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HOW TO START A NONPROFIT
1. START WITH A STATED NEED AND A NEEDS ASSESSMENT – DOCUMENT WHY SOCIETY
NEEDS YOU.
First, do you have facts that support your belief that a need exists for the nonprofit?
Simply put: Don’t fall in love with a cause before you do research to prove the need. If
the facts show a problem exists, then determine if the problem needs attention and
how you will provide services to favorably change the problem:
 Identify a need.
 Assess whether this need is being is being adequately met.
Finally and most importantly, determine how to make a measurable change in the need.
If you cannot establish that an unmet need exists and that you can make measurable
change to that need, then you may be wasting time and money.
2. EVALUATE THE STAKEHOLDERS AND THE SOLUTIONS THAT EXIST – HOW WILL YOU
MAKE A DIFFERENCE?
When trying to get people to support a cause, you need to provide them with facts.
Use research to zero in on the issue: the social problem that urgently needs attention.
Then gather, organize, and communicate information to show how society is hurt by this
particular problem not being adequately dealt with. Then use those same facts and
show how your programs will make a positive improvement in the problem. There are
other benefits to uncovering the facts early in the process. For example, you might
discover than an existing nonprofit already provides services for the problem. Knowing
this, you avoid duplicating those same client services by changing your initial ideas to
provide a different type of service.
Establish and document the existence of an unmet need with specific facts that support
your cause.
A thorough understanding of the need situation builds confidence with your potential
donors and future clients, establishes a firm basis for funds, and contributes unity to the
organization.
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Where can you go to get these facts? Both the library and internet have sources of
information for the nonprofit. Census data and government provide data such as, basic
demographics, income, educational levels, health and housing information.
You can also determine how many charities are already supplying services of the same
category. First determine the NTEE code for your service.
To determine how many charities serve that code, look up data from the National
Center for Charitable Statistics: http://www.guidestar.org/npo/ntee.jsp
You can sort the data and determine, for example, that in 2004 there were 1,116
different charities providing “Housing & Shelter” in Texas:
http://nccsdataweb.urban.org/tablewiz/tw_pc.php
Your data should then be organized into facts that convince members of the community
(your potential customers) that an unmet need does indeed exist. Also since people
who donate funds to charitable programs are looking for measurable changes (are you
using funds efficiently?), use this data to establish a benchmark for success. You do this
by identifying improvement in services rendered, or reduction in costs resulting from
your program. Another valuable benefit from this step is that you find and talk to
institutions that specifically fund your proposed services. If your mission is to reduce
hunger in your community, then you want to focus on those organizations that
specifically provide funds for that cause. You don’t want to ask a foundation that funds
education for funds when you are providing a solution to a hunger needs. Knowing at
the start which donors will fund your specific cause saves you time by building a
relationship with the proper donors prior to your needing to ask them for funding.
Building a relationship with the proper donors prior to your needing to ask them for
funding is vital. This activity will also give you the information needed for a budget, a
critical step that tells others that you recognized the importance of disciplined financial
planning and that you plan to spend contributions in a way that maximizes results.
Also talk to potential users of the services, community members and donors. These
groups can provide information that confirms that what you see as a need is indeed a
need! Talking with potential service users and supporters provides agreement on the
need/problem and lines up your future financial support.
The library, internet and clients are all sources of information for:
 Needs assessment.
 Establishing standards for changes to the problem.
 Finding the stakeholders who have a stake in the problem.
 Budgeting
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3. BUILD A FOUNDING BOARD OF THREE MEMBERS, UNRELATED TO YOU, WHO WILL LEAD
YOUR NONPROFIT AND FUND ITS EARLY STAGES.
The Texas Nonprofit Corporation Act requires that there be at least three directors in a
nonprofit corporation. The required officers are a President and a Secretary, but they
cannot be the same person. There must be an individual to serve as Director. To find
these people, look for those who have the ability to give and get others to give. Look for
people with management skills and connections in the community.
Ask: Will they commit both financially and organizationally?
4. PREPARE A BUDGET FOR THE NEXT TWO YEARS.
You will need a budget for your startup period, and will need to have corresponding
commitments from those who will support you for the first two years – until larger
funding materializes. These are most likely to be your board members and primary
stakeholders, as identified above. You can also attend ESCH seminars on Financial
Management at: ESCH Seminars Information and Schedules.
5. RESERVE YOUR ORGANIZATION’S NAME.
Do a thorough search on all business/nonprofit names. You can find a Texas State search
site at: http://www.sos.state.tx.us/corp/sosda/index.
6. DEVELOP VISION AND MISSION STATEMENTS THAT ARE FOCUSED AND UNIQUE: WHAT
WILL I ACCOMPLISH?
As you start, you need a clear and precise description of what you intend to do. Prepare
a short simple statement (aim for 20 words or less) on what you dream of achieving, in
particular a goal you may never reach. This is your vision statement.
Then prepare a short simple statement (aim for 20 words or less) on what you actually
plan to do. This is your mission statement. The mission statement provides the basis
for an organization’s goals and objectives. Your mission and vision are critical
information for those who will provide funds and for you when you design your
programs and develop your staff. When complete you have painted a picture of the
measurable benefits of your services to society and how you plan to get there.
For further information you can attend the ESCH seminars on Strategic Planning at:
ESCH Seminars Information and Schedules.
7. PREPARE AND FILE YOUR ARTICLES OF INCORPORATION, INCLUDING YOUR BY LAWS,
PURSUANT TO NONPROFIT CORPORATION ACTS IN TEXAS.
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A good place to start is reading about the lifecycle of a charity, with respect to the state
and federal paperwork that is required. This can be found online at:
http://www.irs.gov/charities/charitable/article/o,,id+122670.html
An organization’s articles of organization are the articles of incorporation or charter,
trust document, or other written instrument by which the organization is created.
By laws are an organization’s internal operating rules. State law may require nonprofit
corporations to have bylaws and nonprofit organizations generally find it advisable to
have internal operating rules. Note that organizations that want to specify an annual
accounting period generally do so in their bylaws.
To qualify for exemption under section 501(c)(3), an organization must be organized
exclusively for purposes described in that section. This means, among other things, that
the organization’s articles of organization must contain certain provisions. The articles
of organization must limit the organization’s purposes to one or more of the exempt
purposes set forth in section 501 (c) (3) and must not expressly empower it to engage,
other than as an insubstantial part of its activities, in activities that are not in
furtherance of one or more of those purposes.
This requirement may be met if the purposes stated in the articles of organization are
limited in some way by reference to the section 501(c)(3). In addition, assets of an
organization must be permanently dedicated to an exempt purpose. This means that
should and organization dissolve, its assets must be distributed for an exempt purpose
described in this chapter, or to the federal government or to a state or local government
for a public purpose. To establish that an organization’s assets will be permanently
dedicated to an exempt purpose, the articles of organization should contain a provision
insuring their distribution for an exempt purpose in the event of dissolution. Although
reliance may be placed upon state law to establish permanent dedication of assets for
exempt purposes, an organization’s application can be processed by the IRS more
rapidly if its articles of organization include a provision insuring permanent dedication of
assets for exempt purposes.
For examples of provisions that meet the above requirements the IRS provides
examples of a nonprofit organization’s charter or incorporation and a sample of a
declaration of trust at:
http://www.irs.gov/charities/charitable/article/0,,id-122728,00.html
Federal tax law does not require specific language in the bylaws of most organizations.
State Law Requirements for Bylaws and Articles of Incorporation
Texas State requirements for nonprofit corporations can be found online at:
http://www.sos.state.tx.us/corp/forms/filingguide/word/np.shtml
Texas State requirements for unincorporated nonprofit associations can be found at:
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http://www.sos.state.tx.us/corp/forms/filingguide/word/unin.shtml
The federal government has suggested language for nonprofit articles of incorporation
that will be useful later in step 8 see: http://www.irs.gov/charities/article/0,,id96117,00.html
8. APPLY FOR FEDERAL 501(c)(3) TAX EXEMPT STATUS AND OTHER AVIALABLE/NEEDED
TAX EXEMPTIONS SUCH AS STATE AND TAX EXEMPTION.
To apply for federal tax exemption, an organization should obtain and complete the
required forms, Form 1023, Form 8718, and Form SS-4 as below. You need to submit
them, along with the required fee that goes with form 8718. If an organization will be
represented by an attorney or other representative, it must also submit a power of
attorney, which can be prepared by your attorney for inclusion in the application
packet.
You can find the applicable federal forms that you need online at: http://www.irs.gov.
Some items you will want to have handy when preparing you Form 1023 are:
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The names and addresses of your officers, directors, and board trustees.
A list of assets used by the organization.
Any leases to which the organization is a party.
A list of membership requirements, fees and dues, if any.
Any promotional material used to attract members.
Any fee schedules used.
Financial data for this year, three years prior, and a projected budget for the next
two years.
Articles of Incorporation and bylaws prepared above, or the constitution of the
organization.
A narrative description of the activities of the organization, past, present, and
future.
A good place to start is to read Publication 557, a guide to obtaining tax exempt status
for your organization: http://www.irs.gov/publications/p557/index.html. You will need
the following forms in your application:
1. The 501(c)(3) application, known as the Application for Recognition for Exemption,
Form 1023: http://www.irs.gov/pub/irs-pdf/f1023.pdf (Instructions see:
www.irs.gov/instructions/i1023/index.html)
2. Form 8718, User Fee for Exempt Organizations: www.irs.gov/pub/irs-pdf/f8718.pdf
(Details see: http://www.irs.gov/pub/irs-pdf/f8718.pdf)
3. Form SS-4, Application for an Employer Identification Number (EIN). You can apply
for an EIN online at:
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html.
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Or you can download the form at:
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html
The SS-4 instructions:
http://www.irs.gov/businesses/small/article/0,,id=102765,00.html
An Employer Identification Number (EIN), also known as a Federal Tax Identification
Number, is a nine-digit number that the IRS assigns to business entities. The IRS uses
this number to identify taxpayers that are required to file various business tax returns.
Every organization must have an EIN, even if it will not have employees. The EIN is a
unique number that identifies the organization to the IRS. You may want to read:
Publication 1635, Understanding you EIN: http://www.irs.gov/pub/irs-pdf/p1635.pdf.
Please note that the EIN, above, is not your state tax-exempt number. That term
generally refers to a number assigned by a state agency that identifies organizations as
exempt from state sales and use taxes. You can find the forms to receive a Texas state
tax-exempt number at: http://www.window.state.tx.us/taxinfo/taxforms/ap-205.pdf.
Other State and Local Laws
To determine what state laws you may be required to follow, or to register before
soliciting charitable contributions, you should see the Texas State Attorney General’s
website at: http://www.oag.state.tx.us/consumer/charitabletrusts.shtml#research. In
some areas, municipal or other local governments may also require organizations
soliciting charitable contributions to register and report their activities.
9. DEVELOP A STRATEGIC PLAN THAT INCLUDES A BUDGET, MEASURABLE OBJECTIVES,
AND IS TIME DEPENDENT.
A plan is a map, a disciplined approach to the specifics of executing your mission. It
includes:
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How you specifically intend to achieve your mission.
How long it will take to change things.
How much it will cost.
How you will pay for it.
It should state your mission statement then the broad ways (goals) that you will
accomplish the mission. Goals (what you will accomplish) and the objectives (how you
intend to do this) are essential to success. Goals and objectives should be measurable,
time dependent, succinct, and specify who will carry them out. They provide direction
and serve as a unifying “rallying point” for the organization and its clients. After all, it’s
easier to be successful if, at the start, everyone agrees on what success looks like and
sets goals and objectives from that understanding.
This is most important: have clearly measurable service, financial and organization
objectives. These determine the amount and type of financial and human resources
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need. Finally, have a realistic time frame in which to secure resources and meet
objectives. To repeat, you need clearly measurable objectives and an understanding of
what resources are required, when they will be needed and where they will come from.
The end result is an actionable and measurable map.
For further information you can attend the ESCH seminar on Strategic Planning, and can
sign up online at: ESCH Seminars Information and Schedules. If you have completed
your 501(c)(3) application you can request a consultant to help you develop your
strategic plan by filling out a request for consulting assistance at: Request for Assistance.
10. DEVELOP A STAKEHOLDER MARKETING PLAN TO BUILD BRAND IDENTITY – WHAT SETS
YOU APART?
If you have completed your 501(c)(3) application you can also request a consultant to
help you develop your marketing plan by filing out a request for assistance at: Request
for Assistance.
11. DEVELOP A FINANCIAL PLAN AND FUNDING STRATEGY – WHO IS GOING TO SUPPORT
YOU, AND HOW MUCH?
Developing a Financial Plan – Annual Accounting Period
Exempt Organizations must keep books, reports, and file returns based on an annual
accounting period called a tax year. A tax year is usually 12 consecutive months. There
are two kinds of tax years:
1. Calendar Tax Year – this is a period of 12 consecutive months beginning January 1
and ending December 31; or
2. Fiscal Tax Year – this is a period of 12 consecutive months ending on the last day of
any month except December.
For further information, you can attend the ESCH seminar of ABC’s of Accounting or you
can attend the ESCH seminar on Financial Management at: ESCH Seminars Information
and Schedules.
If you have completed your 501(c)(3) application you can also request a consultant to
help you develop your financial plan by filling out a request for consulting assistance at:
Request for Assistance.
Federal Tax Return filing requirements for nonprofits can be found at:
http://www.irs.gov/charities/article/0,,id=96103,00.html.
Generally, tax-exempt organizations must file an annual information return. Tax-exempt
organizations that have annual gross receipts not normally in excess of $25,000 are not
required to file the annual information return. Publication 4221, Compliance Guide for
501(c)(3) Tax-Exempt Organizations, explains the filing and recordkeeping rules that
apply to organizations that have tax-exempt status under section 501(c)(3).
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Tax-exempt organizations must file Form 990, Return of Organization Exempt from
Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt form Income
Tax. Form 990, Form 990-EZ, or Form 990-PF must be filed by the 15th day of the 5th
month after the end of your organization’s accounting period.
Even though an organization is recognized as tax exempt, it still may be liable for tax on
its unrelated business income. Unrelated business income is income from a trade or
business that is not substantially related to the purpose that is the basis of the
organization’s exemption. An exempt organization that has $1,000 or more or gross
income from an unrelated business must file Form 990-T. The obligations to file Form
990-T are in addition to the obligation to file the annual return, Form 990, 990-EZ or
990-PF. See IRS Publication 598, Tax on Unrelated Business Income for Exempt
Organizations for further information.
Developing a Funding Strategy
Successful fundraising requires a plan. A plan includes:
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The Fundraising Goal. Calculate the cost of programs, organizational needs and
financial demands needed to fulfill the mission. Identify these costs by time periods;
present, near future, and future. This process sets your fundraising targets: the
amounts are needed to pay for present, near term, and long-term activities.
The Identity of Your Market: who will you target for funding purposes?
The Vehicle: how will you reach your target market?
There are several ways:
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Annual Gift giving, a Capital Campaign, a Special Event, Planned Giving, written
proposals or Grants, Major Gift Solicitations, mass marketing, telemarketing or
direct mail, and Cause Related Marketing.
For further information, you can attend the ESCH seminar on Fundraising and
Development Basics, or the Grant Writing Workshop at: ESCH Seminars Information and
Schedules.
Understanding the Laws Related to Charitable Contributions and How They Impact
Your Funding Strategy
A charitable contribution is a donation or gift in cash or property to or for the use of a
qualified organization.
A section 501(c)(3) organization will jeopardize its exemption if it ceases to be operated
for exempt purposes. An organization will be operated for exempt purposes only if it
engages primarily in activities that accomplish the exempt purposes specified in section
501(c)(3).
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An organization will not be so regarded if more than an insubstantial part of its activities
does not further an exempt purpose. A 501(c)(3) organization:
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Must absolutely refrain from participating in the political campaigns of candidates
for local, state, or federal office.
Must restrict its lobbying activities to an insubstantial part of its total activities.
Must ensure that its earnings do not inure to the benefit of any private shareholder
or individual.
Must not operate for the benefit of private interests such as those of its founder, the
founder’s family, its shareholders or persons controlled by such interests.
Must not operate for the primary purpose of conducting a trade or business that is
not related to its exempt purpose, such as a school’s operation of a factory.
In addition to loss of the organization’s section 501(c)(3) exempt status, activities
consisting inurement may result in the imposition of penalty excise taxes on individuals
benefiting from excess benefit transactions.
A charitable organization must provide a written disclosure statement to donors of a
quid pro quo contribution in excess of $75. A quid pro quo contribution is a payment
made to a charity by a donor partly as a contribution and partly for goods or services
provided to the donor by the charity. For example, if a donor gives $100 and receives a
concert ticket valued at $40, the donor has made a quid pro quo contribution. In this
example, the charitable contribution portion of the payment is $60. Even though the
part of the payment available for deduction does not exceed $75, a disclosure
statement must be filed because the donor’s payment (quid pro quo contribution)
exceeds $75.
The required written disclosure statement must:
1. Inform the donor that the amount of the contribution that is deductible for federal
income tax purposes is limited to the excess of any money (and the value of any
property other than money) contributed by the donor over the value of goods or
services provided by the charity
2. Provide the donor with a good faith estimate of the value of the good or services
that the donor received
The charity must furnish the statement in connection with either the solicitation or the
receipt of the quid pro quo contribution. If the disclosure statement is furnished in
connection with a particular solicitation, it is not necessary for the organization to
provide another statement when the associated contribution is actually received.
No disclosure statement is required when:
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1. The goods or services given to a donor meet the standards for “insubstantial value”
set out in Rev. Proc. 90-12, 1990-1 C.B. 471, and Rev. Proc. 92-49, 1992-1 C.B. 987
(as updated);
2. There is no donative element involved in a particular transaction with a charity (for
example, there is generally no donative element involved in a visitor’s purchase
from a museum gift shop); or
3. There is only an intangible religious benefit provided to the donor. The intangible
religious benefit must be provided to the donor by an organization organized
exclusively for religious purposes, and must be of a type that generally is not sold in
a commercial transaction outside the donative context.
A penalty is imposed on a charity that does not make the required disclosure in
connection with a quid pro quo contribution of more than $75. The penalty is $10 per
contribution, not to exceed $5,000 per fundraising event or mailing. The charity can
avoid the penalty if it can show that the failure was due to reasonable cause.
Donors taking a deduction under section 170 are required to obtain contemporaneous
written substantiation for a charitable contribution of $250 or more. To be
“contemporaneous” the written substantiation must generally be obtained by the donor
no later than the date the donor actually files a return for the year the contribution is
made. If the charity provides goods or services to the donor in exchange for the
contribution (a quid pro quo contribution), this written substantiation
(acknowledgement) must include a good faith estimate of the value of the goods or
services. The charity is not required to record or report this information on behalf of the
donor. The donor is responsible for requesting and obtaining the written
acknowledgement from the charity.
Although there is no prescribed format for the written acknowledgement, it must
provide sufficient information to substantiate the amount of the contribution. For more
information, see publication 1771.
For more information, see http://ww.irs.gov/charities/article/0,,id=96102,00.html.
For more information on reporting charitable contributions, see Publication 1771:
http://www.irs.gov/pub/irs-pdf/p1771.pdf.
A compliance guide for tax exempt organizations, Publication 4221 can be found at:
http://irs.gov/pub/irs-pdf/p4221.pdf.
12. DEVELOP A CASE STATEMENT – WHY WOULD STRANGERS WANT TO GIVE TO YOU OR
VOLUNTEER TO HELP?
For information on developing a case statement, you can attend the ESCH seminar on
Fundraising and Development basics, or the Grant Writing Workshop at: ESCH Seminars
Information and Schedules.
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13. DEVELOP INVOLVEMENT OF A LARGER BOARD – THEY SET PRIORITIES AND PROVIDE
FUNDING.
For further information you can attend the ESCH seminar on Fundraising and
Development basics, or the Grant Writing Workshop or you can attend the ESCH
seminar on Board Development at: ESCH Seminars Information and Schedules.
If you have completed you 501(c)(3) application you can also request a consultant to
help you develop your board’s roles, responsibilities, and training by filling out a request
for consulting assistance at: Request for Assistance.
14. DEVELOP A 3 TO 5 YEAR PLAN TO CONTINUALLY CULTIVATE DIVERSE DONORS THAT
YOU DON’T ALREADY KNOW.
For further information you can attend the ESCH seminar on Fundraising and
Development basics, or the Grant Writing Workshop or you can attend the ESCH
seminar on Board Development at: ESCH Seminars Information and Schedules.
15. RESEARCH AND PREPARE PROPOSALS (GRANTS) TO REQUEST FUNDS FROM
FOUNDATIONS, CORPORATIONS, ETC.
For further information you can attend the ESCH seminar on Fundraising and
Development basics, or the Grant Writing Workshop or you can attend the ESCH
seminar on Board Development at: ESCH Seminars Information and Schedules.
16. DEVELOP AN ANNUAL APPEAL AND SPECIAL EVENT THAT CAN PROVIDE SECONDARY
FUNDS.
For further information you can attend the ESCH seminar on Fundraising and
Development basics, or the Grant Writing Workshop or you can attend the ESCH
seminar on Board Development at: ESCH Seminars Information and Schedules.
You can also attend an ESCH seminar of Recruiting, Retaining and Recognizing your
volunteers or Conduction Effective Meetings at: ESCH Seminars Information and
Schedules.
17. DEVELOP STEWARDSHIP POLICIES TO RETAIN AND REINVIGORATE DONORS, TRUSTEES,
AND VOLUNTEERS.
For further information you can attend the ESCH seminar on Fundraising and
Development basics, or the Grant Writing Workshop or you can attend the ESCH
seminar on Board Development at: ESCH Seminars Information and Schedules.
You can also attend an ESCH seminar of Recruiting, Retaining and Recognizing your
volunteers or Conduction Effective Meetings at: ESCH Seminars Information and
Schedules.
18. USE FINANCIAL TOOLS TO EFFECTIVELY DEPLOY THE ORGANIZATIONS RESOURCES.
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Use budgets, forecasts, cash flow reports and other information to understand, correct
and communicate progress to the organization. Are you doing what you wanted to do,
how you wanted to do it and in the time expected? Financial tools provide the means to
manage and understand what is happening in the organization. With these tools you can
ask: “Is the organization having success in meeting its objectives?” “Is success what was
expected?” “If not, why not?” “Should the initial objectives be revised as a result of the
actual results?”
Use the answers to the above questions to chart, steer, measure and if necessary,
change directions for your organization. Prepare a realistic budget and use it to compare
actual to expected results. Use actual results to update and when necessary revise
measureable objectives. Use the budgets process to chart a line-by-line numerical
estimate of where your financial resources will come from and what they will be used
for. For example, if you provide shelter for the needy, what will it cost to do that? That
is, rent, or cost of building, staff, insurance, heat, etc. Then determine who will fund this
program.
When done properly, a budget provides your organization with its priorities for the year.
This process unifies the organization because everybody understands what he or she
needs to do to get the mission accomplished.
For further information, you can attend the ESCH seminar on ABC’s of Accounting or you
can attend the ESCH seminar on Financial Management at: ESCH Seminars Information
and Schedules.
If you have completed you 501(c)(3) application you can also request a consultant to
help you develop your financial plan by filling out a request for consulting assistance at:
Request for Assistance.
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