Wednesday, February 1, 2006

What Are the Rules for Nonprofit Fundraising?

We’re speaking with Attorney Ilona Bray, author of “Effective Fundraising for Nonprofits.

NOLO: Ilona, when people think of nonprofits, they often think of charities or environmental groups, but actually a nonprofit can really be any type of business, such as an arts group, or a radio station, a church, or a publisher. So, maybe we should start out by talking about the difference between a nonprofit and a for-profit corporation.

ILONA BRAY: First actually, let me just affirm that you’re right about the variety of nonprofits. I was thinking about just on a daily basis; when we go out and about, all of us probably interact with a number of non-profits. Whether we’re shopping in a charity thrift store, dropping off kids at little league, visiting a museum, attending church, mosque, or temple services, going to a hospital, and when you’re done with all that, going to the theatre at night. So, what being a nonprofit means, really, is that any income that the organization brings in is not used for private gain. In other words, your staff, your board members, and your other members, even if some of them draw a salary (which is fine), never actually get a cut of the profits. Instead, they all go to serve some public or mutual benefit.

NOLO: Just so we’re clear on one thing, can a nonprofit make a profit?

ILONA BRAY: A nonprofit actually can make a profit. This is a great question because it’s an important misconception to clear up. So, let’s say I’m running a nonprofit clinic, maybe in a neighborhood that other doctors won’t come to. Do I have to charge less than a regular doctor? Actually, no, under the tax and other relevant laws, I can charge market rate and that’s just fine. Of course, I might want to reduce the fees just to make the service accessible to them. But what if some of the people coming in actually have an okay income? I might want to have, say, a sliding scale and charge them market rates, and again, that’s just fine. I would even say it’s a good idea for nonprofits to try and find ways like that of bringing in extra funds and putting it into a savings account for the future, for hard times, which most every nonprofit is going to experience. And some places think that that’s a problem, that that means they’ve got profits. That’s not a problem at all; in fact, it’s a good management idea.

NOLO: Here’s another basic question. You see the term 501C3 Status for nonprofits. What does that mean?

ILONA BRAY: 501C3 is a number from the tax code. Most organizations that fit the definition that I just gave about not operating for private gain are 501C3s, meaning that they applied to the IRS for their status. It’s also called tax-exempt status under section 501C3. And, the reason they would want to do that is that a 501C3 is exempt from paying taxes, and its donors can deduct their contributions from their taxes. Not all nonprofits are 501C3s, and I won’t get into too much detail there, but 501C3 is especially for nonprofits serving charitable, religious, or education purposes. A bunch of other nonprofits like Chambers of Commerce or recreational clubs would get other 501 statuses.

NOLO: If a person wants to donate money to a nonprofit in their will, how do they go about doing it? Do they need to notify the nonprofit of the prospective gift?

ILONA BRAY: It’s actually quite easy to leave money to a nonprofit, say, in your will. Apart from meeting the usual requirements of a will, which I don’t want to get into here, the donor needs to accurately state the legal name of the organization, where it’s located, what the gift is (it might be money or it might be property), and what the donor expects you to do with the gift. And, maybe because it’s so easy, they don’t need to, and sometime they simply don’t, notify the nonprofit. Now, that can be great fun for organizations; I once worked in a place where we walked in one day and $10,000 appeared from a donor’s estate. But it would have been nice to thank that donor during her lifetime, and maybe plan for the gift. Perhaps we could have gotten that donor more involved in the organization if we’d known about her. And that’s why it’s worth nonprofits efforts to encourage donors thinking of leaving this kind of gift to let them know, communicate with them, talk about what the gift is going to be used for in advance, and get involved with the organization in other ways perhaps.

NOLO: Ilona, is it better to make a donation in your will, or to set up a living trust?

ILONA BRAY: That’s more of a question for somebody’s overall estate-planning goals. You certainly wouldn’t want to divide it up and say, “Oh, I’m going to leave my money to charity in a living trust, and my money for the rest of my legatees in a will.” Folks might want to do a little research or talk to their estate-planning lawyer about that. Living trusts are becoming very popular estate-planning devices because they avoid probate by essentially having someone act as trustee and transfer the property after your death out of the trust. And because the trust sort of lived while you were alive and continues to live after you’re dead, you don’t have to do the separate route into court at the same time. And, it’s just as easy to put money toward a charity in a living trust as in a will.

NOLO: Let’s say you’re leaving money in a will or a trust; can a person set rules on how that gift will be used?

ILONA BRAY: You can. You couldn’t go so far as to say it had to be used for some illegal purpose, but you can leave your intentions, and nonprofits are obligated to honor those intentions to the extent possible. And let’s not forget that people can leave other things besides money, and are maybe even more likely to leave those with conditions. Like I’ve heard of many cases in which somebody leaves a painting, or even a huge sculpture, to a museum, and says, “I’m leaving this to you on the condition that it be on permanent display.” And then the museum has this headache of trying to figure out, “Do we accept this gift, and have it right there in the middle of the museum for the rest of its life, or do we not?”

NOLO: Can you be personally liable if you’re an individual member of the nonprofit board if there’s mismanagement of a donor gift?

ILONA BRAY: It’s certainly possible, because board members bear personal responsibility for virtually all of a nonprofit’s actions, and gift management is one of the important activities going on within the nonprofit. There can be exceptions, like, depending on state law, if the board member, say, reasonably relies on information from a staff member, they might be protected, which makes sense; if the board member’s being lied to and didn’t have any reason to expect that that was the case, they should get some protection. But that, as I said, depends on state laws. In general, as practical matter, this doesn’t happen that often; board members aren’t often called to compensate for problems within the nonprofit with their personal funds. But this is a good chance to remind anyone serving with a board not to be lax. You know, you don’t want your own sleepiness at a meeting to be the cause of questioning whether you should be liable for some bad action by the nonprofit.

NOLO: A lot of nonprofits raise money by gambling, for example with raffles. Are there legal rules to be followed, and do you ever have to worry if the police will bust the church raffle, for example?

ILONA BRAY: Well, before any nonprofit thinks about having a raffle, they should check their state’s laws. Because there will probably be provisions about that; you can probably find it on your state’s website. A lot of states will allow only nonprofits to hold raffles, but they want to see proof first that the nonprofit is a nonprofit, so they may ask you to get a permit in advance or something like that. There might be other regulations as well, say on how many raffles you can hold, or when, types of prizes, that sort of thing.

NOLO: The Girl Scouts sell cookies to raise money, Green Peace sells calendars… do these organizations have to pay taxes on these sales?

ILONA BRAY: In those particular cases that you mentioned, probably not, because those are irregular sales that are not part of an ongoing business. If the Girl Scouts sold cookies all year, that might be a different story. So, the general rule for federal taxes, and states might be different story, is that nonprofits have to pay tax on income earned from selling things if what they’re doing is getting unrelated business income, and, unrelated means that it has nothing to do with the mission of the profit. A nice way of remembering that is, if you have a museum gift shop, and you sell postcards with the images from the museum, no tax there, because that’s related to your mission; that helps sort of show people the art. But let’s say it’s in New York and it sells little snow globes with the statue of liberty in it, they would have to pay tax on that, because that has nothing to do with the mission of an art museum.

NOLO: I’m sure it rarely happens, but I’m kind of curious… what happens if a nonprofit or a foundation, for whatever reasons, they don’t want to accept money from an individual, is it legal to turn down a gift?

ILONA BRAY: It’s definitely legal to turn it down, or to return it after you get it. Sometimes that will come about because of public pressure. I was reading recently about an organization that had gotten a rather large gift from a man who was widely known as a racist; I guess he was sending inflammatory letters to the local newspapers, and so the question for the group is, “Do we return it, or do we put the money towards some good use and maybe undo some of the damage this guy has done?” It’s a tough question for organizations.

NOLO: I know there are guidelines for nonprofit accountability and efficiency, but how can a nonprofit find them, and, I guess more importantly, why is it so important that the organization abide by these rules?

ILONA BRAY: That’s a question that’s definitely worth every nonprofit looking into. Simply because, we all see in the newspaper these days, accountability is becoming so important; the media are all out looking for the latest scandal, in terms of some nonprofit doing something that wasn’t quite right. So, the starting point is going to be your state’s law, concerning nonprofits; every state has one. Again, that’s probably findable through the state website. Beyond this, nonprofits can look to a group called the Better Business Bureau’s Wise Giving Alliance, and this is a group that’s published detailed standards and guidance that are pretty much accepted as the industry standard these days. For example, they suggest that no more than 35% of a group’s funding be spent on administration and fundraising. There’s a lot more to their standard providing, and so you can access that at

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