How to Legally Accept Donations - Legal Guidelines for Accepting a Donation

How to Legally Accept Donations - Legal Guidelines for Accepting a Donation

Running a nonprofit and accepting donations while staying in compliance with a myriad of legal considerations is no easy task. Even if you’re just starting your nonprofit and only receiving a handful of donations, staying on top of all the federal laws and state regulations regarding charitable giving can sometimes feel like a full time job itself. That’s why we’ve created this article to guide you through all the requirements so your tax-exempt status is never in jeopardy.

Under federal law here in the U.S.A., most nonprofits look to secure and maintain their 501(c)(3) status, as designated by the IRS, so they don’t need to pay income taxes and are able to issue tax exempt receipts to their donors. But this status does come with certain limitations and mandates that the nonprofit's activities must strictly align with its charitable purpose.

In order for the IRS to understand where your money is coming from, any donation above $250 must come with a written acknowledgement detailing the amount of cash or any property donated, along with any goods or services that were exchanged for the donation. Your organization will also need to file annual information returns with the IRS, such as Form 990, which are public records disclosing financial information, board members' names, and compensation for your highest-paid employees.

There are also state laws that will need to be adhered to, as many states require nonprofits soliciting donations to register with a state regulatory agency, which varies by state. This could be the Attorney General's office or a specific department of state, and the requirements for each state can be very different than another. Then there are special permits or licences for certain fundraising events like raffles or bingo that may fall under certain gaming laws that certain states set forth.

All of these legal requirements can seem like a massive hurdle for any charitable organization trying to get off the ground, but it’s not as difficult as it all sounds as long as you follow some basic nonprofit accounting principles in mind, and follow all the rules and regulations that will be discussing below. If you are completely new to the nonprofit sector, it may be advisable to seek the guidance of a legal professional specializing in nonprofit law to be sure you have covered all your bases.

Setting up a Trust, Corporation, or Unincorporated Association for Tax Exemption

Although many nonprofits are in essence a ‘corporation’, under the IRS’ guidelines you can also opt to form a trust or unincorporated association for your charity and still seek 501(c) status. And while each form of entity is a bit different, there are a few steps all of these types of formations will be required to go through. We’ve broken down all of the steps by entity type, and ended with the all inclusive steps.

Which way you choose to form your nonprofit will largely depend on your end goals. If you’re looking to form a social club or similar, then an unincorporated association is probably enough and you’ll be seeking 501(c)7 status. However, if you want to form a mental health charity and perhaps expend to offering medical support someday, it’s best you start with a full corporation unless otherwise advised by a nonproft attorney or accounting firm.

1. Trust

  • Formation: A trust is established by a grantor that decides what the trust will do with the assets given to it. The mission of a trust is often extremely specific, like offering scholarships to handicapped individuals, or neutering and spaying animals in a small geographical location. Trusts also often allow for greater privacy than corporations, as they may not be required to disclose as much information publicly.
  • Apply for Tax Exemption: To obtain tax-exempt status, the trust must apply to the IRS by filing Form 1023 or 1023-EZ (for smaller charities). The application should detail the trust's purpose, structure, governance policies, and how it plans to operate in accordance with tax-exempt purposes.
  • State Compliance: Trusts may also need to register with state agencies, depending on their activities and the state's requirements. Please look into your state’s guidelines for more information.

2. Corporation

  • Incorporation: Many current charitable institutions are created as corporations as they offer the best opportunities for growth even though they are not about profit. The first step in forming your corporation is to incorporate the entity under state law which typically involves filing articles of incorporation with the state's secretary of state office and creating bylaws that govern the corporation.
  • Board of Directors: After you have incorporated your entity with the state you reside or plan to do business in, you should appoint a board of directors in accordance with your bylaws. The board will have the responsibility for overseeing the corporation's activities and ensuring it operates for its exempt purpose.
  • Apply for Tax Exemption: Like trusts, corporations seek federal tax-exempt status by filing Form 1023 or 1023-EZ with the IRS. This application includes detailed information about the corporation's purpose, activities, governance, and finances.
  • State Compliance: Corporations may need to register with state charity officials, obtain state tax exemptions, and comply with state regulations regarding nonprofits.

3. Unincorporated Association

  • Formation: An unincorporated association is formed through an agreement between its members to pursue a common nonprofit goal such as a sports team or an outreach ministry. Though less formal than a corporation, your unincorporated association will still need to adopt bylaws and have a mission statement to guide its operations.
  • Apply for Tax Exemption: Unincorporated associations need to apply for tax-exempt status by filing Form 1023 or 1023-EZ with the IRS just like the two other types of entities.
  • State Compliance: While unincorporated associations have fewer formalities, they must still adhere to applicable state laws, which may include registering with state agencies and following specific regulations for fundraising and operations.

General Steps for All Entities

EIN: Regardless of the type of entity you choose to propel your charitable endeavors, all entities need to obtain an Employer Identification Number (EIN) from the IRS before applying for tax-exempt status.

Exempt Purpose: Your organization must follow the guidelines set out by the IRS. This direct quote is from their website and we’ve included a link so you can find additional information if you are still unsure if your organization meets their requirements. Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).

Documentation and Compliance: In order to never jeopardize your tax-exempt status, lifelong compliance is mandatory and properly documenting all of your finances and activities is required. This includes annual filings with the IRS (such as Form 990) and, in many cases, annual reports to state agencies. One tip here is to use a platform like PayBee to help with all your documentation, as our platform was created specifically for nonprofits and can dramatically help your organization with compliance issues.

Legal and Financial Guidance: Even though it is completely legal for a minor to start a nonprofit, they may not be the best person to form the initial startup. We suggest seeking advice from professionals specialized in nonprofit law and accounting, especially when navigating the application process for tax exemption. Although this may require additional fees for your startup, they may be worth the cost in the long run.

Achieving tax-exempt status may not be the easiest thing to do, but once you have received it you can be sure the benefits far outweigh the initial investment.

Obtaining Necessary Registrations

There are two registrations you must complete with the IRS in order to receive your charitable status. The first one is your Employer Identification Number (EIN) which basically acts like your charity's social security number. The other is filling out IRS Form 1023 or 1024 for tax exemption recognition.

Applying for an Employer Identification Number (EIN)

Luckily, applying for your EIN is the easiest task on your list of things to get done, not to mention it’s also free. The entire process should only take you about five minutes and can all be done online here, on the IRS website. Just be sure you have all your information ready, and once you have enter all the fields on the page, you’ll automatically be given your new Employer Identification Number.

To make things as easy as we can for you, we’ve included everything you’ll need in order to get your EIN. These are all necessary, so make sure everything is complete and redy for submission once you get to the website.

Necessary Items

Legal Structure and Formation – As stated above, you have the opportunity to form either a corporation, unincorporated association or a trust as your charity’s legal structure. Have the information ready as it is the first question asked on the form.

Applicant Information – Next you need all the information about the person or entity applying for your EIN. This includes the legal name, address, and the responsible party's Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). The responsible party is generally the individual who controls, manages, or directs the organization.

Legal Name and Address of the Organization – Use your organization’s legal name and the physical address of your nonprofit organization as it appears on your articles of incorporation.

Mailing Address – Per the IRS’ requirements, you must be able to receive mail and have a legal mailing address for your organization. Be sure to use the same address on all your documents in order to cut down on mistakes or create hold ups in the process.

Contact Information - Include a phone number and, if applicable, a fax number where your organization can be reached.

Type of Entity - Nonprofits are typically classified as 501(c)(3) organizations, but there are actually 29 other types of 501 classifications. So be sure you are choosing the best classification for your entity.

Reason for Applying - Provide a brief explanation of why you are applying for an EIN. Just stating that you are looking to establish tax-exempt status is enough to answer this question.

Date of Formation – When you registered your entity on the state level, you were issued articles of incorporation. On that document is the date of incorporation and that’s what you’ll enter here.

Closing Month of Accounting Year – This can be any month and while some charitties choose to use December, it can be the month of your inorporation or any other month that you find helps in your accounting process.

Principal Activity – This is where you describe your mission statement, or what you plan to do. Keep this brief and to the point.

The easiest way to apply for your EIN is definitely using the IRS website, but you can also apply by mail or fax by completing the IRS Form SS-4. Applying using Form SS-4 is also free, it just takes way more time to get your EIN.

Applying for Nonprofit Status

The next step in applying for tax-exempt status as far as the IRS is concerned has to deal with which form you should be filing out. The IRS does have three options, each one is a bit different, and the amount of work that it takes to complete these applications and fees involved is also different depending on which you choose. You will need to fill out and submit either IRS Form 1023IRS Form 1023-EZ, or IRS Form 1024.

To start with, both Form 1023 and 1024 have the same filing fee of $600. They are also both long forms and range from 22 pages for the 1023, to 40 pages for the 1024. Each of these forms take many hours to fill out correctly and the 1024 has been know to take up to 100 hours, so prepared for some work.

Most charitable organizations choose to use Form 1023 as it has the most advantages for a charity including tax-exempt status, and the ability to pass on the status to its donors so they don’t need to pay taxes on any of their donations. Form 1023 gives your charity the coveted 501(c) classification that also allows your organization to be able to apply for grants and other types of financial assistance as a 501(c) nonprofit entity. Once completed, you can file your document electronically here.

The main difference between the two classifications is your organizations purpose. Form 1024 is for entities that deal with purposes like labor unions, trade associations, health or social clubs. The 1024 offers a wider scope of what a charitable organization can do while the 1023 classification is strictly for charitable causes like providing food, shelter, or other assistance to the poor or needy, religious organizations, educational organizations, arts and cultural organizations and environmental organizations.

Form 1023 generally takes longer to process but it is still a shorter document than the 1024. The absolute easiest way to go is using Form 1023-EZ, which is only 3 pages and has the lowest filing fee at $275. And while that may seem like the way to go, this type of organization is severely limited in the amount of income it can acquire tax-exempt. The 1023-EZ’s tax exemption is capped at $50,000 in annual receipts (donations) and $250,000 in total assets. That’s not a lot to work with, but it may be an easier option for those just starting out and are unsure their charity will get traction.

One last thing to note is the time it takes for the IRS to process your application. This can be anywhere from a month to a year and it totally depends on the amount of staff handling the application process, and how well you filled out your form.

Choosing Online Donation Tools

Having the right set of tools at your disposal as a nonprofit can really aid in your ability to effectively run your organization and work on your cause. Effective platforms like Paybee offer both front end and back end features and tools that can help you manage your donors as well as your employees. These types of online tools available today can literally run your entire organization while saving you thousands of dollars and countless hours through automation.

When it comes time to choose an online platform for accepting donations for your nonprofit as well as running your day to day operations, there are a few considerations to take into account in order to find the best fit for your organization’s specific needs and goals.

Cost is often a major determining factor and often includes both a platform fee and transaction fees for accepting donations. Depending on the platform, there can be monthly or yearly fees, or some platforms just take a percentage of the donations you revive. There are some low cost options, but they often aren’t as robust as paid platforms like Paybee and others. However, PayBee does offer a free version of our software so you can see the power behind it.

Another important aspect of well coded software is ease of use for both you and your supporters. The platform should offer a straightforward setup process and an intuitive interface. Your team should be able to manage donations, communicate with donors, and generate reports without extensive technical knowledge. Similarly, the donation process should be super easy and offer many types of payment methods so your supporters can give easily without any hassles whatsoever.

Getting your message out is always an important consideration, and any great platform will have all sorts of options for sharing your campaigns on social media, through email, and other channels. It also helps to have as many storytelling options as possible to make your content as interactive and engaging as possible. That means you should never be restricted with content types and should be able to post anything from video clips to PDFs and even sound bytes. The more engaging you can make your content, the more your supports will drawn into your message and feel compelled to support your cause.

Then last but definitely not least is support. Customer service is an often-overlooked aspect which can either make the entire experience of the platform a good one, or cause you to look else where. Support should include someone willing to handle your emergencies when they arise instantly. There should be live chat r phone options as well as email or other forms of support like well researched and written guides and tutorials that clearly explains of all aspects of their software.

And yes, it sounds like a lot, but platforms like these do exist. PayBee was created from scratch for one purpose, to help the nonprofit sector run their charities cost effectively in a way that allows them to grow and proper over time through the use of amazing tools and features that help automate many of the processes organizations deal with every day. To see how we can mach a tremendous difference in the way your charity operates, try our free demo account here. It only takes a minute to open an account and test drive the future of nonprofit online platforms.

Top Platforms for Accepting Donations Online

While there are several platforms that stand out for their ease of use, flexibility, and features they offer, each is still radically different in the tools they offer as well as their pricing strategies. Here's an overview of some of the top platforms for accepting donations online, along with their key features:

1. PayBee - Receive Donations Effortlessly

Yes, we really do believe PayBee is the very best fundraising platform offering non-profit specific features at competitive rates. We enable seamless orchestration of in-person and hybrid events, customizable donation forms, and comprehensive event management tools. We also support diverse fundraising events as well as providing solutions from staff management to resource procurement all on one intuitive to use platform. Our solutions offer advanced event hosting modules, including personalized email campaigns, live streaming options, and interactive networking opportunities for guests. Our platform is designed for live and silent auctions, simplifying bidding and payment processes, and maximizes funds through global participation. Event data is meticulously preserved for strategic planning, making PayBee a comprehensive solution for non-profit fundraising.

2. Fundly - Fundraising for Your Small organization 

Fundly serves smaller foundations with a streamlined, user-friendly interface and essential customization options. It integrates social media for effective campaign sharing and supports peer-to-peer fundraising, allowing supporters to create personal fundraising pages. Fundly's features include event management tools, analytics, and the ability to embed maps for visualizing donor locations. Although not as feature-rich as PayBee, Fundly is an ideal choice for organizations seeking simplicity and a platform that facilitates easy sharing and donor engagement without a comprehensive toolset.

3. Donorbox - Accept Donations Using Cryptocurrency

Donorbox is recognized for its swift setup and user-friendly features, supporting over 50,000 organizations globally. It offers branded donation forms, crowdfunding campaigns, text-to-give options, and peer-to-peer fundraising. Donorbox accommodates various payment methods, including cryptocurrency and stock donations, and integrates with several systems for enhanced functionality. The platform supports global donations in multiple currencies and languages, with transparent pricing and the option for donors to cover transaction fees, making it a versatile and accessible option for nonprofits of all sizes.

4. FundRazr - Cost-effective Services

FundRazr positions itself as a cost-effective online fundraising platform, offering visually appealing pages and social sharing features. It supports peer-based fundraising and caters to specific needs, such as sports team fundraising. Despite its "Simply Free" tier, users should be aware of payment processing fees and optional tips. FundRazr is suitable for organizations with dedicated organizers seeking to maximize their fundraising efforts on a budget.

5. BetterWorld - Your Donors Pick Up the Tab

BetterWorld is a free, cloud-based platform tailored for sports teams, facilitating fundraising for tournaments, gear, and training resources. It offers mobile-optimized pages for convenient donations, online auctions, crowdfunding campaigns, and social media integrations. Despite being a no-cost platform, credit card transaction fees apply, with options for donors to cover these costs. BetterWorld is praised for its user-friendly interface and responsive customer service, making it an excellent choice for budget-conscious sports teams.

6. Mightycause - Receiving Donations Online

Mightycause offers a comprehensive suite of fundraising tools, including donor management options, peer-to-peer support, and customizable donation pages. It accommodates various fundraising strategies with easy integration into websites. Mightycause offers two pricing tiers, catering to different organizational needs with additional tools for event management and volunteer coordination. Despite its lack of a free version, Mightycause is a valuable resource for organizations looking for a multifaceted approach to fundraising, combining functionality and flexibility.

FAQs on Legally Accepting Donations

Can you fundraise if you are not a charity?

You can fundraise on behalf of a charity in the form of peer-to-peer fundraising, but as an entity you are not allowed to fundraise and if you do receive funding, none of it will be tax exempt, for neither you or your donors.

What is the charitable fundraising law in California?

In California, charitable fundraising and solicitation are regulated under the Supervision of Trustees and Fundraisers for Charitable Purposes Act. This set of laws requires charities and fundraisers soliciting donations in California to register with the Attorney General's Registry of Charitable Trusts and adhere to specific reporting and operation standards.

What is the charitable solicitation law in California?

Charitable Solicitation Law in California mandates that any individual or organization intending to solicit charitable contributions from the state's residents must register with the California Attorney General's Office before engaging in any fundraising activities.

Are charitable pledges enforceable in California?

Charitable pledges are generally considered enforceable in California under certain conditions, following the principles of contract law. For a charitable pledge to be enforceable, there must be a clear and unequivocal promise to donate, an intention by the donor that the promise be relied upon, and actual reliance on the promise by the charity (e.g., incurring obligations or expenses in anticipation of the donation).

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Bill Allen

Bill Allen is an expat that has been travelling the world for the past 25 years. He received his MA in writing in New York too long ago to remember, but has been writing on all sorts of subjects far varied publications ever since. When he isn't writing he enjoys meditating and working on his own website, UpscaleDrinks.com. Feel free to connect with him any time.