There are several ways to set up a nonprofit that gives you a tax exemption and allows you to apply for grants, and allows your donors to make tax exempt donations.
You could establish an independent, charitable nonprofit known as a 501(c)(3) — a reference to a section of the federal tax code. You could operate as part of a university or college, piggybacking on that institution’s nonprofit status. Or you could take a middle road: You might ask another nonprofit in your area to serve as your “fiscal agent” for the purpose of obtaining grants.
You might ask another nonprofit in your area to serve as your “fiscal agent” for the purpose of obtaining grants.
A nonpartisan organization or a statewide newspaper association or another journalism operation with 501(c)(3) status could play this role, either permanently or temporarily until you are on solid footing.
Each choice has its pros and cons, which we’ll explore in this section.
Going your own way as a 501(c)(3)
Being a completely independent 501(c)(3) charitable organization, which allows you to accept tax-deductible contributions, gives you the most autonomy. Subject to directives from your board, you have substantial independence in:
- Making your own editorial decisions.
- Taking charge of hiring and firing, within the law.
- Entering into contracts with consultants, vendors, collaborators and other parties.
- Applying for and receiving grants without a middleman.
But you’ll also have a bevy of administrative responsibilities, including:
- Articulating a bona fide charitable purpose.
- Assembling and working with a qualified and supportive governing board. (More in Step Three).
- Drafting articles of incorporation and bylaws. (More in Step Four ).
- Filing applications for federal and state tax-exempt status. (More in Step Four).
- Establishing personnel guidelines and payroll systems.
- Buying insurance.
- Developing templates for contracts with subcontractors and vendors.
- Arranging for your financial books to be reviewed or audited, and filing annual federal and state tax returns.
- Fundraising and dealing with donor expectations.
- Establishing systems for accountability to track your spending and activities so you can report on grants you receive.
Affiliating with a university
If you affiliate with a university, many of the responsibilities enumerated above will be lifted from your shoulders. Affiliation offers:
- Assistance in accounting, payroll and personnel issues.
- The possibility of obtaining health insurance and other employee benefits.
- Free or below-market office space and computer services.
- Access to knowledgeable faculty.
- Student assistants and interns to work on your project.
On the downside, you will have to operate within a university bureaucracy and abide by its rules:
- You will need to negotiate issues of editorial independence.
- Your employees may be deemed to be employees of the university. You may be required to empanel a search committee and undertake a full-blown university search for every person you hire. Firing and promotions may also be subject to university rules. Terms of employment, including compensation (according to university pay bands), health and other benefits, and working hours may be dictated by the university.
- You likely will be required to pay an administrative fee for the university’s sponsorship of your grants. Universities can have fees as high as 45 percent of the grant money you raise, although most new journalism sites seem to be negotiating fees in the range of 5- to-10 percent of grant funding. Some donors refuse to pay such fees, and you must negotiate whether the university will sponsor grants for which it will receive no funds.
- You may be required to engage in competitive bidding for some services and/or use pre-approved vendors. Your contracts may have to include specific university language, be approved by your department and be signed by high-level university officials.
- Intellectual property. Universities often want to own intellectual property produced under its name. Will a university claim ownership of all the journalism your site produces? May you share your content with others? May you use a Creative Commons license for any of your material? If you write a book, who will own the copyright?
- You may need to negotiate whether you can have access to a university purchasing card.
- You may need to pay rent for office space and cover the cost of phone service at university rates.
A hybrid approach
You might develop a relationship that allows you some affiliation with a university while still becoming an independent 501(c)(3).
For the university, hosting a hybrid nonprofit can serve as a way to raise its profile in the journalism community.
For example, you might be able to negotiate a limited agreement with a university so that your project is basically a tenant and the university a landlord.
In this model, the university may give you free or inexpensive space and services and, in exchange, you may provide its students with practical experience and internships. Depending on your MOU, you can run your contracts or hiring through the university, or handle them on your own.
For the university, hosting a hybrid nonprofit can serve as a way to raise its profile in the journalism community. In exchange for its support, the university often can get good journalists at the nonprofit to teach a class at a low fee.
This can be a win-win arrangement. Keep in mind, however, that you’ll still need to incorporate as a 501(c)(3) and comply with IRS requirements. And you’ll need a memorandum of understanding or contract from the university that establishes the parameters of your relationship.
An emerging model: The L3C
A handful of states have enacted laws allowing the creation of low-profit limited liability companies, or L3C’s. These organizations operate like traditional limited liability companies, but do not have profit as their primary goal. Instead, they strive to benefit society. They are not, however, charities, and therefore are required to pay taxes, and investments in or donations made to L3C’s are not tax-exempt.
L3C’s are not eligible to receive grants from foundations, but they may be eligible to receive program-related investments. Most foundations convey support via grants, but some are increasingly exploring program-related giving that actually makes them an investor in the project.
This article by the Investigative Reporting Workshop provides more information. We recommend you consult a professional advisor in your state for more details on whether this model will work in your situation.
A final option: You could find a “fiscal agent”
Increasingly, small journalism startups are finding another kind of nonprofit to act as their fiscal agent. They are reaching out to other journalism startups that have already acquired nonprofit status, or to community organizations or even a state newspaper association, for sponsorship.
One advantage to finding a “fiscal agent” is that there are far fewer rules to follow than a university would impose.
One advantage of this option is that there are far fewer rules to follow than a university would impose.These may be interim arrangements until a project gets on firm enough footing to go for its own 501(c)(3) status. Or they may prove to be longer-term collaborations that benefit both sides.
But, as with a university, it’s critical to establish that both you and your fiscal agent have a good understanding of what’s expected. Remember, your fiscal agent is assuming a lot of work: It is agreeing to be responsible for your paperwork, how you spend your grant money and how well you deliver on the promises you made in your grant proposals. In return, most fiscal agents often charge a small administrative fee to cover their bookkeeping costs. Some journalism projects are not charging fees for now.