As we have previously reported, charitable organizations and employers are able to play an important role in providing disaster relief in response to the COVID-19 crisis. During this crisis, individuals may be seeking new ways to help, including by starting new charitable organizations. We describe below some alternatives to consider before forming a new charity, as well as a high-level summary of the necessary steps to form a new charitable organization.
How to Help Without Forming a New Charity:
Cooperation is the name of the game for halting the spread of COVID-19. Governments and health officials around the world are urging us all to shift from an individualist mindset focused on our personal health and comfort to one of collective action focused on strengthening the health of our broader community as we attempt to “flatten the curve.” Philanthropy can benefit from a community-based mindset as well—before forming a new charity, consider opportunities to join the collective efforts already being pursued:
- Find a Partner. Research the organizations that are already addressing the pandemic, and consider joining their efforts as a volunteer, donor, or partner organization.
- For example, the Council on Foundations has published a list of organizations and community foundations engaged in local, national and international efforts in response to the pandemic, and the New York Community Trust has formed a disaster relief fund to support NYC-based nonprofits responding to the COVID-19 crisis.
- Partnerships may also include the creation of a fiscally sponsored project at an existing charity. A fiscal sponsor generally provides administrative, financial, fundraising and other services to a charitable project it wishes to support and charges an administrative fee for such services. In a fiscal sponsorship relationship, the sponsor has ultimate control over the use of charitable assets raised for the project. Fiscal sponsorship is often a good path for testing new ideas before “spinning off” the project into an independent charity.
- Pursue Grantmaking through a Donor-Advised Fund. Individuals interested in making charitable grants through the use of tax-deductible funds may wish to establish a donor-advised fund (“DAF”) at a sponsoring organization (such as a community foundation or a national DAF sponsoring organization). A DAF is a fund or account held at a community foundation or other public charity over which the donor (or anyone appointed by the donor) has advisory privileges. Donors can make tax-deductible contributions to, and recommend future charitable distributions from, the DAF, including grants to organizations working to support those affected by the pandemic. Also, as we previously reported, if an employer forms a DAF focused on disaster relief assistance, it may be structured to permit distributions of direct assistance to employees or their families.
- Broaden Your Support. Think broadly about how you want to help, and focus on areas that are most meaningful to you. There is a significant and immediate need for medical supplies and care in response to the pandemic, but this crisis has also had a negative impact on the entire nonprofit sector, which may continue well after the pandemic has ended. Many nonprofits, from social service organizations to museums and performing arts organizations, are experiencing an increase in demand for their services or a decrease in revenue due to the necessity of cancelled events and closed doors. The Coronavirus Aid, Relief, and Economic Security Act, recently approved by the Senate and the House, includes a number of provisions designed to encourage charitable contributions and emergency unemployment relief for nonprofits and governmental entities. Consider opportunities to help nonprofit organizations – both national and those in your community – bridge the financial gap caused by the pandemic and ensure the longevity of the services they provide.
Forming a New Charity in Response to an Unmet Need:
This pandemic is unprecedented in many ways, and efforts to address this crisis may require innovative approaches that necessitate the formation of new charitable entities. We have outlined below the primary steps and considerations involved in forming a new nonprofit organization. While you can form a nonprofit organization in any state and in several different organizational forms, Delaware is often the jurisdiction of choice. For ease of reference, we will use the term “charity” to refer to this new nonprofit corporation.
- Determine Your Charitable Mission.
- To fulfill the federal requirements for tax exemption described below, the charity must be formed and must operate exclusively for charitable, religious, scientific, testing for public safety, literary, or educational purposes.
- Charitable purposes can be broadly interpreted, and can encompass activities in furtherance of the relief of poverty, combating community deterioration, and lessening the burdens of government.
- A charity focused on providing disaster relief has its own set of considerations, as does a charity formed for the purpose of providing employer-sponsored disaster relief.
- Form the Charity.
- After determining the purpose for which the charity is organized and will operate, draft a certificate of incorporation stating this purpose, and file the certificate with the secretary of state or other appropriate department in the state of incorporation.
- The charity will exist upon filing of the certificate of incorporation.
- The effective date of the charity’s tax-exempt status will apply retroactively to the date of its formation (i.e., the date of incorporation), and donors may be eligible to receive a deduction for any charitable donations made as of or after the date of formation.
- Practice Good Governance.
- After the charity has officially been formed, select the initial board of directors and officers of the charity. The charity should generally have at least three directors, and the initial officers should include a Chair/President, a Secretary, and a Treasurer. Officers may, but need not be, directors.
- The next step should be to draft and adopt the charity’s governance documents, including bylaws and operational policies (including a conflict of interest policy).
- Apply for Federal Tax Exemption.
- Once the charity has been formed under state law, the charity will need to complete and submit an application (IRS Form 1023) in order to gain recognition as a federally tax-exempt entity. The exemption application is the charity’s chance to explain its charitable mission to the IRS, and to show the IRS how it plans to accomplish that mission. The IRS recently transferred the IRS Form 1023 to an online application process, which can be found at pay.gov.
- Smaller charities may file IRS Form 1023-EZ, the IRS’s “short-form” exemption application. To be eligible to file Form 1023-EZ, the charity’s projected annual gross receipts must be less than $50,000 for each of the next three years, and cannot exceed $50,000 in any of the past three years. In addition, the fair market value of the charity’s total assets cannot exceed $250,000.
- Receiving recognition of tax exemption can ordinarily take many months (the IRS typically takes between three and nine months to process an exemption application). However, a charity focused on disaster relief or alleviating emergency hardship may request expedited handling of its exemption application. In light of the current situation the IRS may have decreased capacity to review all 1023 applications, and even an expedited review may face delays. The IRS will only expedite applications if the charity can demonstrate that it is meeting an immediate need of disaster relief or emergency hardship victims and that its ability to provide immediate assistance to such victims will be adversely affected in a material way if the application is not reviewed expeditiously. In order to request expedited handling, the charity must provide:
- a compelling reason to process its application ahead of others;
- a brief description of the disaster and details of how the charity will provide relief;
- an explanation of the immediate need for the specific disaster relief services the charity provides;
- a description of any pending grants to the charity, including information about the grantor and the amount or property to be received;
- an explanation of how the loss of such grant(s) might impact the charity’s ability to operate and provide relief;
- a description of any significant business emergency, if applicable (such as an impending deadline imposed by a court or government agency) demonstrating that the business emergency will significantly impact the charity’s ability to operate and explaining how expediting the application will enable the charity to avoid the emergency;
- a statement explaining any other anticipated negative consequences should the expedited processing be denied; and
- the date an exemption letter is required, if applicable.
- Federal and State Filing Requirements.
- New charities should be aware of and ensure they are fulfilling all state and federal filing, registration and reporting requirements.
- For example, nearly all tax-exempt organizations must file an annual information return with the IRS (Form 990, Form 990-EZ or Form 990-N), and make this return available for public inspection.
- There are additional state registration and reporting requirements, both in the state in which the charity is incorporated and in states where it conducts business or carries out fundraising activities.