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Who's Watching Your Charitable Organization? by Margaret Truluck, Esq. (from the March 2000 issue of Corporate Counsel) Everywhere we go these days a charitable organization or cause is seeking donations. There are marathons to raise funds for national charities and bake sales to support our local Parent Teachers Association, firefighters and so on. They all seem like worthy causes but who regulates the charitable organizations that solicit funds and how are the donations collected? Most charitable organizations are nonprofit corporations. A nonprofit corporation is a corporation organized for purposes other than generating profit. Its income is not distributed to its members, directors or officers. A nonprofit corporation must be designated as a nonprofit when created and may pursue only purposes permitted by statute. The law grants nonprofit corporations special privileges:tax exempt IRS status, the right to solicit funds, exemption from labor rules, and limited liability for debts and court judgments. The rules governing tax-exempt status are found in section 501(c) of the Internal Revenue Code. Any organization eligible for tax-exempt status under 501(c) 3 has the added benefit of allowing its contributors to deduct the contributions from their personal income tax. After a nonprofit corporation is formed and granted tax-exempt status it may solicit funds. The regulation of solicitation and distribution of contributions is governed by each state. States exercise regulatory authority over nonprofit corporations in two ways. The state has regulatory authority over a nonprofit corporation if it is "physically" present in the state or is "doing business in the state." A corporation is considered to be doing business in a state if it has an office, owns real estate or conducts programs or activities. The state may also exercise regulatory authority over a nonprofit corporation because it raises funds in the state. A nonprofit corporation may be required by the state to register, qualify to do business (if it is a foreign nonprofit corporation) or provide a registered agent to accept service of process. Approximately forty states have a Charitable Solicitation Act that regulates fundraising by charitable organizations and their employees. The laws vary widely in their scope and content, but charitable solicitation is generally defined as any person who solicits money from another for any charitable organization or group whether benevolent, educational, health, humane or patriotic. Charitable solicitation takes many forms:direct mail campaigns, door-to-door solicitations, special fundraising events or coin containers left for donations1. A charitable organization must register with the state prior to soliciting funds, pay a fee and file annual financial reports. Compliance reporting under charitable solicitation laws consists of two parts:
The most common way that states regulate solicitors is to require charitable organizations and fundraisers who solicit contributions within their borders to register prior to solicitation with a designated agency3. In most states the registration is with the secretary of state or office of the attorney general. The registration includes such information as the name, address, corporate status, purpose, proposed activities, tax status; and information about the officers and directors is filed with the required agency4. The reporting requirements include the obligation to file an annual report or other financial information with the relevant regulatory agency annually. The disclosure requirements provide that the fundraising organization must make certain disclosures, such as the nature of the organization's activities, amount of donation actually used for charitable purposes, or fundraisers' fees to the prospective donor, along with any request for funds5. The state registration fees are generally modest. However, the cost of filing fees and related expenses filed in numerous jurisdictions can be costly. To put some bite into their charitable solicitation laws most states have added sanctions to their regulations. Sanctions apply to failure to register or renew, failure to file annual financial reports or file in a timely manner. The sanctions vary from revocation of license, injunctions and fines, to civil and criminal penalties6. In recent years states have been enforcing the sanctions and reporting those organizations that failed to comply with the state laws. Many states' Web sites list the charitable organizations who are currently registered and in compliance with state laws. Registration and compliance with state charitable solicitation laws is complex and confusing. CSC can prepare, file and register your charitable organization in all 50 states and the District of Columbia. We also offer registered agent services, which include providing an office in any U.S. jurisdiction. Charitable organizations and professional fundraisers can be registered through this service. CSC can help you make sure your charitable organization stays in compliance with state charitable solicitation laws. 1-6 Jacobs, Jerald A, Charitable-solicitation laws, Vol. 8, No. 50 Association Management p. 163 Margaret Truluck is the product manager for Charitable Registration Filing and Compliance Services and a corporate attorney with Corporation Service Company (CSC), a leading provider of public records document filing and retrieval services specializing in company formation and registered agent services. |
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