Nonprofit Myths: #3 - Public Charities

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Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.

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Myth: I am starting a foundation to give out school supplies to kids who cannot afford them. I can’t wait to see their little faces when I give them new backpacks and markers!

Truth: It’s a great mission but creating a “foundation” is probably not the way to accomplish it. There’s a better kind of charitable organization, a public charity, that’s also nonprofit and tax-exempt but has a different source for its money. Foundations are usually set up by wealthy individuals or corporations and earn money through investments. Public charities must get at least one-third of their funding from the general public. Although they are both classified as 501(c)(3) nonprofits by the IRS, there are important differences when it comes to how they get and use their money. (the IRS Publication 3833 spells out the rules for direct payments to individuals).

When it comes to kids and their school supplies, a foundation could (in theory) be allowed to make direct donations, but it would have to meet several tests in order for the gifts to meet IRS rules. School kids needing backpacks do not have IRS credentials or nonprofit tax returns, and grant-making foundations would not give out school supplies directly to children.

Since kids aren’t qualified as nonprofits, the donor would have to be an “operating foundation” and run its own program. Only about nine percent of foundations use their own staff, resources and money to actually run programs. The kids would have to prove need; the gifts would have to be consistent with the original mission of the foundation.

Instead, a grant-making foundation would work through public charities  or other nonprofits by giving them grants to buy school supplies and keep track to be sure that’s what was done with the money.

Many organizations choose to use the word foundation in their name although they’re actually public charities. It’s a label that can cause confusion if you intend to apply for funding from a grant-making foundation. Grantmakers are overloaded with requests from nonprofits and if you’re calling yourself a foundation it might trigger a hasty rejection—even if the work you want to do is important.

Moral of this myth: Choose your designation carefully when you decide to create your nonprofit. If you (or your family, or corporation) are going to be the source of funds, then calling yourself a foundation might be appropriate. But the gold standard is public charity status, a 501(c)(3) that invites grant-making foundations to work with you for those school kids.

 

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"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission



 

For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?

 

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