Building a charity can be an excellent way to create social change around an issue that you are passionate about. You could have a desire to raise money for scientific research or aid underserved communities. Whatever the cause, a charity can be a powerful mechanism to bring people together and achieve extraordinary things. Incorporating a charity can be a long process, but it is worth the effort and investment. In this blog post, we’ll explore the benefits of incorporating a charity, the different types of charities, the steps involved in creating a non-profit organization, and answer the commonly asked question about incorporating a nonprofit and more.
What is a Charity?
In general, a charity is an organization that seeks to make positive societal changes. Typically, a charity is established as a non-profit, meaning that the organization’s profits go back into the charity to achieve its mission. Charities are classified under Section 501(c)(3) of the Internal Revenue Code, which means that they are tax-exempt. So, for every donation made to the charity, the donor may be eligible to receive a tax deduction.
Types of Charities
There are five different types of charities:
Public Charities: These organizations receive funding from the general public, corporations, and private foundations. Public charities receive more than one-third of their income from donations and grants.
Private Foundations: Private foundations receive their funding from an individual, family, or corporation, and do not keep ongoing fundraising groups.
Private Operating Foundations: This type of charity maintains an active role in the direct operation of their charitable programs and initiatives.
Support Organizations: These charities are set up to support other public charities and nonprofit organizations.
Donor-Advised Funds: Donor-advised funds are funds held by a supporting organization, usually a community foundation, a gift fund, or an independent charitable organization. Donors contribute to the fund, and the organization administers the money to charities according to the donor’s recommendations.
Incorporating a Charity: Unincorporated vs. Incorporated Non-Profit
If you are thinking about founding a charity, one of the first steps in the process is to decide whether to incorporate or remain unincorporated. If you decide to incorporate, your non-profit organization will become a legal entity, and it will entail certain formalities.
There are many benefits to incorporating a non-profit. Incorporation offers limited liability protection to the organization’s board members and members, which minimizes the personal liability for unpaid bills, damages, or judgments from lawsuits or legal actions. Once the organization has been incorporated, it gains tax-exempt status, making it eligible for tax-deductible donations. Additionally, having a formal structure reveals a sense of stability and professionalism, which often attracts more grants and donations.
Unincorporated non-profits lack legal recognition and protection under the law. Such organizations are essentially informal groups of people or a collaboration of people, and the members share personal liability. Unincorporated non-profits cannot enjoy any state or federal tax exemptions, which reduces their funding opportunities from donors and foundations. Incorporated non-profits also have easier access to grant opportunities.
What Qualifies an Organization as a Charity?
To qualify as a charity, your organization must fall into the categories of an organization that the IRS recognizes as tax-exempt. A few common characteristics of a recognized charity include:
- The organization should exist with the purpose of providing a public benefit, like helping those in need.
- The organization should not distribute profits and revenues to its members or founders.
- The organization should not participate in any political activity.
When you register a charity, you must submit an application to the charity commission and details about your organization’s leadership and structure.
How to Start an Organization Charity: A Step-by-Step Guide
Incorporating a charity entails some specific requirements to obtain a legal status and maintain a 501(c)(3) tax exemption.
Create a Name and Mission Statement: Your organization’s name should be unique and easy to remember, and your mission statement should articulate the core values, vision, and objectives of your charity.
Select Board Members: Involve other individuals who share the same vision and passion about your cause to serve on your board. Create a list of prospects and recruit members to serve on your board.
Develop Bylaws: Create bylaws that reflect the mission statement of your organization that detail the structure of officers, their duties, and term limits.
Register with your State: Generally, organizations register with their Secretary of State. In some states, registration may occur before the charity commission.
File for 501(c)(3) Status: File your application with the IRS for tax-exempt status. Once approved, tax-deductible donations can be accepted.
Are Charitable Organizations Profitable?
Charitable organizations aim to inspire social change rather than personal profit. The goal of a charity is usually to generate donations and revenue to support a specific cause or beneficiaries. Charitable organizations are generally not profitable, as profits are taxed and should be reinvested back into the charity’s mission.
Incorporating a Charity: A Noble Endeavor
Founding a charity is a brave, altruistic endeavor that can have a profound impact on the community around us. By knowing the basics of how to incorporate a charity, you can ensure that your organization operates sustainably and carries out its mission with integrity.
Choose a unique name, have a clear mission and vision statement, select a passionate board of directors, develop bylaws, register your organization with your state, and apply for tax-exempt status. Your charity may face some challenges along the path, but with persistence, hard work, and a lot of passion, you can turn your dream for social change into a reality.