Advising clients on starting a charity
As 2020 marches on with little relief in sight from the crises affecting our region, more and more attorneys, accountants and financial advisors are fielding questions from well-intentioned clients who are exploring starting their own nonprofits to help people in need.
Whether a client's passion is health care access, support for the arts, social justice, or any one of hundreds of other worthy causes, it's critical that you provide counsel regarding the pros and cons of forming a brand new nonprofit.
Here are suggested topics to include in your client discussions:
- For profit, or nonprofit? Help your client decide whether they really, truly want to start a charity, or whether what they’re envisioning would be better structured as a for-profit business. Explain to the client that the rules and tax advantages are different, and so is the way the enterprise is funded. Most charities keep the lights on by securing donations. Businesses keep the lights on by selling goods or services. Either way, you’ve got to pay employees and run a budget. This seems like common sense and something that any astute client would understand, but sometimes even these basic principles are easy to overlook when enthusiasm for a cause takes over.
- The state and the Feds. Explain to the client that if they do decide to start a new charity, just like a business, it still requires setting up a legal entity. Unlike a for-profit business, though, to qualify as a tax-exempt nonprofit, the client will need to apply to the Internal Revenue Service for an exemption under Section 501(c)(3). This exemption is what allows the organization to be free from paying income tax, and it also allows people to donate to the organization and be eligible for a tax deduction on their own tax returns. Again, these rules seem like Charity 101 material, but never assume your client is in the know.
- Sell, sell, sell. Most people who start a charity are passionate about a cause and probably already have programs in place or in mind to help others. The trick, though, is to get out there and share the news about the cause to raise money. Your client needs to be aware that starting a new charity involves "sales," just like a for-profit enterprise, except they most likely will be asking for donations to support their good work instead of selling goods or services like a for-profit business. Certainly nonprofits can generate earned income, but most organizations also should be designed to receive public support in the form of grants and contributions to avoid certain tax rules, such as those prohibiting excess unrelated business taxable income.
- Verify the unmet need. Finally, and perhaps most importantly, encourage your client to research whether there are any existing organizations that are already serving the mission your client intends to fulfill. Indeed, during challenging economic times such as these, best practices suggest that two or more nonprofits combining their efforts is a good way to create efficiencies and ensure more effective service delivery to people in need.
After considering these questions, your client may decide to focus their resources and energy on supporting the work of a charity that is already advancing the cause they are passionate about. Akron Community Foundation's experienced staff is an excellent resource on the local nonprofit landscape and can offer insight into the nonprofits that are moving the needle on key issues in our community. From education and the arts to homelessness and the environment, we know which organizations are collaborating, which ones meet a service gap, and where your clients' philanthropy will be most effective.
If your client prefers to make an outright gift to charity, we have nearly 700 charitable funds at Akron Community Foundation representing a full range of philanthropic interests, including the endowment funds of more than 100 local nonprofit organizations – from Summit Metro Parks to the Akron Civic Theatre to Big Brothers & Sisters and more. We can also help your client establish a charitable fund of their own to support their favorite causes in perpetuity. Your client can even name the fund after their family or company to ensure their philanthropic legacy is continued for years to come.
This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.