As we all know, social media is becoming a greater and greater influence on our daily lives. I'm easily connected to over a dozen groups that provide conversation around topics of interest to me including those relating to my home town community. Not long ago, a neighbor posted a question relating to the solicitation of donations by a charitable organization.
"Does a nonprofit need to have a license to accept donations?"
It is important for every donor to ask questions around an organizations' operations and important for every nonprofit to be as transparent as possible to their community. Of course, I had to chime in with several posts, as this isn't all that straight forward a question. However, the details of the conversation are not as important as the gist of the question.
How should donors evaluate an organization to ensure their donation is effective?
This should be as important a question to 501 (c)3 organizations as it is to donors. First the basics, generally, a nonprofit organization is like any other business except they have been granted by the IRS an exemption from paying tax on revenue. There are several types of nonprofit status and the most common form is a 501 (c)3. Now, you can spend your money in any way you like and therefore you can gift money to any person or business, but when you donate money to a (c)3 you can deduct the donation from your personal tax return. A nonprofit is owned by the community not an individual and is governed by a board of directors. They should be able to answer all your questions about the organization and provide you with a receipt of your donation and proof of their nonprofit status. Following are some areas you will want to investigate to be relatively sure you are making a good investment in your community or area of interest.
- Licensing – If you want to encourage donations, the first hurdle for any nonprofit organization is to register with the Secretary of State and file for nonprofit status with the IRS. These are two separate legal statuses and in most cases both are necessary. The IRS Determination Letter is a donors proof that a donation can be deducted from personal taxes. These two documents will ensure that the organization has completed the stepping stones of legal compliance. They are not necessarily a guarantee that your money will be spent in the way that you expect.
- Transparency – This is the hallmark of good governance for a nonprofit organization. They should be able to provide you with a receipt of your donation and a copy of their IRS Determination Letter. They should be open to telling you about all aspects of their operations. Disclosure laws vary from state to state, in general, nonprofits should be happy to provide financial and organizational information like bylaws, board minutes, and IRS form 990 upon request. If they don't, there could be a problem.
- Personal Relationship – Fundraising is about building relationships. An open relationship with an organization is your best indicator of their forthrightness. Do they answer your questions willingly or with trepidation? Are they forthcoming with all the documents that you request? Are they excited to tell you about the wonderful work they do? Often your gut will tell you more about an organization than any document you receive.
- Financial Stability – The IRS 990 is the report filed by a nonprofit organization that is similar to your personal tax return. It provides a wealth of information about revenue and expenses that can tell you a great deal about how an organization is managed. Small organizations that earn under $25,000 a year typically do not need to file a 990. Audited financial statements are another window into operations. Provided at a cost to the organization by an outside CPA or auditing firm, they are usually only found in organizations that can justify the cost.
- Ratings and Reviews – There are several sources of charity evaluators that provide ratings and reviews for nonprofit organizations. You can start with Guidestar, Charity Navigator, and Charity Watch. If you can't find the nonprofit in question here, chances are they are not yet identified by the IRS as a charitable organization. Keep in mind that if an organization has filed their 1023 charitable exemption paperwork with the IRS, they are considered in process and you can donate to them.
- Impact and Outcomes – As a donor myself, I am not so concerned about overhead as I am about impact. The rules around percentage spent on administration are changing and measuring outcomes are becoming a more important factor in evaluation. Seeing verifiable numbers that support and reinforce success stories is a good indicator that the nonprofit you choose to support is doing a good job. In simple terms, does the charity accomplish its mission? Do they have clear goals and do they evaluate their own programs, better yet do they regularly engage in outside assessments? Do they provide both anecdotal success stories and data that back up their claims? Are they able to tell you how many people they serve, how their services are administered, or how they define success? These are the true tests of effectiveness.
By and large, charitable nonprofit organizations do a heck of a job on shoe string budgets. They are often over worked, understaffed, and nearly overwhelmed. My experience is that they have been started and staffed by passionate people who only wish to do good. Occasionally, someone will try and game the system resulting in fraudulent activity, but it is not that prevalent. If you suspect dishonesty here are some steps to help you report fraud. You can also report a complaint to your Secretary of State. One bad organization can taint the whole barrel, so it is important for donors and nonprofits to support one another and to work to expose nefarious individuals.