Fundraising – Multi-state registration answers

Lately, my mail has been loaded with questions about nonprofits having to register to solicit funds in various states. These questions reflect a lot of confusion about the requirements. Since this blog reaches so many people, I thought it was worth the time to try to clarify the out-of-state registration issue.

The bare bones explanation

First, these are charitable solicitation laws. They do not require you to create a new corporation  in all 50 states. You simply register the one you already have.

They are intended to control, legitimize, and in most cases account for revenue raised within a state. In many cases the laws are intended to protect the charity from having to pay state taxes on the money raised and they allow would-be donors some protection from fraud as well as the right to deduct donations on their state returns. And, as you might expect, they also allow states to generate some revenue from the registration fees.

Second, there is no all-encompassing Federal law that requires states to have a uniform application process, or that limits states in the amount of registration fees they charge.

Every state has different requirements and fee structures for registration. Some require the IRS determination letter and some do not. Some require an annual renewal and some do not.

It is not a given that you have to register in all the states with such laws. It depends on the specific state guidelines.

Interestingly, many start-ups are of the opinion that if they are only making a general online appeal, such as on their own website or Facebook page, they don't have to register in any state but their own.

Not necessarily true! Depending on your particular situation, you may or may not need to register in a given state.

Where did all these regulations come from?

Back in 2001, a document called the Charleston Principles was approved to provide advisory guidelines by NASCO (National Association of State Charity Officials) to curb fraud in the charitable giving arena, particularly through online campaigns.

If you fundraise in a state other than the one you incorporated in, even via an online donation page, Giving Day or Twitter account, you may need to register as a charitable organization in all the states that require it.

 A fairly comprehensive explanation is found on the GuideStar website at: http://www.guidestar.org/rxa/news/articles/2014/state-registration-requirements-for-fundraising.aspx and http://counsel.cua.edu/nacuanote-reqs-for-charitable-orgs.cfm

If this all sounds confusing, expensive and cumbersome, it's because it is. However, the penalties for soliciting without registering can be substantial, so ignoring the laws is not an option. As of this posting, several more states have been reported as considering or adopting registration regulations, but currently the list includes 40 states and the District of Columbia.

Laws change, so be sure that your information is current. For instance, as of 2010, California removed the exemption from registration for out-of-state charities. You may also be required to file an annual statement of revenues obtained from state residents.

While many people think that educational institutions and churches are exempt from registration, this is not always the case, particularly if you hire a professional fundraising firm.

Arising from the aforementioned Charleston Principles, and in an apparent attempt to standardize the application process, a form was created known as the Universal Registration Statement (URS).

It is the name of this document that I think creates the idea that there is some over-arching Federal control of the process. Again, it doesn't do that, and it isn't even universally accepted by the states.

Since the states still require a varying amount of additional independent documentation, the form is becoming somewhat obsolete, although a few states do still require it. For more info see: http://www.multistatefiling.org/

How do you do it?

Private firms such as mine, or your attorney or accountant offer fee-based registration assistance, or you can do it yourself.

A source citing a synopsis of the various state regulations as of 2013 and the governing state agency can be found at: http://www.nacua.org/nacualert/docs/CharitableSolicitation/2013_JurisdictionalRequirementsCharitableSolicitation.pdf. The URS form is included at the end of the state listings and is worth looking at, including the additional forms required.

What about costs? Fees vary from state to state, with some states having a flat fee and others tying the cost to the nonprofit's revenue, even going as low as zero for many small charities. Some states require registration no matter how little you raise, while others may not require registration until in-state donations reach a set amount.

In some cases, the registration of an aggregating or sponsorship agency (such as the United Way for instance) may provide sufficient legal protection, since these organizations usually require proof of legitimacy as a condition of use.

     

Also, many of the documents that start-ups typically may not have (such as the IRS determination letter and a financial statement or 990) are often required to file with the states, so before you spend a lot of time and money, be sure that you have everything on hand.

Given that fraud in the charity world remains an ongoing problem, it is unlikely that these requirements are going to go away. Some organizations are seeking to update the Charleston Principles to reflect the realities of a world where everyone carries a tiny computer cleverly disguised as a phone, but to date that hasn't happened.

If you are saying "all of this sounds time-consuming and a good way to eat up scarce start-up revenues", you are right.

Nevertheless, if you are contemplating starting a charity, this is information you can't afford to ignore. The costs in both time and money need to be a part of your advance planning.

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5 Tips to set a true-cost operating budget for your start-up.

Most lenders, investors and even grantors require some sort of business plan when considering whether to invest in a start-up. One of the first things they look at is your cost of doing business projections. If they find that part lacking, they seldom look further.

  

When I'm working on a business plan for a new enterprise, whether nonprofit or for-profit, most of the initial budgets I see fail to include some fairly non-negotiable costs. Here are some areas to consider.

1. Government-required payments

Almost without fail, one area that trips up a lot of new business owners is the amount they have to include for what I call government and legal compliance costs.

Some people do include the FICA costs, i.e. the 7.53% of payroll that the employer must remit to the Feds, but fail to include costs for state and Federal unemployment assessments, workman's compensation premium payments, local taxes and licensing, liability insurance, and any professional association fees or licenses that are beneficial to or required for the business. Also, new costs associated with new laws like the ACA many factor in as well.

2. Advertising and marketing

Another often under-estimated cost is advertising. There is a prevailing attitude that everything can be done online, and it's free. No matter how wide-ranging your business plans are, all businesses have a local component, and this is particularly true for nonprofits or small retailers.

Revving up local interest can be expensive.

Websites and domains cost money. One of the popular web hosting sites that advertises ".99 cent" websites has initial start-up costs for the domain and the initial website hosting starting at around $75.00/yr for a completely static site. Add any sort of customer interaction (blog, email sign-up, mobile friendly,  etc) , and the price can triple.

As great as it is, the internet isn't a foolproof business growth tool. Running a few spots on the radio, a 15-second spot during your local news program, or utilizing any other form of "traditional" advertising avenues may be necessary just to drive traffic to your site or social media page.

3. Legal or professional costs

Sure, you may be able to get some sort of generic business document template and file it for a few dollars, but that's just the start. All states have specific documents, i.e. non-discrimination clauses, by-laws, and a multitude of other things that you may need the help of an attorney or other professional to complete or at least explain.

4. Wages

Believe it or not, you won't be able to "do it all" for very long. Even nonprofits usually find themselves at the point of needing at least one employee that they can count on being where they are supposed to be when they're supposed to be there.

5. Daily expenses

Things like utilities, phones, office supplies and equipment aren't free. Even donated equipment has to be maintained and replaced when it breaks. Having an allowance for these items is not optional.

Almost without exception, when I am working on a business plan for a client I find that they need to increase their annual cost projections by 25-40%, and that naturally affects the amount of revenue they need to break even as well.

Are your cost projections reasonable?  If you'd like a review, drop me a line at rightwords@ida.net and we can discuss them. 

How to make your first budget work for you

One of the things that seems to frustrate most new businesses, especially nonprofits, is the "imaginary budget," also known as the projected budget, an exercise required by most lenders and grantors.

Of all the sections of a business or strategic plan, this is the most one often ignored or done badly.

Having looked at too many start-up budgets to count, I find that most people tend to pick a desired revenue number and make the budget arbitrarily fit that figure.

I see a lot of grant requests from new nonprofits that begin "We need $1.3 million dollars this year  to accomplish our goals." In reality, that's what they will need a few years down the road, not now.

That leads to things like allowances for a $20,000 website, $1 million buildings and marketing budgets that would be the envy of a lot of Fortune 1000 companies.

Budgets like this turn off donors, grantors and bankers. They advertise that the person or organization hasn't done their due diligence, or that they have no concept of financial development and management.

That's a bad place for you to start.

A beginning budget isn't going to look anything like your eventual goal.

 

You have to start with where you are, not where you want to be in the future, and then build up to your desired goal.

Let's inject a modicum of realism into the process.

Let's take the $20,000 website. There is no doubt that you can sink that much money into developing a website, but do you really need it in your first year? I would submit that given all the hosting companies that want to capture your business, you can probably get one that will suffice for the first year or two free or nearly free, and many of them don't require any coding knowledge at all.  Even if you need to process payments or donations at the start, most of the major players offer e-commerce packages for under $50.00 a month, sometimes substantially under.

Investors and supporters know that too, so your line item of $20K for a website simply tells them that you won't be spending that money on your core business or program.

Good budgets start with realistic planning. You may eventually want to feed 10,000 hungry people or sell 100,000 handbags, but you aren't going to do it today, next week, or this year.

Take the time to find out what things actually cost.  I well remember getting a budget for a charity wanting to provide a safe after-school environment that allowed $10/day for a single snack for each child. A quick check of the national averages showed that the range was from $.60 to $1.50/day, making it impossible for me to sell the $10 snack to any grantor.

Your dream may be to have a 20-room building for sheltering domestic violence victims, but you may have to budget for vouchers at a motel in the beginning.

The other side of any budget is the revenue side, and your base revenue target is dependent on your break-even cost.

If your initial costs are out of line, then your revenue target will also be out of line.

I once got a request to construct an investor-grade proposal from someone with one of those ideas to manufacture something that makes you say "Wow! Why hasn't anybody thought of this before?"

The marketing and manufacturing process side of the proposal was well done, but when it came to manufacturing costs the client had made some very unrealistic assumptions. That resulted in his costs of manufacture being some 2.5 times higher than he could cover with his targeted selling price.

That impacted the whole proposal. Now instead of a product with a cost that was easily manageable by almost anyone, his target market shrank to upper-middle class and above customers, shrinking his projected sales figures and thus his revenues, by more than half.

If you don't know how to fact-check costs, or simply don't have the patience to do it, hire someone that can do it for you.

In conclusion, budgets aren't sexy or inspiring, but doing them right will pay off big in the long run. The first thing you need to sell is yourself or your organization, and good budgets make good first impressions.