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Charitable organizations play a vital role in society. Their services span many fields, from caring for the needy to protecting wildlife or preserving old buildings. Are you planning to set up a charity to serve your community? If so, it is important to understand how a charity is registered.
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Different Types of Charities
Public charities comprise churches, hospitals, schools and other philanthropically set up organizations. They raise funds for their operations through specific programs and from the general public. A public charity can also actively support other public charities.
Private foundations normally have a single main source of funds gifted by a single family or corporation. They provide grants to other charitable ventures that promote their mission. A private foundation can in turn be classified as a private operating foundation, an exempt operating foundation or grant making foundation. All charities are considered private foundations unless an organization is specifically excluded from this definition as referred to in section 509 (a) pertaining to a public charity.
Organizations qualifying as charities receive tax exemption under section 501 (c) (3) of the Internal Revenue Code if their organizing documents contain provisions to satisfy this requirement. These provisions ensure that the assets of a charity are used for the purpose described in section 501 (c) (3). If the charity is dissolved, the assets are distributed for an exempt purpose or to the federal or state government for public use. In addition to federal tax exemption charities get exempted from State and local taxes.
Private operating foundations are levied an excise tax on their net investment income if their total tax for the year exceeds $500. Additionally, penalty taxes can apply if the organization is run in a way that jeopardizes its main objective of serving the public.
An Exempt Operating Foundation is a private operating foundation that has been publicly supported for at least 10 years and has a governing body representing the general public. At any time during a tax year, fewer than 25% of this body would consist of persons considered “disqualified" on account of their majority stake in the organization. A private foundation requiring exemption should obtain a ruling from the IRS to this effect.
Private foundations that are neither of the above two are called grant making foundations.
All donations made to a tax exempt charitable organization by individuals or corporations are deductible under code 170.
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Registration of a Charity
The first step in setting up a charity is to check on applicable requirements with your State office. Most States require registration before an organization can raise funds from the public. However some States may exempt an organization if the funds it hopes to raise is below a certain limit provided no compensation is paid to anyone to solicit funds.
To be effective, a charitable organization should have a well defined mission, programs and services that further these objectives, a reliable way of funding operations and supporting facilities.
To set up a charity, articles of incorporation or other organizing documents have to be filed with the appropriate State agency. These documents should contain bylaws required by the State for registration. An application for exempt status should also be made to the Interal Revenue Service (IRS). Every charity must get an employer identification number from the IRS even if it no employees are hired.
The IRS expects charities to be well governed. This means that the organization should obey tax laws and comply with all regulations including State bylaws. The charity should have competent persons to run its operations and manage its funds. The governing body should have independent members representing the public interest. The IRS reviews the governance and policies of a charity at the time of the application as well as during its annual reviews. The organization is expected to be transparent and accountable in its activities. It should provide accurate information to the public about its policies and finances.
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Should You Register a Charity?
A registered charity has some benefits. It can apply and be granted tax exempt status. The charity can solicit donations from the public and avail of public and private grants. Its formal structure and mission ensures it is operated with limited liability.
At the same time, the organization has to bear some costs in terms of time and expenses relating to professional and incorporation fees and maintaining records and issuing reports. Based on whether it is a public or private, the charity has to file a Form 990 or 990- PF which is subject to public disclosure. This return provides information about its finances, Board members and employees. Even if a core group of people formulated the mission, regulations require sharing of control with members of the public.
There are alternatives to setting up a charity. One option is to volunteer for a charity that shares your objective. Another is to find a non-profit organization that agrees to act as your fiscal sponsor to carry out your venture. You are then eligible to get grants or tax-deductible donations under your sponsor’s tax exempt status.
Registering a charity gives you the opportunity to serve your community or further a cause you are passionate about. Understanding how to do so can contribute to better planning and implementing.