With all the press about how bad things are, it's comforting
to know that we still have a human need to help, to make things better.
A lot of awfully nice people out there want to do really
nice things for people. If there is a perceived need, there is almost always
someone who wants to fill it, and most of them feel that starting a nonprofit is
the way to do that.
Doing those nice things effectively is not so clearly
defined.
One of the first obstacles that greets many people is
understanding what it takes to legally become a tax-advantaged nonprofit.
One of the core principles is that any non-profit must
operate for the "public" good. The problem is that the term
"public" doesn't just mean "for someone's benefit other than the
founder(s)."
Benefitting just one person or a few families isn't what the
term implies. When used in the strictest legal sense, it means to benefit a
class of beneficiaries. For instance,
the class could be low-income children or victims of domestic violence. The class can be geographically localized,
such as low-income children in a specific city, but the mission has to be
inclusive enough to have a wide-ranging impact within that geographic border.
Case in point. One
person sees a young person who needs assistance in paying for college, and
wants to start a charity to benefit that one person. That's not "public". It's targeted
to that one specific beneficiary. Although the mission is purely philanthropic,
it would not qualify to receive tax-exempt status.
Another person sees that low-income children in general have
a hard time finding money for college. The
proposed charity is meant to acquire funds to help children in that area
immediately, and any subsequent qualifying children going forward in time. Although
these children may live within a specific area, such as a city, town or county,
the mission is aimed at all of them. The potential area of impact might be a
population of several thousand.
The latter is defined as operating in and for the public (general)
good.
Another example of a non-qualifying charity would be one
that exists to benefit the founders in
some way. One of the most common requests I get is for people who want to
generate personal income by starting a charity.
It doesn't work that way. Once you start a charity, any
funds collected belong to the public.
For instance, a person owns some undeveloped property and
needs to derive income from it.
The person decides to start a charity and rent the land to
urban farmers. Although on the face of it the charity could claim that it was promoting
healthy nutrition, the underlying principle is to generate income for the
founder. If the rental income is principally used to pay a salary to the
property owner, it is not being operated "for the public good" in the sense that the law intends.
One of the thinnest lines any charity has to walk is the one
involving use of funds. Funds have to be used primarily to advance the purpose
for which they were collected. An awful lot of the legislation generated around
charitable giving is to assure that the "public" derives the maximum
benefit from the collected funds. Some states have even proposed legislation
requiring charities to spend at least 60-80% of the funds for direct program
costs, not administrative funding.
While that doesn't preclude a founder taking a salary from
the charity, the salary has to be for the advancement of the mission, not to
provide a job for the charity's key personnel.
You can't "sell" a charity or its assets in the
way you do personal or traditional business property, i.e. for personal profit.
All proceeds have to be used for the "public" good, such as by
donating the assets or the proceeds of any sale of them to another charity.
These are just a few of the things that potential nonprofit
founders have asked me when contemplating starting a charity of their own.
If you need more information or would like to contact me
about your nonprofit plans, drop me a line at rightwords@ida.net.
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