I think most people dream of doing more charitable work and giving to others. It’s an amazing feeling to lift and bless another. For some, just donating some time and giving what they can financially is all they can do, and there is certainly nothing wrong with that. Oh, how the world would benefit if more of us could just do a little something more to help others in charitable ways.
But for others, their dream is a little more grand. Some have the goal to start their own charity. Create their own 501(c)3 or charitable organization. A project that they can control with a board of directors, have fundraisers and events, and maybe even do a little more to impact our society and those in need.
I’m writing this article for those ambitious souls that want to start a legitimate non-profit charity.
At it’s most basic level a charity begins as a corporation. It has articles, bylaws, minutes and most importantly an independent board of directors. The unique aspect to a non-profit corporation, is that there are no owners; no shareholders. That’s because there isn’t any ‘profit’ to distribute. The goal of the non-profit is to help the world be a better place and re-invest it’s profits.
First, the Bad News- the Regulations and Rules to Operating
Now it might seem that it’s pretty straight forward: make money, get donations, do something good to help the public, the end. However, with the IRS, and especially an entity where you don’t get taxed, nothing is ever easy. There are some important rules and regulations. Here are just a few to understand as you contemplate setting up a charity structured as a 501(c)3 non-profit:
- The entity must show through its policies and procedures that it is serving the general public good in a specific way.
- There can’t be any transactions with officers, board members, employees or related organizations where they receive excessive compensation, free services or benefits from the charity in an inappropriate manner.
- The non-profit entity cannot participate in any political or substantial lobbying activity. For example, the entity can’t make contributions to political campaign funds or promote a particular candidate for office.
- The charity is of course allowed to receive donations, but it can also sell products, rent property or perform services for compensation. However, whenever it earns this type of income ‘unrelated to its exempt purpose’, the charity actually has to pay taxes on that net-income (known at UBIT).
- Yes, a non-profit can make money and it will have to in order to survive and carry out it’s purposes, but the funds (after any potential taxes) are reinvested to serve the charity.
- Finally, although the non-profit is exempt from certain taxes, it still must file a federal tax return (so the IRS knows what is going on), and must also pay employment tax, excise tax, and potentially property tax or local taxes if they don’t obtain a specific exemption.
Now the Good News!!
Once you are up an operating, a non-profit can be an amazing entity to operate and be a part of. I have served on several 501(c)3 boards over the years and they are truly some my most fondest memories from being in business. Here are some of the ‘perks’ for lack of a better word:
- Donors get a tax deduction for giving your organization money and you don’t pay taxes on the donations or grants you receive.
- You and your board control how the funds are spent and distributed to the public purpose of the charity. For example, you may not have been pleased how your money was spent when you donated to the college, the hospital, United Way or even the Salvation Army. However, with your own non-profit you make the calls and decisions (with your board) regarding how the money is spent and invested for the charitable purpose.
- Your non-profit entity may get special discounts from other for-profit businesses in the local area, and oftentimes benefits you would never get with your own business or as an individual.
- You get to associate with people that may not normally give you their time or energy. When you direct or simply participate in a non-profit you will typically associate with more affluent or successful people (because they generally have the time and money to be involved). These relationships can bless your life personally, but may even improve your business or financial contacts.
- Limited liability for directors, officers, employees, volunteers and members. This provides incentives to those asked to serve the organization on the board or as volunteers.
- You get to be a part of amazing fund raising events, black tie affairs, publicity events, golf tournaments, and get to work with the media, public officials and often times celebrities.
- Bottom line, you help people. You make the world a better place and it changes you. It makes life more tolerable and down right special at times. It certainly can give you meaning in life.
How Can I get Started Now?
We are constantly helping many of our clients set up their own 501(c)3 non-profit charity. It’s affordable, taking into account the enormous amount of paperwork and time to get it approved (approximately $3,000+ filing fees)…and better yet, the organization can reimburse you for the fees to set it up with donations it receives now or in the future.
Here is some of the information we typically ask for at the outset of setting up a charitable organization and will certainly get the set-up process well under way:
- A name for the organization, and the company address and contact information typically needed to set up a standard corporation.
- At least 5-7 members to serve on the Board of Directors. We’ll need their addresses, social security numbers, titles and the role they will play in the organization.
- Your mission statement, charitable purpose and goals for the company.
- How you plan to raise money and a tentative budget for the first 3 years.
- Your URL and Website should be set-up to reflect the information above and be a direct reflection of your goals and your application to the IRS.
As you can imagine, there is a lot more to it than that, but the law firm you work with for the set-up of the organization should provide multiple phone calls and consultations to help you through the process and answer all of your questions. We even start out with a 2-3 page Memo of all the information we will need and direction on how to start operation your charitable organization.
In sum, I just want to say that if you have this dream to start a non-profit, please don’t give up on it. If it was easy everyone would do it. Sometimes your greatest legacy can be what you do for your fellow man or woman and helping lift another in need.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.