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Putting It Together, Part II

by Mark A. Santillo
Aug 13,2002

 

ConVocation: Diary of A New Convention

by Mark A. Santillo
President, Active Imagineering Inc.

"Putting It Together, Part II"

In the first part of "Putting It Together," I described the impetus for the formation of our new non-profit organization, Active Imagineering Inc, our first steps toward creating the organization and our initial attempts to solicit industry support for a major East Coast industry/consumer show on the model of Origins. Before moving on to discuss formation of a Board of Directors and other organizational necessities, I'd like to backtrack a little bit, to revisit something I glossed over in the first column - our decision to incorporate as a non-profit.

Since I work in the non-profit world [as a program coordinator for an educational non-profit that deals with workforce development and adult education], I take it for granted that everyone understands what non-profits are, how they differ from for-profit businesses and why Active Imagineering might choose to go that route. So let me present you with some common misconceptions and basic facts about non-profit organizations.

Myth #1: Non-profit organizations don't make money.
Fact: Non-profit organizations still need to make a profit, i.e. revenues exceeding expenditures, although we like to call it "surplus." If non-profit corporations did not make a profit, they would not be able to fund new projects, make capital improvements [purchase a new photocopier, for example], or generate interest income to hedge against future shortfalls. A non-profit needs to budget on a cash basis just like a for-profit business. If a non-profit cannot sustain itself through generated revenues, it will rapidly cease to exist. The main difference between the non- and for-profit enterprise is what happens to the money once we get it. In the private enterprise, profits are the property of the owners, who may remove those monies from the business to line their own pockets. Non-profit organizations do not have owners or shareholders and do not distribute profits or dividends. All surpluses generated by the activities of the non-profit must be re-invested into the organization. This is so because non-profits are granted special dispensation by the government - we don't pay taxes on our revenues in exchange for providing a social "good." The business of the non-profit is the fulfillment of its mission, not increasing the wealth of its principles.

Myth #2: Non-profits do not pay salaries.
Fact: Well, you probably won't get rich working at a non-profit [unless you're the head of the United Way!], but they do have employees and those employees collect salaries. And we pay income taxes on those salaries just like everyone else. Non-profits are permitted to pay "reasonable compensation" for services necessary to fulfill the mission. Just about everyone I know who works at a non-profit has some gripes about what constitutes "reasonable compensation" but if we wanted the big bucks, we'd be in another line of work. Many non-profit organizations, however, are composed entirely or mostly of unpaid volunteers who believe strongly in the mission. For the moment, Active Imagineering is one of those. The best that the officers can hope for in the short term is reimbursement of out-of-pocket expenses, and not even that until we generate significant revenue. Fortunately, unreimbursed expenses are also called "tax-deductible contributions."

Myth #3: Non-profit organizations get most of their operating revenues from the government - they're just big tax sponges!
Fact: On the contrary, in order to receive Federal tax-exempt status, a non-profit organization must prove that it derives the majority of its revenues from broad public support, not government handouts. In most cases, no more than 20% of a non-profit's operating funds can come from government agencies; the rest must come from membership fees, fees for service, donations and multiple grants from philanthropic foundations. The whole point of a non-profit from the government's point of view, and why it receives a tax break, is that it provides to society some service which the government might have to undertake were it not for the existence of the non-profit. If the government were paying the lion's share of the cost, it might as well be doing the job itself.

Myth #4: A gaming advocacy organization can't possibly fulfill the criteria established for tax-exempt status.
Fact: You'd be surprised at the variety of organizations that qualify as tax-exempt under the 501(c)(3) designation [Educational]. Any organization which seeks to inform and educate the public about a particular topic, without financial remuneration to its owners, would potentially qualify for 501(c)(3) status. Which is not to say that it's a cakewalk. Obtaining 501(c)(3) status is the holy grail of the non-profit, but achieving that status requires completing a lengthy and complicated federal application that makes the average 1040 form look like MadLibs! All tax-exempt organizations are non-profit, but not all non-profits are tax-exempt.

Myth #5: It is easier to operate a non-profit than a for-profit business.
Fact: Believe it or not, private businesses have much more flexibility in their day-to-day operations than non-profits. If you're the owner and you decide to make a change in the business, you can do it on the spot. If you decide that you've had enough of selling widgets you can start selling doodads or building bridges or cleaning toilets if that's what you want to do. Non-profit organizations must demonstrate that they are acting in accordance with their mission. A drastic change in the activities or purpose of the non-profit could jeopardize its tax-exempt status. In a private business, the money goes into one pot and gets drawn out again for whatever purpose the owner has in mind. A non-profit organization must keep its revenues segregated, depending upon the source and the purpose for which the funds were designated., and may only use "restricted" funds for their designated purposes. Most large donations come with strings attached. If you want to make a non-profit officer's day, give him a big fat check marked "unrestricted" or "for general operating expenses." In addition, the reporting requirements for non-profits are more involved than a standard business tax return. Remember, we have to prove to the government that we're not abusing our tax-exempt status and that we're respecting the various restrictions placed on us by our funding sources. Lastly, if a private owner decides to shut down, he gets to keep any assets that remain in the business. When a non-profit closes its doors, it must distribute its assets to other non-profits or give the assets to the government for redistribution.

I hope this primer has given you a better understanding of the complexities of the non-profit world. Now knowing as much as you do, you're probably asking yourself and me, if it's so gosh-darn difficult to be a non-profit, why did Active Imagineering not incorporate as a private business? I'll have to cop to a prejudice; I'll admit that I'm not too thrilled with the capitalist system as it is currently practiced here and now in the good old U.S. of A. The rich just get richer and the poor are ... still poor. Too often, when personal financial gain enters into the equation, basic ethics get tossed out the window. Even when ethical dilemmas are not involved, the profit-motive can distort the decision-making process, leading individuals to make socially irresponsible choices in favor of personal advantage. I'm not against individuals making a decent living in private enterprise, however. It's just that Active Imagineering is not about my financial solvency - you don't see that in the mission statement anywhere. It's about giving back something to a hobby that I have grown to love, and leaving it better for my contribution. It's about the vision. [Oh dear, he's started in on that again!]. Do I hope that Active Imagineering will one day generate enough surplus to compensate me for my time and effort? Of course! I'm not an idiot. But I'm not counting on it, either.

As we plan our new East Coast show, when we have to make decisions about what to include and what not to include, what kind of pricing to set, etc, I don't want to have to worry about how each of these decisions will affect my take-home pay. Active Imagineering Inc is about service to the community and that's where our emphasis needs to be, not on whether I get to install that new Jacuzzi I've had my eye on! My chief concern with hobby conventions run for profit is that, too often, they forget where they came from, who they serve and what they're about. One of the qualities which so impressed me about the Origins administrative team was their unremitting commitment to quality customer service, even at the expense of revenue [please see my next column, "There's No Business Like Show Business" for more about my experience on staff at Origins]. Active Imagineering expects to serve the hobby in the same way that GAMA and the GPA serve the hobby; only our slant is different.

I'll get down off that particular soapbox now and move on to the next phase of non-profit formation: the Board of Directors. Every non-profit has to have one. Much like that of a private corporation, the Board of Directors at a non-profit is responsible for setting the tone and direction of the organization, for overseeing the actions of its Officers, and for setting policy. Because most non-profits like Active Imagineering are intimate affairs, the Board members usually serve double-duty as Officers, public-relations liaisons, envelope-stuffers, deal-makers, etc. What are some of the qualifications one should look for in a potential Board Member? Members of the Board need to have a clear understanding of the mission of the organization so they can guide it effectively; they ought to have enthusiasm for the goals of the organization and a willingness to work to achieve those goals; they need time to devote in service to the organization; and, lastly, the Board of any non-profit organization is always the lender of last resort. While it is usually not a requirement that Board members make financial contributions, it's more or less expected in the non-profit world that Board members will provide funds as needed to reach crucial objectives or sometimes just to remain viable.

If our commitment to providing service to the hobby was to mean anything, then the structure of our Board needed to reflect that commitment. Which is why our Bylaws state that the Board of Directors of Active Imagineering Inc. must contain one designated seat for a Manufacturer, one for a Creator [game designer, writer or artist], one for a Retailer, one for a Club Officer, and one for an Educator, in addition to the four Officers of the corporation. These five designated seats represent our target constituency and the Board member who occupies each of these seats is expected to represent the interests and perspective of his respective group and also to serve as a liaison to that group. Our Retailer seat, for example, is expected not only to inform us of the needs of retailers and their likely reaction to various policies and initiatives, but also to advocate for Active Imagineering within the retail community. Our Board is meant to be organic as well. Should the need arise for some other type of representative seat, then such representation could be added. It is possible, for example, that we might wish to add a Fundraising Officer in the future, when the task of fundraising becomes more than the current Officers can handle. And just as we have an Educator's seat to represent that profession, we may wish to add a Youth Development seat to advocate for the needs of children. At the moment, we have confirmed our Manufacturer and Retailer Board Members, are actively searching for our Creator, and expect to fill our Club Officer slot later this fall. The most difficult seat to fill will most likely be the professional educator because not many educators have awakened to the possibilities of using games in the classroom and our ideal candidate should be both an educator and a gamer.

The structure of the Board is contained within the bylaws. All non-profit organizations must draft a set of bylaws which specify its objectives, its organizational structure and its procedural structure. Objectives are usually limited to a mission statement. Strategically, your organization's mission statement should be written as broadly as you think you can get away with and still be accurate. More restricted mission statements may make it difficult for you to remain in compliance with the bylaws should your programs expand in new directions. A perceived change to the de facto mission versus the written mission could cause trouble down the line, particularly with regard to the almighty tax-exempt status. Or put another way, write your mission statement as narrowly as you can so long as it includes all of the objectives you intend to pursue immediately and all those you may pursue in the near future.

Let's examine Active Imagineering's mission statement for clues: "The purposes of this Corporation are: 1. To promote the educational, cultural, and social benefits of game-playing; and 2. To foster community, continuity and growth within the game-playing hobby." That says quite a lot, but not very much! The first part of the mission communicates our intention to operate in accordance with the restricted purposes allowed to tax-exempt organizations. Our primary purpose is communicating the benefits of a particular activity to the general public, an altruistic function focused on informing and educating, The second part of the mission has a more social focus, which also falls within the realm of the 501 statute, although not as advantageous as (c)(3) status. In neither case have we said how we intend to achieve these aims. Were we to place those limitations in the bylaws, it would require a refiling of our articles of incorporation if we wished to change them later. We wanted to give ourselves room to explore how to best fulfill the mission.

Your organization's structure also requires much thought. We've already talked about the composition of the Board, but the bylaws also specify how the Board and the Officers are appointed or elected, the powers of the Board and of the Officers, their terms of office, whether or not the corporation will have voting members, etc. These are not inconsequential matters. A poorly conceived structure can doom an organization to inefficiency at best or, at worst, constant internal struggle. One of the questions we needed to answer was whether Active Imagineering would be funded by membership, and whether those members would have voting privileges. I have participated in other hobby organizations that had this type of structure and my conclusion: democracy is overrated. A benevolent oligarchy can govern more effectively and efficiently. The input of volunteers is valuable and your volunteer pool should be treated with respect and consideration; their concerns should be addressed; but it's impractical for most large organizations to make decisions by consensus. Add voting to the mix and you add a new layer of complications - every formal vote taken on an issue potentially sets up a winner/loser scenario that can lead to gloating on the winning side and simmering resentment on the losing side. A small Board of Directors is better capable of a negotiated settlement that either satisfies all interests or none. Also, the many voices of a voting membership may not all have the same view of the mission that unifies a Board of Directors and may inadvertently take the organization in a direction which violates its bylaws. Generally speaking, under non-profit law, a Board of Directors has a fiduciary responsibility to make sure that the organization does not violate its mission; voting members are not so constrained.

Organizational structure is the top-down view - where does authority reside? Who is responsible for each area of operation within the organization? Procedural structure defines how things get done. The most important procedural structure which every organization needs to determine and document is how it will handle its financial transactions. This includes cash handling procedures, check writing and depositing, electronic transfers, bookkeeping, etc. A well-documented and smoothly-running financial operation can make the difference between confidence and suspicion in the mind of a potential funding source. Ideally, the person who keeps the records [usually the treasurer or bookkeeper] should NOT have check-signing authority. Otherwise, the temptation to fraud and abuse would be ever-present. Receipts should be issued for all donations, cash deposits counted by more than one individual, and cash values assigned to all "in kind" donations [goods and services donated to your organization in lieu of cash]. There are many other procedures of this type, all of which constitute "accepted best accounting practices," the gold standard of financial record-keeping to which all organizations should strive. Adherence to these procedures will help your organization to achieve a favorable result during an independent audit, something every non -profit wants and needs. It's not necessary to go into the level of detail in your bylaws that I've described, but worthwhile to indicate that you will be following "accepted best accounting practices." A second important procedure to describe in your bylaws is the manner in which issues will be resolved. For example, does the Board vote on issues, and, if so, what if there is a tied vote? Do you have any specific human resource policies?- a non-discrimination statement is always a plus. And don't forget to include a mechanism for amending the bylaws.

I hope that today's column has given you some insight into the many complex issues that make up the founding of a new non-profit. We'll continue with... "You Put One Foot In Front of the Other.." but first, we're going to take a bit of a detour. Coming up next, "There's No Business Like Show Business" or What I Did on my Origins Vacation.

To learn more about Active Imagineering Inc. or to sign up for automated updates on our activities, please visit our website at http://www.activeimagineering.org

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