Q. WHAT'S THE FIRST THING TO DO WHEN STARTING A NEW CHARITY?
ANS. Before doing anything else, survey the "competition." Investigate to determine if there are other charities in the geographic area in which you will operate that already perform the service that your organization plans. You must take a hard look on how you'll compete with those charities for "clients," donations and resources within your community. There may be well funded national organizations which closely track your charitable mission. Consider starting a local chapter of the national charity, or if there's a local organization with the same mission as yours, consider "piggy backing" yours onto theirs.
Q. DO I NEED A WRITTEN BUSINESS PLAN FOR MY START UP CHARITY?
ANS. Most definitely. Starting a nonprofit is complex. You cannot just have a great idea and a local need for "clients". You should not haphazardly search for funders. You need a written business plan. Why do you need one? For-profit start ups have one to give to potential investors. Nonprofit leaders also have a responsibility to get ready to open business. The IRS will ask a significant number of questions about your start up. The business plan becomes a "sales tool" to give out in your community, and to potential donors, both individual and government/private foundation. Check under the General Category of "Nonprofit Resource Links" on my website for examples and "how to's."
Q. THERE ARE MANY CHAPTERS OF OUR START-UP NONPROFIT ORGANIZATION. DOES EACH HAVE TO FILE ITS OWN APPLICATION FOR TAX EXEMPT STATUS?
ANS. Not necessarily. A "group tax exemption" would be an administrative convenience which avoids the need for each of the chapters to apply for exemption individually. The central organization must have chapters, called "subordinate organizations" in tax jargon. The subordinate organizations typically all have similar structures, purposes and activities. To qualify for a group exemption, the central organization and its subordinates must have a defined relationship. The subordinates must be affiliated with the central organization; subject to its general supervision and control; and the subordinates must all be exempt under the same paragraph of IRC 501(c). The central organization must submit a letter to the IRS on behalf of itself and its subordinates to verify the existence of the required relationship; provide a sample copy of a uniform governing instrument adopted by the subordinates; supply a statement that the subordinates have furnished written authorization to the central organization; and provide other pertinent information. The central organization in a group exemption does have additional administrative requirements not imposed on a "stand alone" tax exempt organization. The central organization is responsible for ensuring that its existing subordinates continue to qualify as exempt; must verify that any new subordinates are exempt, and update the IRS annually on changes in the membership of the subordinates, such as address changes and existence changes. The central organization may require either that the subordinate organizations file their own IRS information tax returns, or may file a consolidated return on behalf of all, or some of, the subordinate organizations.
Q. WHAT HAPPENS AFTER I SUBMIT OUR ORGANIZATION'S 1023 APPLICATION FOR EXEMPTION TO THE IRS?
Ans. After receiving an application, the IRS Exempt Organizations division takes one of three courses of action. These actions do not include either losing the application or failing to respond. Persistence is necessary to keep after a case that may seem lost or inactive. To ensure that the IRS receives the application, make sure you send the application by certified mail (return receipt requested) or Fed Ex, UPS, etc. In any case, the IRS sends a notice (usually after 30 days) that it has received the application. The first course of action is one some people have experienced: the IRS returns the application as incomplete. Returned applications usually contain a written explanation from the IRS. At this point, most people supply the additional information and resubmit the application. For organizations requesting IRC Section 501(c)(3) status, the IRS will give the organization additional time to supply the missing. Upon receiving what it considers to be a complete application, the IRS grants exempt status, asks for clarification or more information, or says that the application will be assigned to an examiner. In the latter case, the IRS currently has a six month backlog of applications to be assigned. The IRS's action of ultimately granting or denying an organization's request for exempt status takes two forms. If the IRS Exempt Organizations' "Determinations Office" or the "Appeals Office" decides the organization is tax exempt, they issue a "determination letter." That's the letter which tells the entire world your organization is tax exempt and can receive tax deductible contributions and grants. The Determinations Office, however, can refer a case to their "Technical" division if the case presents a new question not answered by legal authority or the IRS internal procedures require it. If the Exempt Organizations "Technical" division decides the case, then the letter issued is called a "Ruling." It has the same effect as a "determination letter." Most organizations deal only with the Exempt Organizations Determinations Office when they initially seek exempt status. As a result, most IRS actions originate at that level. If an organization's application is turned down, it usually can seek at least one level of administrative review. The IRS has created a system of administrative review that ensures that most "adverse" actions are subject to one level of review. The purpose of the review is to give cases a "second look" by someone in the IRS who was not involved in the original review.
Q. CAN MY ORGANIZATION START RAISING FUNDS WHILE ITS 501(C)(3) APPLICATION IS BEING EXAMINED BY THE IRS?
ANS. Yes, you can raise funds pending determination of your tax exempt status, but make sure to check your state laws on soliciting contributions first. If granted, your exempt status will relate back to the date of formation of your organization, and you will then be able to give receipts for tax deductible donations. But, until that status is granted by the IRS, you can't indicate, or imply, that any contributions are tax deductible. You should be up front with donors, and give them a written statement that you've not yet been recognized under the tax laws as a charity and that your application is pending. You may also put in your statement that if granted, exempt status will relate back to a date when your organization was created, such as its incorporation date.
Q. WHAT HAS EXPERIENCE SHOWN TO BE THE MOST IMPORTANT THINGS TO DO IN OUR FIRST YEAR OF OPERATION?
ANS. Networking to establish relationships. Many will pay off in the years to come. Sharpen the mission of your charity. Create a website that will excite donors. Find a CPA familiar with nonprofit accounting. Establish a computerized donor database. Hire or obtain volunteer administrative help, and don't be afraid to ask for money.
Q. I HAVE A GREAT IDEA FOR PROVIDING A BADLY NEEDED CHARITABLE SERVICE IN MY COMMUNITY. IF I MAKE PRESENTATIONS TO EXISTING CHARITIES, WHAT'S TO PREVENT THEM FROM TAKING MY IDEA?
ANS. The only "sure fire" way to prevent this would be for them to agree to sign a confidentiality agreement before making your presentation.
Q. IS THERE A SPECIFIC NUMBER OF BOARD MEMBERS I SHOULD HAVE?
ANS. In Florida, a nonprofit corporation must have at least three members of the board of directors. It's always a good idea to have an odd number of board members, to prevent deadlocked votes. Generally, the smaller the board, the better the governance and management. Large boards can become unwieldy and "cliques" can develop. Advisory (nonvoting) boards are useful for and specific expertise in the services your organization provides, or the services it needs, such as investment or management experience.
Q. CAN MY STARTUP CHARITY PAY ME A SALARY?
ANS. It's usually best at the beginning of operations for the "founder" of the charity not to take a salary in his or her capacity as a member of the Board of Directors. There are "inurement" tax problems which could develop, and which increase the chances for audit. As time goes by, and you still feel a salary for you is warranted, then you should ask your board if you can become an employee of the organization in addition to being a director. If the Board grants your request, then it should take a salary survey of the amounts paid in your community to persons in similar positions, to properly document the amount which your board may determine as salary. Salary surveys can be obtained by subscribers to The Chronicle of Philanthropy, www.philanthropy.com, which is an excellent overall resource for all charitable organizations.
Q. IF I START A RELIEF FUND AT A BANK FOR ONE INDIVIDUAL OR HIS OR HER IMMEDIATE FAMILY, WILL I BE ABLE TO TELL DONORS TO THE FUND THAT THEY CAN TAKE INCOME TAX DEDUCTIONS FOR THEIR CONTRIBUTIONS? DO I NEED ANY PAPERWORK FOR THE FUND?
ANS. Under these circumstances, the IRS will not grant tax exempt charitable status to the fund, as it is established for the relief of only a single person or family, and not a broad class of deserving recipients. Without this tax exempt recognition by the IRS, contributions to the fund are not tax deductible. Please also make sure that a proper trust document is prepared, as the bank will require this to set up the relief account.
Q. SHOULD THE CHARITABLE ORGANIZATION I'M CREATING HAVE MEMBERS?
ANS. It depends. If your organization has many volunteers from diverse geographic areas, most of whom contribute their time on a regular basis, then perhaps allowing each to become a member would give them more of a sense of belonging. If maintaining control by the founders or a small group of directors is important, then perhaps having a voting membership is not a good fit. If you determine that a membership organization is best for your charity, then Florida law requires that your articles of incorporation or bylaws set out the designation of how someone can become a member and the rights of each member. Perhaps the most important consideration regarding members is their voting rights, which determine the extent to which members have a say in the operation or policy of the organization. Experience has shown time and again that giving the membership voting control over major decisions is a serious impediment to the future well being of the organization. In these times of rapid changes in the nonprofit landscape, sometimes quick action is required. It can be cumbersome and costly to have the membership vote on needed actions. In Florida it is permissible to have non-voting members. That just has to be set out in your corporate documents, preferably in your bylaws, not in the articles of incorporation.
Q. MY ORGANIZATION WANTS TO HOLD A RAFFLE. HOW DO I DO IT?
ANS. Florida law places many requirements for raffles. These are found in Florida Statutes Section 849.0935. First off, your organization must have received IRS Tax Exempt Status under Internal Revenue Code Section 501(c) (3), (4), (7), (8), (10) or (19). Any advertisements or tickets must disclose, among other things, these items: rules of the raffle; source of prizes; date and time of drawing and that no purchase is necessary to win the raffle. This means the organization holding the raffle can't charge for the tickets. Rather, they must "ask for a donation" instead. Violations of these requirements are second degree misdemeanors.