation, which offers grants to rescuers of reptiles. The Zenith lizard rescuers contact the foundation and are told that if they secure nonprofit status, they will be eligible for grants!

When the lizard advocates sit down, they identify three members who are willing to serve as board members, and their accountant member is willing to serve as the organization’s director. They are much more comfortable creating this formal structure with a clear delineation of responsibilities, as they haven’t worked together extensively before. They decide that they could best serve the needs of rescued reptiles in the Zenith community by forming a new nonprofit, Lizard Lovers, which will enable them to seek a grant from the national foundation immediately, and also donations from the public that will be tax-deductible to the donors.

Conclusion

In the hypothetical examples above, two different groups of animal advocates weighed the costs and benefits of seeking nonprofit status. They considered all of the same factors, which we discussed extensively above, but came to very different conclusions based on their long-term goals as well as their existing place in their community. We hope that these examples illustrate that there is no single “right answer” to whether or not your animal organization should go nonprofit or stay grassroots, but that with either decision will come costs and benefits, that you will have to figure out how to balance in a way that best suits your group’s members, the needs of your community, and the animals that you are hoping to serve!

Action Steps

If you are thinking of starting a nonprofit organization, talk to your fellow organizers about all of the considerations we have discussed above, to make sure this decision is the right fit for you and your group
Consult with experienced nonprofit attorneys in your jurisdiction to get a sense of your local requirements, and how compliance with nonprofit regulations may impact your organization’s operations.
Consult with other local organizations to learn from their experiences and see how you can complement their work, or fill any gaps in the community.
Whether you choose a nonprofit or a grassroots structure for your organization, make sure that you have good internal understandings of who is responsible for what, and who answers to whom.
Regardless of your organizational status, always make sure to be accountable and transparent both within your group, to your supporters, and to the general public.