Search form


Advising clients on starting a charity

With little relief in sight from crises affecting our region, more and more attorneys, accountants, and financial advisors are fielding questions from well-intended clients who are thinking about starting their own nonprofits to help people in need.

Whether a client's passion is health care access, support for the arts, social justice, or any one of hundreds of other worthy causes, it's critical that you provide counsel regarding the pros and cons of forming a brand new nonprofit.

Here are suggested topics to include in your client discussions:

  1. For profit, or nonprofit? Help your client decide whether they really want to start a charity or whether what they’re envisioning would be better structured as a for-profit business. Explain that the rules and tax advantages are different for nonprofits, as well as the way the enterprise is funded. Most charities keep the lights on by securing donations while businesses stay the course by selling goods or services. Either way, both have to pay employees and budget properly. This may seem like common sense and something that any astute client would understand, but sometimes even these basic principles can be overlooked when enthusiasm for a cause takes over.
  2. The state and the Feds. Explain to the client that if they decide to start a new charity, just like a business, it requires setting up a legal entity. Unlike a for-profit business, though, to qualify as a tax-exempt nonprofit, the client will need to apply to the Internal Revenue Service for an exemption under Section 501(c)(3). This exemption is what allows the organization to avoid paying income tax, and it also allows others to donate to the organization and be eligible for a tax deduction on their own tax returns. It can take anywhere from nine months to a year to receive the designation.
  3. Sell, sell, sell. Most people who start a charity are passionate about a cause and probably already have programs in place or in mind to help others. The trick, though, is to get out there and share the news about the cause so they can raise money. Your client needs to be aware that starting a new charity involves “sales” or marketing just like a for-profit enterprise, except they most likely will be asking for donations to support their good work instead of selling goods or services like a for-profit business. Certainly, nonprofits can generate earned income, but most organizations also should be designed to receive public support in the form of grants and contributions to avoid certain tax rules, such as those prohibiting excess “unrelated business taxable income.” 
  4. Verify the unmet need. Finally, and perhaps most importantly, encourage your client to research whether there are any existing organizations that are already serving the mission your client intends to fulfill. During challenging economic times such as these, best practices suggest that two or more nonprofits combine their efforts to create efficiencies and ensure more effective ways to help to people in need.
  5. Answer unmet needs though a community foundation Donor Advised Fund. Community Foundations like CFAAC can become your client’s partner in philanthropy and assist in locating and vetting nonprofits that meet the client’s goal to aid those in need. Benefits of partnering include providing tax relief through an immediate charitable tax deduction, as well as the ability to accept complex assets. Together, you, your client, and the Community Foundation will be able to have a lasting impact in the community. 

Sign up and stay connected with CFAAC:

Thank you! Your submission has been received!

Oops! Something went wrong while submitting the form