The Law Office of Melanie L. Ryan, LLC • 9 Cottage Place, Nutley, New Jersey 07110 • 917.346.6547
Should I form a Charitable Organization?
03/17/2016 - 03:44
It takes a heart of gold to want to start a charity and I give alot of kudos to anyone who is that giving and committed to anything. If you are reading this, you are probably already thinking about fundraising ideas and how great it will be for your cause to be recognized and supported. Great! I commend you...but, I would encourage anyone looking to form a 501(c)3 to read on before you do so....
I have been involved with charities since childhood when I trick-or treated for Unicef. As a young adult I did alot of "Fill in the Blank-a-thon" type fundraisers and...I even once rode a belt sander to raise money for MS...anyway the point is I love giving back and always have. During law school I was asked to help with formation of a 501(c)(3) as the "business/tax person." I loved the combination of using my work experience while at the same time giving something back. Before long I was setting up charitable organizations with the diverse purposes of organ transplantation support, local sports clubs, PTA's at public schools, animal rescue and education. Over the years, I learned a few things worth sharing and that's why I asked you to continue reading...here are a few questions to ask yourself about your proposed organization and if you really need/want a 501(c)3 to accomplish your goals. I also have a Q&A regarding the IRS application procedure, which you can request via my web page.
1. What do you want to fund/support?
To qualify for 501(c)3 status as a charitable organization, your purpose must be for the PUBLIC good, not the benefit of any one particular individual or someone related to you and your family. Simply put, you can raise funds for XYZ disease that a family member has and transfer those funds to a public entity like the XYZ foundation, but you cannot form a charitable organization for the sole purpose of paying the medical bills of your family member with XYZ. There are other ways to raise funds directly for a stricken individual or family member, but 501(c)3 is not the way.
2. How do you intend to raise funds?
One of the primary reasons for seeking 501(c)3 status is tax exemptions for donors. If you are seeking funds/grants from foundations, other charities, corporations, then you will probably need 501(c)3 status. Deductibility of contributions is a huge consideration for corporations. Another thing to keep in mind when soliciting contributions is that when hosting an event like a golf tournament, the deduction will only be the entry cost net of the fair market value (FMV) of what you received. Accordingly, you might incur more administrative costs in calculating FMV and providing the required disclosures to participants than you expect.
3. What is your long term plan?
Forming a charitable organization means you are taking responsibility for an "existing entity." There may be tax benefits and other advantages to 501(c)3 status, but you are still responsible for an organization - and by this I mean accounting, recordkeeping, annual filings, etc. Before you apply to the IRS, you must form a legal organization at the state level. The ongoing requirements of the IRS and your state should be considered.
Please consider these questions when deciding whether or not forming a charitable organization is the right solution for you. If you are interested in more information or would like the Q&A, send me an email and I will be happy to work with you. Again, I commend you on your charitable interests.