The Challenges of Expanding Your Nonprofit

One of the most challenging situations your nonprofit organization can face is the need to expand.  It is also an exciting challenge.  Compared with the alternative of diminishing effectiveness and shrinking support, growth is a good thing.  At least it means (usually) that your programs are having a positive impact and people are motivated about your organization's cause.

But with expansion comes growing pains.  To significantly increase your footprint or your scope (or both!) requires a huge commitment on the part of the leadership, members, staff and volunteers.  When your organization is faced with opportunities that scream “Take action!", there are critical things you must consider.  In this post, we're going to take a look at two scenarios:  1) location expansion and, 2) additions to program services.  Knowing what to do in these situations can spell the difference between success and failure.

Location expansion. We're talking geography here.  Let's say that you are operating a children's tutoring program in Asheville, North Carolina.  Your organization is about 5 years old and it has met with enormous success.  Results are measurable, donors are happy, volunteers are motivated and the community has taken notice.  Because of the strategic planning your founders wisely engaged in early on, your unique program is scalable and replicable.  Your executive director just received a call from a school principal across town who heard about your program on the evening news.  She thinks it is just the thing for the parents of her students.  Though replication of this sort will involve enormous effort, it is technically easy to figure out.  Just go do it all again across town!

But let's say the call is from a city councilman in Louisville, Kentucky who happened to read about your program on your blog.  He thinks your program is just what his district in Louisville needs"¦and, he wonders if you have ever considered expanding.  Should your leadership decide to accept the challenge, what is technically involved?

Assuming you've successfully implemented a program once, you know how to do that again.  The tricky part is the legal and administrative.  In this scenario of adding a location in another state, you must know what that state requires.  The most common requirement is to register with that new state as a foreign corporation and to apply for a Certificate of Authority to operate a location there.  It is not automatic.  In addition, you will find yourself dealing with all the issues and agencies in that state that you encountered in your own:  from payroll taxes to sales taxes/exemption to charitable solicitations registration.  It can feel a lot like starting over"¦and, in a sense, you are.  Growing pains"¦

Program expansion. For purposes of this post, we should really call this program addition.  Expanding an existing program doesn't require much in the way of getting permission.  It is when you are materially expanding your scope (or changing your purpose) that things get complicated.  An example is in order"¦

Suppose again we are talking about your tutoring program in Asheville.  Five years into the program, your leadership recognizes an inescapable conclusion:  you really need to become a full blown private school.  This is a situation where things are even less automatic.  In fact, since a school is a different category of 501(c)(3) than the existing program, your organization must inform the Internal Revenue Service and seek their approval under a different sub-Code section.  A formal written request must be made, complete with a detailed description of the situation and proposed new program.  You will likely have to include supplemental IRS Form 1023 schedules relative to the new program.  It is a big undertaking.  Unfortunately, we've seen numerous instances of an existing 501(c)(3) going off on a tangent completely unrelated to its approved purpose"¦as if changing course was simply a matter of board approval.  It isn't.  And to be unaware or out of compliance with IRS requirements in this regard is to invite much unwanted attention from your Uncle Sam.

Expansion is not for every organization.  Many nonprofits prefer to stay small and easily manageable"¦and that's OK.  Growth for growth's sake alone just multiplies the headache.  But for those with the unique opportunity to expand their borders for the sake of achievement, knowing what lies ahead makes the journey a bit more navigable.

About the Author:  Greg McRay is a co-owner and co-founder of The Foundation Group®.  He received a B.S. degree in Business Administration from the University of Tennessee at Knoxville and is credentialed by the Internal Revenue Service as an Enrolled Agent, licensed to practice tax cases before the federal government. He is currently a member of the Internal Revenue Service's Nashville Territory Instructors/Speakers Cadre.  Mr. McRay specializes in the areas of IRS tax-exemption, clergy compensation and tax, as well as nonprofit financial management and compliance.  He is frequently a featured speaker at seminars and conferences, as well as private group settings.  He is also the author of "Successfully Applying For 501(c)(3) Status".