Help with Your Nonprofit
How Does a 501(c)(3) Help?
This post reproduces Chapter 3 of the 20-chapter, 50,000-word, start-to-finish guide Help with Your 501(c)(3), available in paperback and digital as part of the Help with Your Series. Investigate the series at help-with-your.com.
Will was all set to start his own 501(c)(3). He’d volunteered for years for another organization. His charitable service had taught him a lot about the people whom he wanted to help. Indeed, he saw a significant unmet need among many of the people he helped, that he was sure he could find a way to meet. Yet the organization for which he volunteered wasn’t interested. They’d been doing things the same way for years and showed no inclination to do anything else. Will’s research had shown that no other organization was likely to help. He knew he was ready to start his own 501(c)(3). He just wasn’t exactly sure how doing so would help.
Benefits
You’ve already seen in a chapter above, the discussion of whether now is the time for you to pursue your charitable-organization dream. But asking is now the time differs from knowing whether you need a 501(c)(3) organization and what benefit it should produce. Whether you need a 501(c)(3) organization depends in large part on the advantages that a 501(c)(3) organization can supply. Understand the benefits of a 501(c)(3) public charity, and you’ll likely reap those benefits to a greater extent. In other words, as you form and operate your 501(c)(3) charitable organization, keep its benefits in mind so that you can make the most of those benefits and help others do so, too.
Identity
A first benefit of a 501(c)(3) charitable organization is that it supplies an ongoing, corporate, charitable identity that an individual does not possess. Your charitable mission benefits from a charitable entity behind it. Indeed, the two–the mission and the organization–go hand in hand. For instance, we all know both what the charitable organization Goodwill is and what it does. Likewise with the Salvation Army, Feeding America, American Cancer Society, and Nature Conservancy. You probably know a good dozen or two other charitable organizations and their missions, not because you’ve necessarily volunteered with them but because of the clarity of their identity. None of those entities would have succeeded if their founders hadn’t formed a corporate entity aside from themselves. You won’t succeed broadly in your charitable mission if it’s all about you. You need something, a corporate entity, apart from you. Even Mother Teresa had a charitable organization behind her. She founded Missionaries of Charity in 1950.
Structure
Having a 501(c)(3) organization does more than give your charitable mission an identity apart from you. It also gives your charitable mission a structure. To attract and gather supportive people around you, you benefit from having an entity to which they can relate. If it’s just, say, Joe raising money, leasing a facility, recruiting volunteers, hiring staff, and serving needful individuals, without any supporting corporate entity, people will have to constantly ask, where’s Joe? Nothing will get done without Joe. Everyone will need to connect with Joe. And if Joe gets sick, needs a break, takes a vacation, or quits, nothing happens in Joe’s absence. Everything revolves around Joe. A 501(c)(3) charitable organization instantly solves that problem. The 501(c)(3) has an identity, life, and structure all its own. If Joe disappears for a moment, season, or lifetime, the 501(c)(3) entity goes on, with whatever leader, board, donors, volunteers, staff, facility, and patrons the entity can muster. A 501(c)(3) charitable organization is, above all, a structure for continuous, ongoing charitable service.
Duration
As just suggested, a 501(c)(3) charitable organization also provides for duration beyond the life or interest of its individual founder or any other individual contributing to it. Founders are essential. But they’re also expendable. Founders get things started but then get bored, sick, or simply busy with other things, even if others whom they have recruited to the charitable cause aren’t bored, sick, or too busy and instead want to continue with the charitable mission. I’ve helped several individuals start 501(c)(3) charitable organizations, only to see those individuals promptly wander off, leaving the development and operation of the charitable organization to others. And that’s fine. Some people are starters, while others are finishers. When you form a 501(c)(3) charitable organization, it can take on a life of its own that expands and persists beyond your own life and interests, which is good for the needful individuals or charitable cause the organization serves.
Donors
Forming a 501(c)(3) organization should also help you attract donors and other financial support for your charitable mission. Charities run on passion and purpose, but they also run on money. While some charities are remarkably effective in carrying out their missions with barely any funds, many charities wouldn’t be able to do anything if they didn’t have donations or other financial support. You have to keep the lights on, and the utility company isn’t going to give that power away free. You may need funds for rent, utilities, supplies, staff, licenses, equipment, and any number of other things. Donors don’t just hand over money to individuals, where they have no trust in how the individual might use the money. Donors instead give to charities, where the law constrains the charity to use the money for its declared purpose.
Deductions
Many donors also expect to gain an income tax deduction for their donations. Some donors won’t contribute without gaining a tax deduction. Donations to a 501(c)(3) charitable organization qualify for tax deduction, provided the donor otherwise meets deductibility requirements. Generally, individual donations must exceed standard deductions, and the individual must itemize deductions, for the individual to gain a benefit from making charitable donations. After recent substantial increases in the standard deduction, many fewer individuals are able to itemize deductions, meaning many fewer individuals have the tax incentive to give to 501(c)(3) organizations. But even if the donor doesn’t get to deduct the donation against income tax obligations, the donor may give only to 501(c)(3) organizations because the 501(c)(3) recognition certifies the organization’s charitable intent.
Grants
Forming a 501(c)(3) organization can also help secure government grants. Government agencies distribute funds to nonprofit organizations to carry out government interests, especially public-welfare interests. You may find federal, state, or local government grants available for feeding, housing, daycare, after-school, tutoring, counseling, mentoring, health, education, and other programs. Government agencies generally will not give grants to individuals or to organizations unless the organization has IRS 501(c)(3) recognition. Government agencies need no tax deduction when giving grants. They instead use the 501(c)(3) designation to ensure that the nonprofit organization receiving the grant is a credible charity. You’ll have opportunities to seek and qualify for grants, after forming your 501(c)(3) organization.
Foundations
The same is true for private foundations. The foundations of wealthy families and big corporations give grants to 501(c)(3) public charities to carry out the foundation’s charitable mission. Foundations do not generally give grants to individuals or to nonprofit corporations lacking the 501(c)(3) public-charity recognition. You need a 501(c)(3) organization if you are to qualify for a private foundation grant. Private foundations may focus on special charitable causes and missions, certain disadvantaged populations, or certain geographic communities and regions. You may find private foundation grants supporting your organization’s charitable mission, for which you can apply through your 501(c)(3) organization. I have helped clients form 501(c)(3) organizations specifically to qualify for private foundation grants they knew were available to support their charitable mission. You might even start your charitable-organization plan by identifying those private foundations and crafting your organization’s identity, structure, and purpose to meet their grant parameters.
Volunteers
Forming a 501(c)(3) organization should also help you recruit volunteers. Your friends and family members may be perfectly happy and comfortable to accompany you, individually, on your charitable adventures, without a 501(c)(3) organization anywhere in sight. Good for you, good for them, and good for the people whom you help. But volunteers whom you don’t know so well or don’t know at all may not have the confidence in you, personally, to join you on your charitable romps. They may, on the other hand, be quite interested in joining your 501(c)(3) organization’s cause, trusting that its corporate form, declared charitable purpose, program identity, and IRS recognition all suggest credibility. You may, in other words, get a lot more volunteer help by having a 501(c)(3) organization than you would when proceeding individually. Volunteers value a sense of community among fellow volunteers. Community arises around something larger and higher than any of its single members. Your 501(c)(3) organization is something larger and higher that may attract and unite volunteers into a vital charitable community.
Staff
Forming a 501(c)(3) organization may also help you recruit and retain paid staff members, once your organization has the need and funds for paid staff. You may be your charitable organization’s executive director, meaning its only or top paid management employee. You may, as the saying goes, be chief cook and bottle washer. On the other hand, you may be able to raise the funds to attract, retain, and pay an executive director who may, sooner or later, hire other employees. Attracting, hiring, and compensating employees generally benefits from a formal corporate structure. People are generally more comfortable and confident working for a distinct corporate entity, including a charitable organization, than working for an individual whose interests may change and with whom their relationship may also change on a dime. A 501(c)(3) organization may help you recruit, retain, and employ a skilled and experienced executive director, program manager, and other paid staff.
Contracts
A 501(c)(3) organization may also help you negotiate and enter into contracts for needed goods, services, and facilities to carry out your charitable mission. Charitable organizations often need to form and formalize reliable relationships with landlords, suppliers, insurers, utility companies, and others whose goods, services, and facilities the organization needs. Negotiating and signing contracts is the legal way in which to secure those goods, services, and facilities on terms that both sides understand and agree. You could contract with others as an individual, without a 501(c)(3) organization behind you. But doing so makes you individually liable on the contracts, whereas signing in your organization’s name could keep the liability and responsibility solely or primarily on the organization. And some suppliers will only deal with other entities, not individuals. You may need a 501(c)(3) organization to acquire the goods, services, and facilities your charitable mission needs.
Taxes
Forming a 501(c)(3) public charity also secures you the significant advantage of not having to pay federal income taxes on your operation’s net receipts. It may also qualify your organization to avoid state income taxes. As most employees and business owners are acutely aware, income taxes can take substantial bites out of income. If your charitable organization did not qualify for 501(c)(3) public-charity status, you could end up paying a quarter, third, or more of your net receipts over to the federal, state, and local governments in income taxes. With 501(c)(3) public-charity recognition, you avoid those income tax payments and can use the excess to advance your charitable mission. Your organization could also potentially avoid real estate taxes on its owned facility, depending on state and local law. Your organization’s 501(c)(3) status is a huge operating advantage relative to taxation. For many public charities, lawfully avoiding taxes is the primary advantage of pursuing and securing IRS 501(c)(3) recognition.
Key Points
A 501(c)(3) organization can bring several benefits to a charitable cause.
A 501(c)(3) organization supplies clear, independent identity.
A 501(c)(3) organization supplies reliable and helpful structure.
A 501(c)(3) organization ensures continuous duration.
A 501(c)(3) organization can attract donors seeking deductions.
A 501(c)(3) organization can attract government and foundation grants.
A 501(c)(3) organization can attract volunteers and staff.
A 501(c)(3) organization can facilitate contracts for goods and services.
A 501(c)(3) public charity avoids paying federal income taxes.
