December 1, 2014

By Cheryl Olson, CPA, CGMA

Due to highly publicized fraud cases and poor governance practices, as well as state budget issues, more people are scrutinizing the activities of not-for-profit organizations. This, of course, results in greater board and committee member expectations, donor questions and new regulatory requirements.

With all of this increased scrutiny, it’s essential that not-for-profit organizations learn how to navigate all of the rules and regulations, especially those relating to state laws. To assist in that goal, here are relevant information and good practices for your organization to follow that apply to charitable organizations under 501(c)(3) of the Internal Revenue Code, trade associations, social welfare organizations, and fraternal organizations, among others.

  • Establish tone at the top. Ultimately, the board of directors is responsible for compliance as one of their fiduciary responsibilities. There needs to be a clear expectation from the board and management that compliance with laws and regulations is important to the organization and is expected of staff and volunteers.
  • Invest in knowledge and internal systems to stay compliant and up-to-date on the ever-changing rules. Knowledge can include designating a staff member (usually the CFO) as the compliance expert, hiring qualified attorneys and accountants, or a combination of the two. This means building in time and money for reading, attending educational opportunities, and hiring professionals.
  • Ensure your partners play by the same rules that you’re following. For-profit companies working with not-for-profit organizations are subject to the same legal consequences as charities under most state laws.
  • Before soliciting donations, check your state’s requirements to see if registration is required. Currently, 38 states and the District of Columbia require some form of registration. In addition to the initial state registration, an administration fee, excise fee, and annual filing may be required. There are exemptions, and many states base it on how much is raised annually.
  • If your state requires registration, learn the registration process. Fortunately, there have been efforts to standardize and centralize the state registration process with a Unified Registration Statement (URS). The majority of states (35) and the District of Columbia accept the URS. Some states still require supplemental filings in addition to the URS.
  • Ensure clear communication between the finance and fund development functions. Finance and fund development staff need to communicate on which states donations are being solicited and received to ensure compliance with charitable solicitation laws. Solicitations made in person, by mail, via telephone and online all need to be considered. Keep in mind, states can define “solicitation” differently. For example, the state of Pennsylvania defines any sale, offer or attempt to sell items of value as a form of solicitation.
  • Be aware of state requirements for any professional fundraisers and solicitors that are used and verify their vendors are following them. For example, effective July 1, 2014, Florida requires organizations to be incorporated in the state, as well as those soliciting from Florida citizens to comply with the new rules.
  • Be mindful of your online donation solicitations. With the increased use of the Internet for charitable solicitations, the National Association of State Charity Officials (NASCO) developed nonbinding guidance known as the Charleston Principles. The principles determined that, if online activity specifically targets residents of a specific state, there is cause for registration. On the flip side, if the organization has only an Internet presence, even if unsolicited funds are received, that isn’t enough to require state registration.

The consequences and financial and reputational risks of an organization’s noncompliance with charitable solicitation laws are numerous. An organization can be listed on a state’s website for noncompliance, fined, hit with a state authority agency audit, and forced to return donations. The most drastic outcome is the potential loss of your tax-exempt status in a specific state.

If you set the tone and do your due diligence, you can help to minimize these risks to your organization. Reach out to your accounting or consulting services provider for assistance.

© Clark Nuber PS, 2014.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.