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.

Click here for important legal disclaimers.