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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Seven nonprofit dream killers (and how to avoid them)

Many good people want to start nonprofits. They usually have great passion for their cause, and want to solve problems. They expect smooth seas and clear sailing on the way to their destination. Unfortunately, they often run aground on the rocks of reality. Here are some common pitfalls associated with starting a nonprofit.

1. You haven't developed a support network.

Nonprofits don't function well as one-man (or woman) shows. Start by identifying supporters, and hold a well-publicized informational meeting or two to assess the interest in your nonprofit. These folks will be your potential board members, donors and volunteers and the meetings may generate immediate financial support.  

2. You think your organization is the only one that can address the problem you want to solve.

It is unlikely that no one else has seen the problem you are seeing. Don't re-invent the wheel. Check for nonprofits in your area that are addressing the same issues, especially those that are currently receiving funding. There is a good chance that you may find not only kindred spirits, but organizations that are already dealing effectively with the issues that you can join. If no one else is in the arena, there is probably a good reason why they aren't.

3. You believe it is easy to get money to support the organization.

You may be willing to invest every dime you have in your organization, but the world of nonprofit funding is competitive and notoriously difficult to access for fledgling organizations, particularly for day-to-day expenses. Only about 20% of nonprofit support nationwide comes from grants and unrestricted donations. The other  80% is up to you to figure out.

4. You haven't researched the skills needed to operate the organization.

The mission is important, but it takes real-world business skills to achieve success and longevity. There are serious legal, financial and administrative aspects involved in being a nonprofit. If you don't have all the skills needed, you will need to attract or hire people that can fill in the blanks.

5. You are easily frustrated when things don't immediately go your way.

Growing a viable nonprofit is often arduous, expensive, frustrating and time-consuming. Starting a nonprofit is not the place to find instant gratification.

6. You think it will be an easy way to create a paying job for yourself.

Founders usually form part of the board of directors, since their goal is (or should be) to guide and expand the organization. Board members normally don't and can't receive a salary for serving on the board. If you can accept being an employee of the nonprofit as the CEO or executive director and understand the potential risks associated with that, there may be income potential, but it isn't a sure thing.

7. You don't have a coherent plan for long-term success.

You may know what you want to accomplish, but you need to have a way to get there. The time you spend on a five-year plan now will save you innumerable wasted and expensive hours spent in crisis management later.

Knowledge really is power. Know what you are getting yourself into before you start. For more in-depth insight into the realities of starting a nonprofit, I offer a free whitepaper, "Climbing the Ladder to Nonprofit Success". Request your copy at granthelp@ida.net. If you need assistance  in implementing or understanding  any of the steps, or just have a comment, drop me a line. Want to know more about my services? You can view my website here.