Starting a charity: An overview of costs, re­quire­ments, and pro­ce­dures

Whether for the common good or for private interests: Char­i­ta­ble or­ga­ni­za­tions are a good in­vest­ment for wealthy people who want to make their money work for a good cause. But what do you need to start a charity? Initially, you need the will to do it. Every­thing that goes beyond this can be found in our guide.

Prac­ti­cal­ly anyone can set up their own charity – including in­di­vid­u­als from the age of 18 (these make up a big per­cent­age of charity founders) as well as legal persons like companies and legally-capable or­ga­ni­za­tions. The re­quire­ment, though, is that you possess (enough) char­i­ta­ble assets. Apart from this, there are no other special re­quire­ments.

But before you rush into the founding process, you should ask yourself these important questions:

• Do I have a clearly defined char­i­ta­ble mission in mind?
• Is there a need for the services that my charity could provide?
• Am I willing to con­tin­u­ous­ly invest my private assets for the good of the charity?
• Do I want to take part in day to day charity work or limit my in­vest­ment to the foun­da­tion of share capital?
• Do I feel ready to take on the re­spon­si­bil­i­ty of founding and managing the charity?
• Or do I want to perhaps invest in or donate to an already existing charity, or pass my assets over to a trustee?

Your answers to these questions will also help determine how high the share capital for founding the charity has to be and which legal form will best suit its purpose.

Every charity needs a clear goal that you subscribe to with all your assets and efforts.

Public charities are the largest category of the more than 30 types of tax-exempt nonprofit or­ga­ni­za­tions defined by the Internal Revenue Code. They account for more than three quarters of revenue and expenses for the nonprofit sector and include arts, culture, and hu­man­i­ties or­ga­ni­za­tions; education or­ga­ni­za­tions; health care or­ga­ni­za­tions; and human services or­ga­ni­za­tions. Since these kinds of charities have direct benefits for society they are exempt from paying federal income taxes. Donations to charities are therefore also tax-de­ductible expenses that can reduce your taxable income. However, you must con­tribute to a qualified tax-exempt or­ga­ni­za­tion with a 501(c)(3) tax-exempt status. The IRS provides a search tool to check the status of an or­ga­ni­za­tion.

Private foun­da­tions, on the other hand, do not solicit funds from the public and instead are funded by a single source, such as an in­di­vid­ual, family, or cor­po­ra­tion. If the foun­da­tion does not support char­i­ta­ble, ed­u­ca­tion­al, religious, or other ac­tiv­i­ties serving the common good, then it cannot qualify for US tax exempt status.

No matter which goals your charity is committed to: Consider that once you’ve defined your charity mission it can only be amended in certain cases. Amend­ments to your mission state­ments will usually not jeop­ar­dize the or­ga­ni­za­tion’s tax exempt status as long as it remains con­sis­tent with its tax exempt purposes and the change is disclosed to the IRS.

For this reason, you should keep in mind not to make your charity mission statement too specific. By for­mu­lat­ing a more general, evergreen statement, you can make sure that your charity can flexibly adapt to future de­vel­op­ments and tasks, without having to consider an overhaul of its purpose. Foun­da­tions with a limited shelf life can take a more relaxed stance on this.

There are no legal re­quire­ments in terms of what is required in assets for your charity. But it must fulfil the re­quire­ment to ef­fec­tive­ly meet the goals of your mission statement. Com­pli­ance re­quire­ments must meet both the state and federal level, and include a corporate annual report, IRS Form 990, and state char­i­ta­ble so­lic­i­ta­tions reg­is­tra­tion and renewal.

Most small tax-exempt or­ga­ni­za­tions with gross receipts that are $50,000 or less must file the IRS form 990-N known as the e-postcard. If a public charity’s gross receipts are between $50,000 and $200,000, and if its total assets are less than $500,000, the or­ga­ni­za­tion can file either form 990-EZ or form 990. If a public charity’s gross receipts are greater than or equal to $200,000, or if its assets equal or exceed half a million dollars, the or­ga­ni­za­tion must file form 990. Re­gard­less of income and assets, all private foun­da­tions must file form 990-PF.

Charity funding sources can stem from grants from local, state, and federal gov­ern­ments, but generally speaking charities are funded by in­di­vid­u­als, bequests, foun­da­tions, and cor­po­ra­tions. In 2017, char­i­ta­ble giving surged to an estimated $410 billion, in­creas­ing 5.2 percent from 2016. Think about it: When you start a charity, you forever cut yourself off from your assets. After all, donors want their money to go to the ultimate ben­e­fi­cia­ries.

There are many types of nonprofit or­ga­ni­za­tions, many of which don’t benefit the general public (like homeowner as­so­ci­a­tions or clubs). The non­prof­its that do benefit the general public (charities) are the best known type of nonprofit. When setting up a charity, there are two main dif­fer­ences in or­ga­ni­za­tion types:

This “classic” charity types usually receives a greater amount of financial support from the general public or gov­ern­men­tal units and benefits from greater public in­ter­ac­tion. Public charities include hospitals, schools, churches, and or­ga­ni­za­tions that make grants to others.

This type of charity is usually con­trolled by a select group of people, drawing funds from one sig­nif­i­cant source, like a family or a cor­po­ra­tion. To ensure that they are active and benefit the public, private foun­da­tions are required to make an annual dis­tri­b­u­tion of 5% of their prior year’s average net in­vest­ment assets.

While the specific re­quire­ments for setting up a char­i­ta­ble or­ga­ni­za­tion or nonprofit vary from state to state, there are some basic re­quire­ments that all share in their so-called “Articles of In­cor­po­ra­tion”:

• Name: While each state has specific re­quire­ments, your or­ga­ni­za­tion name should be unique and not mislead consumers.
• Existence: Will you or­ga­ni­za­tion exist per­pet­u­al­ly (without a specific end date) or are you planning a fixed existence?
• Effective date: This is the date of your charity’s official creation. Usually this is the same as the filing date, but some states allow a delayed effective date.
• Members: Will your or­ga­ni­za­tion have any members? These must have a formal re­la­tion­ship to the or­ga­ni­za­tion, for example, with a right to vote for stake­hold­ers.
• Cor­po­ra­tion type: Are you forming a public benefit, mutual benefit, or religious cor­po­ra­tion?
• Reg­is­tered agent: This is an in­di­vid­ual or business au­tho­rized to receive legal notices on the behalf of your or­ga­ni­za­tion. This must include a reg­is­tered name and a physical location.
• Principal office: The official address of your or­ga­ni­za­tion.
• Mailing address: If this is different from your principal address, it should be listed here.
• Directors: Although this number varies by state, usually you can list at least three names here.
• In­dem­ni­fi­ca­tion: This article secures or­ga­ni­za­tion members, directors, employees, etc. against personal liability
• Purpose: Here you describe your or­ga­ni­za­tion’s purpose using specific tax-exempt language by the IRS. Contact your state office for a template of bylaws to use.
• Pro­hib­it­ed ac­tiv­i­ties: To obtain 501(c)(3) status, you must state that you will per­ma­nent­ly dedicate the or­ga­ni­za­tion’s income and assets to IRS-approved nonprofit purposes without engaging in sub­stan­tial lobbying or any political campaign activism.
• Dis­tri­b­u­tions upon dis­so­lu­tion: Income and assets may never benefit the directors, members, employees, including when the or­ga­ni­za­tion shuts down.

Once you have gathered all your documents for the Articles of In­cor­po­ra­tion, then this should be filed at state level. Usually this involves the secretary of state or an equiv­a­lent state agency. On the website of the National As­so­ci­a­tion of State Charity Officials you’ll find contact details are listed per state.

However, to of­fi­cial­ly start a charity, not only does the state have to approve your nonprofit articles. Once your or­ga­ni­za­tion of­fi­cial­ly exists, you need to get a federal EIN (employer iden­ti­fi­ca­tion number) from the IRS, open a bank account, apply for 501(c)(3) status with the IRS, and then register as a charity. The legal re­quire­ments needed to do all this are listed on the IRS website section on charities and non­prof­its.

If you want to start a religious or­ga­ni­za­tion, then the ap­pli­ca­tion process is the same. However, in order to be exempt from taxes, certain re­quire­ments must be met:

• The or­ga­ni­za­tion must be organized and operated ex­clu­sive­ly for religious or other char­i­ta­ble purposes
• The net earning must not benefit any private in­di­vid­ual or share­hold­er ex­clu­sive­ly
• No sub­stan­tial part of the or­ga­ni­za­tion’s activity may be the attempt to influence leg­is­la­tion
• The or­ga­ni­za­tion cannot intervene in political campaigns
• The or­ga­ni­za­tion’s purpose and actions cannot be illegal or violate fun­da­men­tal public policy

The time it will take to receive tax exempt status is difficult to pin down, although you can expect a pro­cess­ing time of at least three months. In addition, it’s important that you submit your ap­pli­ca­tion within 27 months from the end of the month you first formed your charity. As to the question whether starting a charity will cost you, the answer is: yes. Filing fees amount to $600, re­gard­less of your or­ga­ni­za­tion’s projected income.

Only once the entire gov­ern­ment recog­ni­tion process is complete should you transfer money to your charity account. This is es­pe­cial­ly true if your project involves a char­i­ta­ble nonprofit. Only once your charity of­fi­cial­ly exists can you deduct your capital in return for a donation receipt from your taxes.

When a charity trustee is involved, then the transfer should also occur only after the charity has been formed and rec­og­nized by the state.

Charity trustees are sometimes referred to as dependent charities, because the founder doesn’t cover the setup (and man­age­ment) them­selves, and instead a charity trustee delegates. This role can be taken on from a diverse array of service providers, for example for the operation of a science foun­da­tion, you might consider uni­ver­si­ty pro­fes­sors or research in­sti­tutes.

Contrary to the above mentioned legal struc­tures, deciding on a charity trustee does not require any in­volve­ment from the state. A bylaw isn’t nec­es­sar­i­ly required, either. Thereupon, the founder transfers the agreed upon share capital to the charity trustee, who then manages it (sep­a­rate­ly from his own assets). This model is par­tic­u­lar­ly suited to novice founders with little ex­pe­ri­ence in managing a charity, or if they simply want to spare them­selves the effort. Another reason could be that the available money isn’t enough for an in­de­pen­dent setup.

If you do however happen to change your mind further down the line, and would like to become more actively involved in the charity, then this is also possible. The pre­req­ui­site is that you can prove you meet and un­der­stand the legal re­quire­ments. Then you can turn a charity back into an in­de­pen­dent charity or dissolve it entirely.

If you only want to con­tribute fi­nan­cial­ly to a charity, then your work is done. Now you can lean back and watch the charity develop.

If you’ve decided to actively par­tic­i­pate in a charity (and have the as­so­ci­at­ed voting rights), then day-to-day charity work is about to hit you:

• The board of directors must focus all of its efforts on its char­i­ta­ble goal and how to reach it.
• In ac­cor­dance with the Articles of As­so­ci­a­tion and their confining guide­lines, the assets must be invested in a prof­itable way. This involves making sure that the in­vest­ment strategy is regularly realigned, to be ever prepared to shifts in con­di­tions in the capital market.
• Funding projects must be planned and im­ple­ment­ed.
• In char­i­ta­ble or­ga­ni­za­tions, ad­ver­tis­ing and fundrais­ing are important work tasks.
• Not to be forgotten: ac­count­ing. Make sure that several board members submit their tax returns in a timely manner.

In every­thing that you do, know that the au­thor­i­ties are watching your every move. The most important thing is ongoing com­pli­ance with federal and state laws, so that you can guarantee that you’re always working towards your charity’s purpose. While the state may not intervene in decisions made within your or­ga­ni­za­tion, changes to your Articles of In­cor­po­ra­tion, a merger with another charity, or the dis­so­lu­tion of your charity must first be approved.

The board of stake­hold­ers in turn have a strict oblig­a­tion to provide in­for­ma­tion to the governing bodies. Part of this is making sure that annual accounts are filed in a timely and accurate manner as well as main­tain­ing an annual agenda of business. The state is always in a position to request in­for­ma­tion or an in­spec­tion of files.

If a violation of law or of the join statute is found, then the IRS will be obliged to intervene. For example, charities are pro­hib­it­ed from engaging in leg­isla­tive or political lobbying exceeding 10 to 20 percent of the or­ga­ni­za­tion's resources and assets, and then only if the leg­is­la­tion in question is related to the group's ac­tiv­i­ties. Violating this ban may result in denial or re­vo­ca­tion of the or­ga­ni­za­tion’s tax-exempt status, as well as an excise tax on the amount of money spent on the activity.

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