How a Nonprofit Sets Up a Scholarship

Sometimes a nonprofit elects to reinvest its money into the community by establishing a scholarship. Although the process for establishing a scholarship can be as simple as adding a budget line and making an announcement, ensuring the scholarship is sustainable should always be a priority.

Scholarships are generally part of a nonprofit's annual budget. A large organization might choose to endow a scholarship fund and hire a manager or management company to invest the funds so they don't expire. For many small nonprofits, however, setting up a scholarship is a matter of setting aside the funding and distributing the money. Once a nonprofit elects to provide a scholarship, it sets up a scholarship committee. The committee is in charge of recommending award amounts and establishing the criteria for winners. Committees for very small nonprofits often organize fundraisers to keep money set aside for the scholarship.

For nonprofits, establishing a scholarship is not as simple as choosing an amount and a child to give it to. Unlike private or corporate scholarships, a nonprofit's income and expenses must be directed to a specific cause for the nonprofit to remain tax exempt. This holds true with scholarships, which should be awarded based on criteria that are consistent with the organization's mission.

Often, a scholarship will be established for the purpose of an annual award, but after a few years, the person or group that made the commitment finds itself in dire financial straits. If the scholarship is jeopardized, so is the organization's credibility. Worse than that, if money was raised for the scholarship, it must be spent that way or the organization can jeopardize its tax-exempt status or the status of those funds raised as tax exempt. Before making a long-term commitment, many organizations elect to have a year-to-year scholarship. By the time a given school year starts, the group has already raised and set aside the amount of that year's scholarship. Only after the funds are in hand are the amounts revealed.

Nonprofits can donate to other nonprofits or contribute to a general scholarship fund rather than sponsoring their own scholarship. A nonprofit might wish to open a scholarship fund but it might lack the administrative capacity. In other cases, like-minded nonprofits can combine smaller funds into an endowment administered by a larger foundation. For example, many municipalities, counties and regions have community foundations acting as central clearinghouses for grants and endowments. By establishing a relationship with one of these larger organizations, a nonprofit can do the legwork for raising scholarship funds and get the credit for being a catalyst but avoid the administrative difficulties that can be attached to starting a scholarship fund from scratch.