1. Learn About the Different Types of Charities You Can Start Charities can be started with different missions. Here are examples of common types of charities: • Animal charities—formed for the purpose of animal rescue, wildlife conservation, or animal welfare • Health charities—formed for the purpose of supporting the sick and disabled, curing diseases, medical research, or family and patient support • Education charities—formed to serve students, including by way of private elementary schools, high schools, and universities, and through scholarships • Art & culture charities—formed for supporting the arts and culture, including by way of museums, public broadcasting, or the performing arts • Environmental charities—formed for supporting environmental protection and conservation • International non-governmental organizations— often referred to as “NGOs” and formed to support disaster relief, humanitarian aid, or peace missions • Religious charities—formed to support specific religions and worship, or for religious-oriented media • Human services charities—formed to provide assistance to people in need, such as supplying care for the elderly, food, or shelter For IRS purposes, IRC §501(c)(3) charitable organizations are classified in one of two ways: a “public charity” or a “private foundation.” Public charities, such as the American Cancer Foundation or the ASPCA, generally receive a greater portion of their funds from the public and governmental units. Public charities are the organizations people generally think of when they hear the word “charity.” A private foundation is typically a nonprofit formed, funded, and controlled by a family or by a small group of individuals (examples include the private foundations set up by tech executives). Private foundations are subject to a number of operating restrictions not applicable to public charities, and must donate at least 5% of the fair market value of their assets each year to permissible donees. Private foundations typically use their funds to make grants or gifts to public charities for charitable, religious, educational, or other causes that help the public. Some pubic charities (such as the United Way) act like foundations by making grants to public charities. You will need to decide what kind of charity you wish to form, as the IRS will presume you are a private foundation unless you can establish that you are going to be a public charity.
2. Verify That Your Charity Will Qualify as an IRC §501(c)(3) Organization The IRS provides that to be tax-exempt under IRC §501(c) (3), an organization must be organized and operated exclusively for “exempt purposes.” According to the IRS: “The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.” The organization must also not be organized or operated for the benefit of “private interests,” and no part of the organization’s net earnings may inure for the benefit of any private shareholder or individual. However, this requirement does not prevent the founders or employees of the charity from receiving fair compensation for their services. The charity must apply to the IRS to get exempt status, and jump through a variety of hoops, as outlined in Section 6 below under “What Do You Have to File with the IRS to Get Tax Exempt Status for Your Charity?” State qualification may also be required. The IRS website has a helpful section entitled Tax Information for Charitable Organizations that lays out the requirements
for qualification. 3. Come Up With a Good Name for the Charity Before you form your
nonprofit, you need to come up with a name that will be accepted by the Secretary of State’s office where you will incorporate. Each state has its own rules, but here are typical requirements:
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December 2020 | The Business Review
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