Public Charities Need to Address Compliance Risks

Greg McRay, the founder and CEO of Foundation Group – an organization with the stated mission of helping nonprofits thrive – writes that, “One of the least understood compliance issues facing nonprofits is charitable solicitations registration. Consequently, this also makes it the filing that an organization is most likely to be delinquent concerning. And that’s a recipe for trouble – trouble that is unnecessary and totally preventable if nonprofits take the time to understand this critical compliance requirement.”

Before we consider further the risks associated with charitable solicitations registration, let’s consider some background information on public charities and private foundations, both of which are 501(c)(3) organizations – organizations established for the purpose of granting money for charitable causes.

In a nutshell, public charities perform charitable work while private foundations support the work of public charities. While oversimplified, this description should give our readers a starting point to understand these nonprofits. While public charities are supported by the general public and must have a diversified board of directors, private foundations can be controlled by and even funded by a relatively small group – oftentimes by an individual or family. Both public charities and private foundations are regulated by the IRS. In addition, over 40 states and the District of Columbia require 501(c)(3) organizations to meet charitable solicitations registration requirements.

Many small and medium-size charities do not have formal compliance programs due to a lack of awareness among nonprofits – especially smaller ones run by volunteers – as well as the poor job done by most states in making charities aware of compliance requirements. For example, there is a widespread mistaken belief that registration in the state where the charity is domiciled is all that is required.

McRay further writes about the history behind state registration: “the necessity to register with a state in order to seek donor support goes back at least 30 years. Over time, more and more states saw the need to directly regulate fundraising activity, primarily in order to provide a certain level of protection to donors.”

While compliance by nonprofits has been minimal until recently, the past few years have seen a dramatic rise in compliance as states have been doing a better job of getting the message out. McRay states that, “it is harder than ever for a nonprofit to escape scrutiny for long.”

The first step in assuring compliance with applicable state laws is to determine which states require registration for the particular charity. Once that is determined, the nonprofit files applications with these states, and nearly all  require an annual renewal. While this can be an arduous process for small nonprofits, it must be done to avoid fines and other penalties. Of course, donations from individuals and grants from private foundations are absolutely essential to the work of public charities.

The penalties for failing to comply with state charitable solicitation requirements comes at a price. One significant risk is damage to the nonprofit’s reputation. Once the public loses confidence in a charity’s commitment to follow the rules donations and grants can dry up quickly. Another penalty is financial with fines levied by states targeting delinquent nonprofits. Worse still can be the media coverage of a noncompliant charity which could have readily reduced its risk by adhering to the various state registration requirements. Remember Ben Franklin’s sage words, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” In short, Ben Franklin did things the right way every time, and public charities must act similarly.

To be successful, public charities must be transparent with their stakeholders (donors and the public at large) and operate in full compliance with all applicable federal and state laws. In the case of charitable solicitations registrations, it is not just best practice: it is the law.