If you have ever seriously thought about starting a charitable organization, now might be the time. And simply put, it might be a lot easier than you think. I advise my clients to engage in a three-step process; Planning, Forming, and Launching. I will be sharing these insights and more at the upcoming Community Legal Series offered by my law firm in Sacramento, CA at the Guild Theater from 4-6 pm on March 20, 2013. Click here for the flyer. Although the seminar will cover a broad spectrum of topics related to charitable organizations, below are highlights of some of the things that I will personally talk about. In addition, the CFICS Innovation Fund will be around to talk about how you can get money to get started and webconnex will be there to show you how to raise money online and through social media. All this, and discounted coffee from Old Soul Cafe! Too good to be true? Don’t be “Swayed.”
You should first make sure that forming a charitable organization is what you should do. You should only plan to form a charitable organization if the principal activities of that organization are in fact going to be “charitable.” For a discussion regarding this see “Free Lunch” at the Flying Pig Bistro-Part II: Today’s Special-Why You Should Start a Nonprofit Charitable Organization (and Why You Shouldn’t)
Once you are confident a charitable organization is the right type of organization to form, you need to focus on its anticipated financial model. How will it pay for general and administrative (G&A) expenses? How will it pay for its program costs? Will you rely solely on donations or grants? Are there revenues that you can earn as a result of providing services that are substantially related to the organizations charitable purpose? Examples of this are tuition payments for a child care facility or admission fees for a museum. If so, this “related business income” will also qualify as income for which your organization does not have to pay taxes. Do you anticipate activities that you are think are great money-makers for your organization but are not related to the organizations charitable purpose? You have to be careful with this one. Too much “unrelated business income” could jeopardize your charitable status.
Many times I counsel people who believe that starting a charitable organization poses a “Catch 22.” They need to have an IRS Determination Letter in order to raise money, but they need money to pay for the costs of completing and filing their 1023 Application with the IRS. A solution? Identify another charitable organization that already has an IRS Determination Letter (preferably for providing service or activities similar to those of your organization) and ask it to serve as a “sponsor” of your organization. This sponsoring agency can receive donations on behalf of your organization under a simple “donation agreement” until such time as it has received its IRS Determination Letter.
Your Formation Team
Before you form a charitable organization, it is best to assemble your formation team. You will need a volunteer board of directors that can bring expertise or resources to your organization. You will need corporate officers, generally a president (or chief executive officer) and secretary (think corporate records keeper and document signer, not typist) and a treasurer (or chief financial officer) (think someone who focuses on the finances, not necessarily someone who manages the finances.) Who is going to do the work? Are you planning on being the president (or CEO) and the “Executive Director” (a title that is often used by the lead staff person in a charitable organization)? If so, do you have the necessary skills and experience?
Your Formation Documents
Generally, in order to actually form a charitable organization you are going to need to file Articles of Incorporation with the Secretary of State. This document states the purpose of the organization and contains other language required by state law in order for your organization to qualify as a charity (aka, a nonprofit public benefit corporation.) You are going to also need bylaws, the documents that govern the governance of the organization. While a great deal of flexibility exists within certain aspects of your bylaws, such as the number of board members, the frequency of meetings, the number and type of committees, other provisions such as conflict of interest policies and prohibitions on using the entity for personal benefit are either required by state law or are essential to qualify as a recognized IRS 501(c)3 public benefit nonprofit under federal IRS law and regulations. The completion of an Application for Recognition of Tax Exempt Status (or 1023 Application) is necessary to obtain the covered “IRS Determination Letter.” This letter informs donors that based on the activities that you stated the organization is or will be engaged in, the IRS has determined that it believes that you are operating within a tax exempt purpose under the Internal Revenue Code. HMS offers a service to complete all of this documentation for a flat fee of $2500 (plus state filing fees).
Personally, I think that one of the best ways to launch a charitable organization is to plan a “launch event.” By this I mean an event that services as a sort of “coming out” party to introduce the organization to the people who will most likely be involved in helping it become a success. A “launch event” is not necessarily a fundraising event. It might instead be an event that simply introduces the mission of your organization and its formation team members (e.g., directors, officers, and staff).
Commencement of Operations
It is important to build on small successes. Identify smaller, obtainable projects or activities at which the organization can “succeed” versus large (and often expensive and risky) ventures that will strain your resources a potentially straddle the organization as being DOA (dead on arrival).
Once you have formed a charitable organization it is important to stay current with state and federal corporate and tax filing requirements so that you do not lose your rights to conduct business or your IRS status as a presumed 501(c)3 charitable organization. HMS monitors this for charities for a quarterly fee of $250.
You could be very surprised at how quickly you could be on your way to starting the charitable organization that you always thought of starting. In the Google, Facebook and social media era that we live in your support base could potentially be all over the world. See for example www.givingfuel.com. If you or someone you know in the Northern California area is interested in starting a charitable organization please contact me. I am providing free one-hour “Planning” consultations to everyone that sees this blog, or my Facebook, LinkedIn, or Twitter feeds. Just tell me how you saw this. And like I said, now just may be the time.
P.S.- If this message is for you, and you are not “Swayed,” I hope to see you at the seminar. Please come as my guest!