This article was written by 2024 summer intern Brandon Sookoo in collaboration with our team. We are grateful to Brandon for his work and the Posse Foundation for their support of our internship program.
Deciding where to donate can be daunting given the plethora of nonprofit organizations that need contributions. It is essential to evaluate these organizations to ensure your donation is impactful and used efficiently. This guide will walk you through evaluating nonprofits, from identifying who to work with to recognizing warning signs and asking the right questions before contributing.
Types of Nonprofits
Nonprofits come in various forms, each with specific functions and goals. It is helpful to understand the differences in operations so you can understand how impact and funding sources may vary. Whether donations are tax deductible depends on the type of organization and how their nonprofit status is structured. Here are the most common forms of nonprofits:
Charitable Organizations 501(c)(3): These organizations operate for religious, charitable, scientific, literary or educational purposes. These are the most common type of nonprofits and include entities like food banks, homeless shelters and educational institutions. Donor-advised funds also fall into this category.
Donor-Advised Funds (DAFs): These nonprofits are a type of 501(c)(3) organization that allows donors to make a charitable contribution, receive an immediate tax dedication and then recommend grants from the fund over time. This flexibility makes DAFs a popular choice for donors who want to manage their charitable giving strategically. DAFs are typically managed by public charities, such as community foundations, or financial service companies.
Foundations: Foundations typically provide grants and funding to other nonprofits and initiatives rather than offering direct services. They must distribute a certain percentage of their income annually to maintain their tax-exempt status. Examples include the Bill & Melinda Gates Foundation and the Ford Foundation, which support various causes through substantial grants.
Advocacy Groups 501(c)(4): These organizations work to influence public policy and legislation to bring about social change. They can lobby for legislative changes and are often involved in campaigns to raise awareness about specific issues. Notable examples include the American Civil Liberties Union (ACLU) and the National Association for the Advancement of Colored People (NAACP).
Professional and Trade Associations 501(c)(6): These nonprofits support the interests and professional development of their members, often through education, networking opportunities and industry standards and certifications. Examples include the American Bar Association and the National Writers Union.
Cultural and Recreational Organizations 501(c)(7): These nonprofits promote arts, culture and recreation. They manage museums, performing arts groups and recreational clubs, providing cultural enrichment and recreational opportunities to communities. Examples include the American Museum of Natural History and local country clubs.
Understanding the different types of non-profits helps clarify the diverse landscape of charitable organizations and their specific functions.
Key Criteria for Evaluation
Now, let us delve into the key criteria for evaluating these non-profits to ensure your donations are making the most significant impact possible.
Mission Statement
A clear mission statement should articulate the organization’s goals and how it intends to achieve them. It is important to see if the nonprofit’s mission statement aligns with your personal values and the issues areas that you care about in addition to finding a nonprofit organization that aligns with your desired impact. Some questions you may want to ask are:
• What is your organization’s mission statement? (if not readily available on their website or in other materials)
• What are the values that inform your work?
• How does your mission statement guide your operations?
Impact
Search for nonprofit organizations that can provide evidence of their impact. This includes data on how many people they have helped, the outcomes of their programs and specific success stories. Nonprofits often publish annual reports or impact assessments that detail their achievements. Some questions to ask are:
- How do you measure the success of your programs?
- What metrics do you use to evaluate the effectiveness of your programs?
- Can you share any recent impact reports or success stories?
Financial Health
Reviewing a nonprofit’s financial health is essential to ensure that it manages its resources wisely and transparently. Here are some resources you can examine:
Form 990: This IRS form provides detailed financial information about nonprofits. Key sections to review include total revenue, total expenses, executive compensation and spending on programs vs. overhead. Nonprofits are required to make their Form 990 available to the public, and it can be accessed through resources like GuideStar or ProPublica’s Nonprofit Explorer.
In the 990, you should examine:
Budget Allocation: Look at how the nonprofit allocates its budget. A healthy organization will spend a sizable portion of its funds on program activities rather than administrative or fundraising costs. A common benchmark is that at least 75% of expenses should go towards programs.
Financial Statements: Examine the organization’s income statements, balance sheets and cash flow statements. These documents provide a comprehensive view of the nonprofit’s financial position.
Some questions to ask are:
- What percentage of your budget is allocated to programs versus administrative and fundraising expenses?
- How do you ensure financial transparency and accountability?
Governance and Leadership
The quality and experience of the board and leadership team are critical indicators of a nonprofit’s effectiveness and sustainability.
Board Composition: A strong board should include members with diverse skills and experiences relevant to the nonprofit’s mission. Look for a mix of professionals, community leaders and individuals with expertise in areas like finance, law and fundraising. Consider if the Board is representative of the grantees. This ensures that the community has power in the decision-making process that ultimately affects them.
Leadership Stability: Frequent changes in leadership can be a red flag, indicating potential instability or internal issues. Research the tenure of key leaders and any recent transitions.
Governance Policies: Effective nonprofits have robust governance policies in place, including conflict-of-interest policies, regular performance evaluations and strategic planning processes. These policies ensure that the organization operates ethically and transparently.
Some questions to ask are:
- How often does the board meet, and what is their level of involvement?
- Can you provide information about your leadership team’s qualifications and experience?
- What governance policies do you have in place?
Sustainability
Assessing the long-term sustainability of a nonprofit ensures that it can continue to do its work over time.
Diversification of Funding Sources: A sustainable nonprofit will have multiple funding sources, including individual donations, grants, corporate sponsorships and government funding. This diversification reduces dependency on a sole source and enhances financial stability.
Long-Term Planning: Evaluate the nonprofit’s strategic plans and goals for the future. Organizations with clear, achievable plans are more likely to sustain their impact over the long term.
Financial Reserves: Check if the nonprofit maintains financial reserves or an endowment. These reserves provide a buffer in times of financial uncertainty and demonstrate prudent fiscal management.
Some questions to ask are:
- What are your primary sources of funding?
- Can you provide your long-term strategic plan?
- How do you engage with donors and stakeholders to ensure ongoing support?
Fully understanding the inner workings of a nonprofit allows you to establish a healthy funder-organization relationship. This is the core of the Trust Based Philanthropy framework.
Trust-Based Philanthropy Framework
The trust-based philanthropy (TBP) framework is an approach to giving that addresses the inherent power imbalances that exist between funders, nonprofits and the communities they serve. At its core, trust-based philanthropy is about redistributing power and reducing burdens in service of a healthier and more equitable nonprofit ecosystem. It is important, as a funder, to understand the responsibilities and boundaries you may have. Below are some of the trust-based practices you might want to incorporate into your giving process. Some of these considerations are relevant when making direct donations to nonprofits, while others are crucial for evaluating how nonprofits engage with their community and donors. Additionally, certain aspects should be kept in mind if you are responsible for making grants, such as your own family foundation.
Multi-Year, Unrestricted Funding: Providing long-term, flexible funding allows nonprofits to respond to challenges and opportunities as they arise. It gives them the freedom to allocate resources where they are most needed and without the constraints of project-specific grants.
Transparent and Responsive Communication: Building open lines of communication fosters mutual respect and understanding. Funders should actively listen to their grantees, provide timely feedback and be transparent about their decision-making processes.
Supporting Organizational Capacity: Investing in the capacity building of nonprofits enables them to strengthen their infrastructure and sustainability. This includes funding for leadership development, technology, strategic planning, and other critical operational needs.
Partnering in a Spirit of Service: Funders should approach their relationships with grantees as partnerships rather than transactions. This involves recognizing and valuing the expertise of nonprofit leaders and working collaboratively towards shared goals.
Streamlined Application and Reporting Processes: Simplifying the grant application and reporting processes reduces the administrative burden on normally lean nonprofits, allowing them to focus more on their mission-driven work. This includes minimizing the amount of paperwork required and being transparent about expectations.
Soliciting and Acting on Feedback: Incorporating feedback from donors and the communities they serve helps ensure that funding strategies are aligned with actual needs. Nonprofits should create mechanisms for receiving regular feedback and demonstrate a willingness to adapt based on what they learn.
Tools and Resources for Evaluation
Several tools and resources can aid in evaluating nonprofits:
Charity Navigator: Rates nonprofits based on financial health, accountability and transparency. It provides a comprehensive evaluation of nonprofits, helping donors make informed decisions.
Guidestar: Provides detailed profiles and financial information on nonprofits. It is a valuable resource for accessing nonprofit tax forms and financial statements.
BBB Wise Giving Alliance: Evaluates nonprofits based on rigorous standards of accountability. It offers insights into the governance, effectiveness and transparency of nonprofits.
Trust Based Philanthropy: Website offers strategies to develop trust-based relationships with nonprofit organizations. They also offer a self-reflection tool designed for funders to examine how trust shows up across their organizations.
Philanthropic Consultant: Professionals who specialize in advising individuals, families, foundations and corporations on how to make their charitable giving more strategic, effective and impactful. These consultants bring a wealth of knowledge and expertise in the nonprofit sector, helping donors navigate the complexities of philanthropy and maximize the positive outcomes of their donations.
Conclusion
By understanding a nonprofit’s mission, financial health, governance, efficiency and sustainability, you can make an informed decision and feel confident that your contributions will be used effectively. Having a good understanding of any nonprofit you might donate to and how they operate and asking pertinent questions early can help you identify potential red flags and ensure your donations have your desired impact. Check in with your LNW team about your charitable goals so that we can help with resources and support for your philanthropic giving and legacy planning as part of your comprehensive wealth and estate plan.
