 What is Required to Create a Charity?
By Jack Etzel
Most of us have good intentions; however, just because we are ‘good
people’ or we believe in a cause does not mean we are able to suddenly
organize a charity and begin soliciting money. These and similar
matters were discussed ‘charitably’ by Attorney Kathleen Sain of Sain
Law, LLC. Sain is very active in local and regional affairs and
currently serves on the boards of some half-dozen community
organizations in the North Hills and Pittsburgh region. North Hills
Monthly Magazine (NHMM): First, Kathy, when we are greeted by a person
at the door or we read a printed solicitation, how do we know that
when we donate to that charity, we are dealing with a legitimate
organization? Kathleen Sain: In brief, what I typically tell people
is that most states have either a state-run department or a
consumer-based regulatory agency. Here in Pennsylvania, information is
available through the Department of State and the Bureau of Charitable
Organizations. On the Internet, there’s a searchable database where
someone can verify whether the charity has appropriately registered
with the state agency and is properly licensed to solicit donations.
If someone isn't sure whether or not the charity or foundation is
legitimate, it’s relatively simple to verify this information by going
to the state website. NHMM: As well as the state, doesn’t the
federal government have a big say about charities? Sain:
Specifically, the Internal Revenue Service (IRS) and its code sections
govern, regulate and play a large part in the creation and regulation
of any charity. It also maintains a charities and nonprofit search
page on the Internet. There, one can verify if a charity is exempt
from taxation and how much or what percentage of a person's
contribution is tax-deductible. Just because someone says or indicates
that you get a tax deduction when you donate to a charity doesn’t
necessarily make it so. A person should check with the state or the
IRS. NHMM: Most people don’t understand the difference between a
charity and a foundation. Is donating to a foundation the same as
donating to a charity? Sain: That question isn't easily answered,
since there are many forms of nonprofit entities and various tax code
sections that they could potentially qualify under for purposes of
allowing them to be tax-exempt; however, having said that, exempt
charitable organizations are either public charities or private
foundations. NHMM: Then what’s the difference between giving to a
charity and a foundation? Sain: At the risk of over-simplifying it,
the most common one might be a nonprofit entity, a charity if you
will, falling under the Internal Revenue Code Section 501(c)(3). This
is simply a nonprofit organization, usually incorporated, that has
applied for and obtained recognition of tax exemption by the IRS. In
order for the IRS to recognize the organization for this status, it
must be organized ‘for charitable purposes.’ This is not a
black-and-white issue; it gets a bit gray. What constitutes charitable
purposes is defined in the code; however, a case-by-case determination
should be made. Typically, included charitable purposes would be
religious; educational; benevolent (purely charitable); scientific;
literary; testing for public safety; fostering of national or
international amateur sports; or prevention of cruelty to animals and
children. Those categories are taken right from the qualifying code
section 501(c)(3). I know this sounds very ‘legal,’ but stay with me.
On the other hand, private foundations typically do not qualify under
one of the charitable purposes or fall under one of the above
qualifying sections. Instead, they usually have a single major source
of funding or gifts. One example would be the case of family or
corporate foundations which have their primary activity being the
making of gifts to other charitable organizations or individuals.
Gifts received by foundations are usually used for funding of other
foundations, or that particular foundation’s purpose, as opposed to
the actual operation of the entity. NHMM: Does the IRS code section
known as 501(c)(3) cover all nonprofits? Sain: (Smiling) You might
regret asking that. The short answer is “no.” For example, a
501(c)(6), notice the ‘6,’ is also a tax-exempt nonprofit, but
typically donations to an organization which is qualified under this
code section will not be tax-deductible. These are typically
business-type organizations created to improving business conditions.
A 501(c)(6) business may further its exempt purposes through lobbying
as its primary activity without jeopardizing its exempt status.
However, if it does engage in lobbying, it may be required to either
provide notice to its members regarding the percentage of dues paid
that apply to lobbying activities, or pay a proxy tax. Examples of
501(c)(6) organizations include Home Builders Associations and local
chambers of commerce. There are, as you can imagine, various other
code sections for other ‘nonprofits.’ NHMM: Having explained that,
and returning to charities, can anyone set up their own charity?
Sain: That would depend on what their intent is, and what the purpose
of the entity will be. Determining that is the easy part. The answer
is “yes” only if they are diligent in following the various legal and
tax rules and regulations; filing the appropriate forms; insuring that
a person doesn’t solicit donations prior to the IRS determining that
the organization qualifies as tax-exempt; and making certain that it
is set up correctly—legally, tax-wise, and setting up bank accounts
the right way, just to name a few things. If these details are not
followed carefully and completely, it can cause someone's good
intentions to cost a lot of money in addition to causing other serious
problems. NHMM: Wouldn’t a person need a lawyer or an accountant?
Sain: A good idea would be to have both! State information charity
contact: Pennsylvania Department of State
Phone: 1-800-732-0999
Website:
www.dos.state.pa.us/char/site/ Federal Government Contact:
Website:
www.irs.gov/charities/index Kathleen Sain:
Sain Law, LLC.
Phone: 724-933-3100
E-mail: kathy@sainlaw.com |
