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.

©2015 All rights reserved. 

The R.E.A.L. Formula for attracting grantors

There are approximately 1.5 million nonprofits vying for funding from approximate 100,000 foundations every year.  Standing out in that crowd requires a strong survival strategy.

There are a few core criteria that every funding source adheres to when sifting through grant applications. Those criteria can be summed up in the R.E.A.L. formula, as follows:

• Relevancy.  Does your organization's application match up well with the donor's mission, vision and geographic limitations?
• Efficacy – If the funder gives you money, will their mission get the most bang for the buck from your organization, or will it just enable you to keep the lights on a little longer?  Various sources have reported that between 30 and 60 thousand nonprofits disappear from the IRS database each year, prompting grantors to confine their support to those organizations that can deliver benefits well into the future.
• Accountability – Does your organization have a strong track record of transparency relative to your previous operations, outcomes  and funding partnerships? Can you provide concrete examples to prove your successes and verify your financial data?
• Legitimacy – are you a legally recognized nonprofit with good references and strong outcomes?

Increasingly, as detailed in an article by Rick Cohen in the Nonprofit Quarterly, foundations are simply refusing to accept unsolicited applications. While some of that reluctance is due to recent economic factors, it is also due to simply receiving too many applications from organizations that obviously can't accomplish their mission.

Other foundations are adding restrictions to application requirements, such as not funding startups, or those whose current revenues are under a preset amount. Most have always required that you provide copies of the long form 990, indicating that your revenues are above six figures.

All prospective grantors use some sort of rubric, either written or implied, to separate the wheat from the chaff. Failing to deliver on funder expectations in any of the above areas can and probably will kill your application.

Some  shortcomings I see often are a lack of data and an unprofessional public persona.

For instance, let's look at legitimacy. The first thing I do when approached by a new nonprofit client seeking grants is to look for them online. I'm looking for a website that actually tells me something about the organization and its key personnel and programs. I want to see some sort of evidence of positive outcomes. There should be a link to the financials and  a copy of their determination letter, or at least the ability to request them.

I am also going to check all the databases for verification of their nonprofit status, including the IRS website, if necessary. While I also check out social media, the most important thing for me is to see if they present well on first impression, since I know that any funding source will be doing the same.

Grantors that ask for a website URL are going to click on the link. Even if they don't ask, they may well include your online presence as a scoring metric.

Master the R.E.A.L. formula and your funding success rate is going to go up dramatically.

Don't know if you will fit the formula?  Drop me a line at rightwords@ida.net for a review.   

Is your charity meeting donor expectations?

Given the high trust level that charities are expected to measure up to, could you look a donor in the eye and swear that all their donations will go to the mission?  More importantly, should you?

Donor confidence is not just important to your nonprofit, it is critical. If donors get even a faint whiff of something a little off, it can take years to regain that confidence.

In an article on 9/11 of this year, the Huffington Post noted that  even the venerable Red Cross took a hit for misleading donors after 9/11/01. The article noted that in the wake of the problem, donor and public confidence in charities in general dropped from 25% approval in July 2001 to 18% by May of 2002.

Charities that lose donor confidence don't survive intact. Some may not survive at all. The above-referenced article also noted that out of about 300 9/11-related charities started after 9/11, only five were surviving by 2006.

The best way to retain donor confidence is to be able to prove effectiveness and be up-front with the donors regarding the use of funds.

Given what I do, i.e. grant writing and funding research, I see this statement a lot.

"Once we get some grant money coming in, we can use part of it to pay you."

Ah…no, you can't. Nor can you pay the back rent or the overdue power bill. Almost every RFP plainly states that funds may not be used to pay debts incurred prior to the grant award. This is known as "restricted" funding, i.e. the use of the funds is restricted by the donor to certain costs for defined programs.

Most of them also state that "usual and customary expenses unrelated to the delivery of mission-related goods and services" (or words to that effect) are not eligible to be paid out of grant funds. The exception would be any grant funds received that state the use of the funds is unrestricted, or may be used for "general operating support".

But what about those individual donors?  The ones that chip in a few dollars every month, or write one check a year?  Of course you would never outright lie, but should you sort of gloss over the fact that you are paying the utility bills with their money? After all, shouldn't they just know that you have to pay some administrative expenses out of donations?

Maybe they should, but they don't. However naïve it may be, casual donors think that every dollar buys a meal, a coat, a bag of dog food, or whatever else your appeal is highlighting.

The best way to avoid that is to either define the percentage of each donated dollar that goes to the charitable purpose, or state in the appeal that funds received are used for both general and program support.

In the beginning, that administrative percentage could be 50% or more. Once you have your infrastructure in place, it should be reflected in your program-to-administrative cost ratio.

Just don't over-promise. It is usually unrealistic to claim that your administrative expense-to-mission allocation goal is five or ten percent of total donations. If you've done a proper business plan, you should have at least a rough idea of what percentage of the money will eventually be used for organizational support versus program expenses.

Be sure to let donors know about the good things their money has purchased. If your food pantry  fed 100 people every Wednesday of the last year, put it in your year-end report and plaster it all over your website and social media accounts. If your program participants are willing, tell a few personal stories. Have an animal rescue?  Along with all the animals needing homes, have a page for those that found their forever homes.

Like your Mom always said…honesty is the best policy. 

Keeping the Tax Man Happy

In "Climbing the Ladder to Nonprofit Success"* I try to emphasize that state and Federal laws governing nonprofits may not be the same. As tax season approaches, one of the areas that differs from state to state is whether or not you must have audited financial statements.

When deciding whether to accept a client requesting grant writing services, I pretty much have two iron-clad rules. You must be a 501(c)(3) and you must have formal accounting procedures in place that are at least capable of producing financial statements. My reasoning behind that is those are the two of the three things virtually every foundation or corporate sponsor requires, with the third being the 990. Without them, your application or entreaties for funding are going nowhere.

More importantly, not having at least the ability to produce audited financial statements can put you in violation of tax reporting laws.

The Council for Nonprofits has a list of states that will help you determine if your state requires audited financials. If you still have questions, the list also links to the specific regulatory reference for each state, or you can contact your state tax commission.

Income doesn't always predict the need for an audit.

While most small or new nonprofits will initially be under the income threshold that requires audited financials, several states require an independent audit if the organization employs "a professional solicitor", regardless of the revenue level, or if the organization receives a significant portion of their income from state funds. In general "professional solicitor" means any employee or paid professional that helps you raise funds, and can and usually does include everything from your CEO to your office manager, to contracted grant writers and  phone solicitors. Also, an independent auditor can't be the person who records or reviews your financial transactions on a regular basis.

Also noteworthy is that varying revenue levels may also require lower-level independent reviews such as an accountant's review or letter of compilation. For instance , Pennsylvania requires an independent auditors review of one form or another if your gross annual income exceeds $50,000, although the full-blown audit requirement doesn't kick in until receipts reach $300,000.

Audits aren't fun.

Last year, one of my former clients contacted me after her first-ever audit and was thoroughly incensed about the "intrusive behavior" of the auditors. The auditors had interviewed several of the staff members regarding how donations were recorded, and when the interviews indicated a somewhat chaotic system, they dinged the organization in their report. She was also angry that they "demanded every single receipt and every single phone message note" to back up expense records, including whether employees had called in or provided doctor's confirmations for sick pay. She wasn't complaining about having to provide the proof, as much as she was about the "inordinate waste of time" required to dig up the records  "to prove a $22.00 expense".

This is what an audit does. It isn't about whether you can add two and two. It's not even just about whether your books are in balance. It also evaluates whether you are exercising sound financial management. It can provide clues regarding the expertise of your staff. Perhaps you are recording expenses under the wrong category, or maybe you are reporting donations as unrestricted when they should have been applied to a specific program's income and spent only for that program. Maybe you are carelessly co-mingling personal and organization funds. It can uncover problems like embezzlement.

Audits should be learning opportunities.

Assuming that your audit problems stem from a lack of knowledge and not outright attempts to deceive, then your audit should be viewed as a chance to improve. You should want to have complete confidence that all the financial controls are in place, and that your financial position is exactly what it appears to be, good or bad. You should  be willing to either provide staff training or replace incompetent staff with people that know the rules and follow them.

Audits provide credibility with donors.

Being able to state that your financial dealings are honest and above-board as evidenced by your audit report reassures donors that their money will be used as they intended it to be when they gave it to you. That level of confidence can greatly impact growth in donations.

Good records mean smooth audits.

Depending on the type of audit or review, there are certain levels of sampling required under GAAP (Generally Accepted Accounting Principles). You are never going to get by without providing some selected source material, i.e. the invoice, receipt, purchase order, payroll check, deposit slip etc. that backs up the journal entry. Written procedures and even minutes of board meetings will also be on the request list.

However, if everything the auditor requests checks out the first time, there is usually no need for the auditor to keep digging. If the auditing firm has been hired on a total fee basis then they want to get done as soon as possible, but they are also required by law to investigate any irregularities. If they find something they don't feel is quite right, they have to keep digging until they have an explanation.

Hiring a proficient bookkeeper or retaining a bookkeeping firm to review your financial records monthly or at least quarterly might seem like an avoidable expense when you are first starting out, but in the long run, it will pay for itself in terms of smooth audits and happy donors. It is far better  to learn to do things properly now, before bad habits turn into bad audits!

© Rebecca L. Baisch 2013

* For your free copy, or to be on the subscriber-only newsletter list, email granthelp@ida.net