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A column from February, “We Really Need to Talk,” (oddly renamed on the web as “Foundations’ Four Biggest Faux Pas”) is a little list of four points she’d make to foundations. To me, they boil down to versions of “we know what’s best and so just give us money to do what we want.” That sounds like I’m being critical, and I am for those nonprofits for whom the first part of that statement isn’t true: sometimes, perhaps far too often, nonprofits don’t really know whether they know what’s best. There’s no question that millions of Americans are wholly dedicated to numerous worthy causes and contribute every day with hard work, honest emotions, and hope, only to contribute further every payday with a smaller paycheck. Our country would be less friendly, more hostile, and less vibrant without their good hearts.

The question is whether organizations have established their own metrics to determine efficacy and efficiency. I’ve written before about choosing strategies and selecting performance metrics as well as admirable models worthy of emulation. Today, though, the message is simply this: you have to have some plan for figuring out how well you’re doing your job.

And yes, if you’ve been paying attention, you realize that this post isn’t really about nonprofits: it’s about performance management. Only when you have some system in place, however imperfect, can you improve it. Even public companies with constant feedback on performance and no excuse for not having near real-time operating data, often lack any considered metrics that feed into strategic decisions in scenario plans or tactical decisions on a short fuse basis.

First, the fundamental concern: will the change of mission jeopardize nonprofit status (and that typically means jeopardize 501(c)(3) status, which means deductibility of donations by donors)? The answer depends on whether the new mission falls within the law’s requirements to qualify for 501(c)(3) status. Easy example: an organization dedicated to educating children about music switches to educating children about art: no problem. Hard example: an organization that switches from operating a homeless shelter to advocacy, lobbying, and litigation about homelessness issues. Maybe that change would institute a review by the IRS to determine whether the rules were all still being followed, but the inquiry is always going to be fact-specific unless the organization changes so dramatically that you already know the answer to the question. (Example: the homeless shelter converts to a bed and breakfast.)

The trap you should not fall into is confusing the mission (“charitable purpose” is the catchphrase) of the organization with its operating model, financial structure, or even “mindset” about the issues. Many nonprofits charge money to at least some of the people who benefit from their programs or services. I gave a talk at a conference this past weekend for AutismNJ, which charges parents, educators, and professional members for attendance. That alone has no determinative effect on their nonprofit status.

Second concern: does this change affect our donors’ view of the organization?

Third concern: does this change affect our employees’ and volunteers’ view of the organization?

These last two concerns are readily handled together because they are essential components of any strategic planning exercise: determining the effects of a proposed strategy on the ecosystem around the organization. This question arises for nonprofits and for-profits alike. The answer for any group is going to be different, based on the particular history, composition of these stakeholder groups, and the rationales for the proposed changes.

I take the original questioner’s point of view to be best expressed as “I don’t like the new changes and so I’m going to complain.” And then that person will probably leave, looking for a new organization with similar goals and models and operations to the old group before it changed.

Do I need to have a nonprofit status to become a social entrepreneurial enterprise?

I found this LinkedIn question to be interesting for two reasons: first, it’s very related to a nonprofit question I field all the time, and second, I have a current client that is very socially conscious, both in terms of their personal focus as individuals and as a major goal for the company.

Here’s the answer and my advice:

What’s a social enterprise?

First, the “social enterprise” moniker is a red herring. There is no such thing as a unique type of company. (The L3C, the “low-profit limited liability company,” is a very distinctive special purpose entity, only available in a few states, that only really has a precise regulatory function. This almost certainly doesn’t apply UNLESS the major portion of your funding will come from large private foundations.)  I’ve read the heck of the L3C documentation, and it’s not the answer that people are looking for.

There are nonprofits and for-profits. For-profits can do whatever they choose with their profits or pre-operating profit cash flow, as determined by the board as elected by the shareholders. For example, does a for-profit company that donates software licenses qualify for your “definition?” Maybe, but so what? The best “proof” that what I’m saying is true comes from looking at one of the references in another (helpful but ultimately uninformed) answer to that same question:  the B-Corporation folks use traditional corporate governance to institutionalize broad social goals as explicit goals for a particular company. I think that’s dead-on.

What structure is the right one for these companies?

The real question is what *your* organization wants to do, and what corporate form is best suited for that purpose. Good corporate lawyers will never make the tail wag the dog: we find the right organizational and operational and contractual structure to help you accomplish what you want.

So please, do yourself a favor and start out with a vision, then find a lawyer to implement that vision.

I have clients that run the gamut of arrangements: for-profits, nonprofits, discounts for nonprofits, donations of services, cash donations, and side-by-side related for-profit and nonprofit entities. Every plan is different: what’s yours?

To get more information about this last point, read these posts on planning a nonprofit and forming a nonprofit; they describe the importance of starting with your vision, and then a plan, and only then turning to someone like me for actionable, firm recommendations that I stand behind.

In the course of forming a number of nonprofits as the lawyer on the team, I’ve seen the early stages of planning several times.

Most often, people think about what they want to do (mission) and how to approach the problem (strategy). They then turn to friends and colleagues to get a sense of whether the plan seems viable from both “will it work?” and “will people donate to this?” perspectives.

Then, depending on the plan, someone like me gets involved to talk about how to go about putting this activity into action (and here, the process parallels for for-profit process but with some different options thrown in the mix). What I’ve written elsewhere is that not everyone *needs* a new organization, and often times people take on new administrative burdens rather than starting their analysis from a “how best to solve the problem” perspective.

Moving back to the beginning, I’ve come to decide that the best way to go about this is to conduct a little thought exercise or scenario planning: imagine, and then work out with questions and details, what a day in the life of this as-yet-unformed organization looks like. What happens in the morning? Who is that person/people? Why are they there, what do they do? How do they get paid or compensated? Where does that money come from? Running through these sorts of questions further parallel the initial business planning process for traditional businesses, and help put things in perspective when it comes time to formalize a budget.

If you can describe the day-to-day operations of your organization in terms of the goal you have, the actions you take, what resources you will use and how you will acquire them, and the results you achieve, then you’ll be a lot further down the road to formalizing your plan when the time comes.

To set up a charitable organization, you generally run through the following steps:

1. Determine whether you need an organization at all. The primary reason for the tactical step of forming a nonprofit is to collect donations from other people that (a) will not be taxable to the entity as income and (b) will be deductible by the donor. If your plan matches up with these desires, keep reading.

2. Determine whether your activities will constitute a “charitable purpose.” There are nonprofits that fall into different categories of charity that all for (a) but not (b) above.

3. Form an appropriate entity under state law (note: you don’t technically have to even form an entity in some states and can operate as an unincorporated association). Some states have a nonprofit corporation entity; in others you form a regular corporation and impose special rules in its articles or certificate of incorporation, sometimes referred to as its charter.

4. Make the appropriate IRS and state filings to secure your charitable status.

I have formed a number of nonprofits under various state laws. While having experience is useful when it comes to the corporate governance issues (the actual detailed language in the articles, bylaws, and corporate resolutions, most of the rest of Form 1023 is straightforward. You can probably do much of the work yourself if you like (see this Nolo resource article and the books they provide).