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How to Start a Charity

September 13, 2016

You have this wonderful idea about how you can help others, and you want to start a public charity to accomplish your goal. Here is how to start.

An exempt charitable organization, also known a 501(c)(3) organization, must operate exclusively for charitable purposes. It must serve a public rather than a private interest, and the activities that it is engaged in must further its exempt purposes. The organization must be created for religious, scientific, literary, educational or other charitable purposes as defined in IRC Section 501(c)(3).

When creating a not-for-profit entity, you must first establish a legal entity under your state’s law. The entity could be a trust, corporation or association. Every state has its own requirements on what is required to create a not-for-profit entity, which may differ from the requirements to create other types of entities. The IRS website provides a listing of contact information, website and phone number, for each state. Here is a link

“Not-for-profit” status is a state concept that may convey benefits such as exemption for state sales, income and/or property taxes. “Tax-exempt” status is a federal tax law concept. Being a not-for-profit at the state level does not automatically make the entity tax-exempt at the federal level.

Once your organization has been created as a not-for-profit entity under your state’s law, you should then apply for federal tax-exempt status in order for donations to your organization to be eligible for tax deductions by the donor. Tax-exempt status will also excuse your organization from paying income taxes on its income from its charitable purpose activities. It will however, be subject to tax on any unrelated business income it may have. Filing for federal tax-exempt status is done by submitting Form 1023 with the IRS. Before filing with the IRS you will need the following documents to submit.

  • Taxpayer identification number (TIN) obtained from the IRS. Here is a link to apply on-line
  • Organizing or enabling documents signed by a principal officer, such as articles of incorporation, articles of organization or declarations of trust.
  • Bylaws if they have been adopted by your organization.

In order for your organization to obtain tax-exempt status from the first day of operation, you need to file Form 1023 within 27 months of the end for the first month it was organized. You can operate as a tax-exempt organization while waiting for IRS approval, but your donors will not have assurance that their contributions to your organization will be deductible until your application is approved. If the application is approved, donors’ contributions made while the application was pending will qualify as charitable deductions. However, if the application is denied the contributions will not be deductible on donors’ income tax return, and the organization will be responsible for filing federal and state income tax returns.

Every state has its own regulations regarding fundraising as well as soliciting donations. These include requiring registration of your organization, special rules when using the services of a paid solicitor or fundraising counsel, gaming activities and financial reporting. You will need to check with each state in which you plan to solicit funds or hold fundraising activities. . Here is a link to the National Association of State Charity Officials. It contains a link to each state’s charities’ website.

Most public charities are required to annually file one of the following forms: Form 990, 990-EZ or 990-N (e-postcard) or if a private foundation, Form 990-PF. Failure to file for three consecutive years will result in automatic loss of your tax-exempt status. Religious organizations are exempt from these filing requirements. If there is unrelated business income Form 990-T must be filed and this includes religious organizations.

The charity will need to provide donors with contemporaneous written acknowledgments for all single contributions of $250 or more otherwise the deduction cannot be claimed. If the donor receives something of value in return for the contribution beyond a de minimis threshold, the organization should describe and give a good faith estimate of the nature and value of the goods or services it provided. If no goods or services were provided, the organization should include statement to that effect in their acknowledgement.

In conclusion, there are many rules and pitfalls involved in creating and running a public charity. This article contains some information to help you get started.

This blog was primarily prepared by Lisa Galinsky, CPA, a not-for-profit organization specialist at WithumSmith+Brown, PC in our Red Bank, NJ office. You can reach her at lgalinsky@withum.com

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