How Can Nonprofits Remain Compliant?
When funds are donated to a charitable cause, there are expectations that they will be used to support the mission at hand. Donors often seek a tax deduction for their contributions and the organization receives a financially beneficial tax status. For this reason, added oversight and regulations are required to protect the public and the nonprofit sector. This requires charitable organizations to comply with specific regulations and processes.
Why compliance is important
The best time to protect your charitable work or project is now! There are strict guidelines around receiving tax-deductible donations, and you want to avoid penalties or revocation of your nonprofit status. Most projects and charitable causes will either partner with a fiscal sponsor, and operate under the sponsor’s 501(c)(3) status, or register as an independent 501(c)(3) organization.
Compliance guidelines
Operating as a compliant charitable organization means that you are operating within set guidelines. The main criterion is that charitable organizations cannot operate in a way that benefits the personal interest of an individual or private shareholder. Financial records are subject to public review and net earnings must not benefit private interests but must be used for specific exempt purposes. There are also strict limitations around lobbying activities and legislative action, such as the activities of 501(c)(4) organizations.
One of the main benefits of remaining compliant is the ability to solicit and receive tax-deductible contributions and maintain grant eligibility.
Keep your charity compliant with Ribbon.
Ribbon gives you the tools your organization needs to maintain compliance.
What does it take to be compliant?
To qualify as a 501(c)(3) and get tax-exemption status, most states require the organization to first file articles of incorporation with their Secretary of State and designate an individual person as the nonprofit’s representative. Incorporating alone does not grant the organization tax-exempt status.
Next, you must register with the IRS, and wait to receive approval.
IRS approval generally takes 6-12 months from the time you file till you receive tax-exempt status, though wait times have increased in recent years. With Ribbon, you can cut that time drastically by opting into a fiscal sponsorship.
Since your fiscal sponsor is already registered with the IRS, fiscal sponsorship can happen quickly rather than take months. This means you can start receiving tax-exempt donations and helping your organization sooner.
How much does it cost to maintain compliance?
Initial IRS registration will cost around $600, with a more realistic cost ranging from $1,200 to $5,000. There are yearly forms that must be filed, each with fees attached. These fees are part of the cost of ensuring that your charitable organization remains compliant. While the $600 filing fee is processed with the IRS, organizations might spend additional amounts of money for legal consultations, hiring accountants, or validating their business plans.
Using Ribbon reduces the time and money required to start your nonprofit and to maintain operations. Our platform saves you the cost of hiring legal and business experts to navigate you through the incorporation process.
Maintaining Compliance While Soliciting Donations
Soliciting donations is a regulated activity. Before you ask for donations, you must file registration forms with your state. This can sometimes include registering in all states that require charitable solicitation registration.
Here’s what the National Council of Nonprofits has to say about soliciting donations:
“Ultimately, an organization should register in its state of incorporation, any state(s) in which it has a physical presence, and any state(s) in which it targets state residents or has ongoing contact with state residents. If an organization is using a webpage to solicit donations, the organization will need to consider its target audience and monitor the sources of its donations. Further, a follow-up email or letter to a state resident following an online donation would be considered active solicitation that triggers registration. Often large charities may choose to register nationwide rather than go through the process of analyzing the sources of income and donations received by various states’ residents, but this is not necessarily the preferred approach for every organization.” Does My Nonprofit Really Have to Register Before Asking For Money? What you need to know about fundraising regulations.
Common forms of solicitation include a direct mailer or email to your list of supporters, while new forms of solicitation include donation buttons on your website or donation forms or posts on social media platforms.
Maintaining compliance
To make compliance easier, your organization will need to keep up-to-date financial records and file appropriate paperwork on time each year. Failing to do so can result in fines of up to $10,000 and revocation of tax-exempt status.
Annual renewal registration at the state level and federal filing requirements must also be met. Be sure to check with your specific state, as each state has different requirements. Additionally, you may need to file in each state if your organization is soliciting donations.
Compliance is necessary to continue to operate in the full capacity of a nonprofit organization. Maintained 501(c)(3) status is a mark of transparency and worthwhile so nonprofits can protect themselves and continue their mission-critical work.
