In a world where there seems to be either a law or regulation covering every conceivable human activity, one might be forgiven for concluding that anything involving money or a gathering of more than three people might require some kind of official sanction, license, permit, or registration with some obscure government office.

As with most seemingly unnecessary regulations, the only likely purpose of such a license is to prevent some high-ranking government official from being unexpectedly informed of potential legal action, an oppositional political movement, or embarrassing media coverage. Nevertheless, if the rules require it, then permission must be obtained. The alternative is time consuming and expensive litigation either at the scene – or for months afterwards.

When it comes to a fundraising event, most regulations are governed at the state level. Some states have agencies with the specific responsibility to monitor the activities of charities and other non-profit organizations. If the event involves the serving of food or drink, especially alcohol, there may be other agencies with jurisdiction as well. If you are planning a fundraising event, here are some things to consider.

Charitable Organizations

In nearly all states and jurisdictions, a charitable organization soliciting any donations – whether they be in-kind, remaindered clothing or property, money, or even real property – must at least register with the state government. In many cases, the smaller the organization and the lower the amount of the fundraising drive, the less burdensome these registration requirements are.

Churches, schools, and various other kinds of civic organizations are often exempt from registration due to the nature of their relationship with the community. But while they may not necessarily need a separate registration with the state, they will often need to establish status as a non-profit organization as part of their initial formation, or before soliciting deductible contributions.

Professional Fundraising

Fundraising events are very often handled not by the organization itself, but by a company or individual with specialized experience in event planning and scheduling. In nearly every instance, a person or company soliciting donations on behalf of any other person or company must be licensed at the state level before either being paid to raise funds, or actually collecting any funds for the separate organization.

These requirements are meant to proscribe fraudulent activity. An example would be where a person or group of people fraudulently claims to represent the interests of a recognized charity, solicits donations on behalf of that charity, and then misappropriates the funds for some other purpose.

Another important element of professional fundraising is disclosure. Very often, as a requirement of their license, a person being paid to raise funds on someone else’s behalf must not only disclose the nature of their fundraising activities, but must also disclose that they are being paid to solicit donations on another organization’s behalf.

Events

How an event is licensed and sanctioned by the government almost always depends on the venue. For example, if a charity throws a parade, there are going to be permit requirements at the city level for traffic abatement, police involvement, and crowd control. If a church has a carnival on their property, they may need various kinds of paperwork for waste disposal, food service, and so forth.

On the other hand, if an event is held inside, at a convention center, church facility, school, or other establishment meant to hold large crowds, the requirements for licensing may be either greatly reduced or non-existent. This is due to the fact that those facilities are likely already allowed to host large crowds. There may yet exist licensing and registration requirements for the actual donations, but the event itself may not necessarily require a special set of permissions from a government agency.

Tax-Deductible

In order to solicit tax-deductible contributions, an organization must register with and be granted permission by the Internal Revenue Service to operate as a federally recognized non-profit organization. As part of the regulations related to section 501, contributions must be reported as part of the nonprofit’s regular business activities. Occasionally, when large donations are involved, additional paperwork may need to be filed by both the organization and the contributor in order to qualify for certain kinds of deductions at tax time.

Political Organizations

By and large, political events are a whole different animal when it comes to both the event itself, and any fundraising that takes place. Because the Constitution prohibits Congress from restricting assembly, the press, or protests, political fundraisers operate under a different set of rules. Naturally, contributions to a campaign or cause aren’t deductible, but a professional fundraiser often must still register with the state. Federal Election Commission regulations may apply to any material distributed by a campaign or political cause as well, even if the purpose of the material is to organize a campaign event, rally, or registration drive.

Games

Some organizations hold events which are primarily meant to be social entertainment and serve only secondarily as fundraisers. Raffles, charity auctions, bingo tournaments, and so forth are popular options for these organizations because they serve a number of purposes in addition to their function as fundraisers.

With any game of chance, fundraising event organizers must exercise considerable caution – as there are both civil and criminal penalties for crossing the line from harmless fundraiser to unsanctioned gambling. Any organization considering such an event should contact a qualified attorney in advance. The rules and procedures for running these sorts of public games can be more than a little complex.

For most intents and purposes, the registration and licensing requirements for fundraising aren’t all that burdensome. They do require advance planning and following the rules may affect some details of the event. But with the number and variety of events that take place on a regular basis across the country, it is pretty clear that even a moderately well-prepared campaign or drive can obtain permission and schedule a successful event without unusually high levels of effort. Usually, the best option is to find someone who has gone through the process at least once and learn from them how the licensing process works.

What Is a Nonprofit?

A nonprofit organization or business has elements that a for-profit business doesn’t have. Nonprofits are established to benefit society in some way and their main goal is not to gain personal monetary profit from their contribution to society. There are three elements that are indicative of a nonprofit such as:

• Having a mission that focuses on a benefit to society without their goal being for a profit
• The organization or business is owned by the public and shares in the interests of the organization or business
• Whatever income is raised or gained for the organization is put back into the organization and not into the pockets of one or more people

Under Internal Revenue Service Rules, no individual can benefit from a nonprofit’s activities except through their salary. In 2017, there were more than 2.2 million registered charities in the United States. The top five states with the highest number of nonprofits over 100,000 are:

• California
• Texas
• New York
• Florida
• Pennsylvania

Nonprofit organizations are soup kitchens, hospitals, universities, and churches. Nonprofits are divided into three subsections of the Internal Revenue Code 501(c). There are public and private organizations.

Public nonprofits such as hospitals, higher education, human services, the arts, and other such entities, register with the IRS as 501(c)(3) Public Charities:

• Their gross receipts are $25,000 or more (such as hospitals, museums, universities, and others)
• Their gross receipts are under $25,000 (Neighborhood organizations, community theaters, and others)
• Registration for public congregations is voluntary

Nonprofits that usually are not registered with the IRS include very small organizations with gross receipts under $5,000 and small congregations. Each nonprofit’s purpose and revenue will be different and depends on many factors. Not all nonprofits will fall under the same category as other like entities.

Private Foundations that can also be hospitals, higher education organizations, and other like entities must always register without exception, with the IRS. Private foundations rely mostly on income from investments generated by their endowments.

A small percentage of these private foundations are actually operating organizations and are usually grantmaking, and most are family foundations. These foundations are always registered with the IRS as 501(c)(3) Private Foundations.

There are other small tax-exempt charities and organizations such as credit unions, social clubs, fraternal organizations, civic clubs, and others that are registered under various the United States Internal Revenue Code 501(c).

What Type of Nonprofit Do I Have?

The IRS officially recognizes 27 types of nonprofits that are exempt from federal taxes and in some instances state taxes. Not all nonprofits recognized will be fully exempt and each nonprofit is different in scope, contribution, and lobbying. The IRS provides a guideline for nonprofit exemption, and subsection 501(c) of the IRS tax code lists rules for each nonprofit.

Nonprofit is a status based on taxes that is given to an organization based on its nature. If you seek funding only from the members of your organization, you may not have to file for a general business license. If you collect funds from fundraising campaigns, seek grants from the government or state, you might need a charitable solicitation license.

Though churches are not required to obtain a license, they must obtain a license if they provide services beyond their regular church service which must be regulated or inspected regularly such as a daycare or soup kitchen.

It is important to note that registering to solicit contributions for your nonprofit is not the same thing as filing a business license. And not all states require you to register a charitable organization. Most all states require registration, however, the following states do not require an organizer to register their charitable nonprofit: Delaware, Idaho, Iowa, Indiana, Nebraska, South Dakota, Vermont, and Wyoming.

Texas has registration limits relating to public safety and veterans organizations and Arizona requires registration if the solicitation of funds if they are intended to benefit or support veterans organizations. Some other states do have exceptions and contacting an attorney who can study your nonprofit proposal and application, and who knows the laws of your state, can assist in the future planning and preparation for launching your nonprofit.

Though the IRS recognizes 27 types of nonprofits which also have subsections, the following are the seven most commonly known nonprofits:

• 501(c)(1)

Corporations organized under an Act of Congress such as federal credit unions

• 501(c)(2)

Holding corporations for exempt organizations, which means they can legally hold the title to the property of an exempt organization.

• 501(c)(3)

The most common type of nonprofit, including religious, scientific, educational, and charitable organizations. All 501(c)(3) organizations are considered private foundations, (i.e., nonprofits that don’t qualify as public charities).

• 501(c)(4)

These can be local associations, civic clubs, welfare organizations or any entity that provides educational or recreational activities.

• 501(c)(5)

These nonprofits are educational or instructive in the improvement of products or labor by nature and can fall under the classification of labor or agricultural organizations.

• 501(c)(6)

These nonprofits are usually such groups as chambers of commerce or business leagues which seek to improve conditions of the business environment.

• 501(c)(7)

These nonprofits are usually recreation or social clubs which promote social activity.

Where Do I Start?

The first step anyone should take if they want to start a nonprofit is to consult an attorney. An attorney can inspect the purpose, plan, and business language of the proposal for the organization. An attorney can advise you on the laws of your state, what is required by the IRS, and assist you in navigating the many aspects of your nonprofit – which in some cases can be complicated.

After you consult an attorney, the following steps are usually taken to create a nonprofit – though the list is by no means exhaustive:

• Register with the state. Your attorney can advise you if you are one of the exempt states.
• Apply for nonprofit status with the IRS. To be considered a profitable nonprofit to the IRS, an organization must show it has a broad base of public support within its first five years.
• Register as a Charitable Solicitor. If you are going to raise money and your nonprofit is seeking support from the public for funding.
• Create a board of members. In order to qualify as a nonprofit, staff must be created to maintain it – such as treasurer, secretary, fundraiser, and other positions.
• Create Bylaws. Bylaws describe your operating procedures.

There is a lot of work and detail involved in creating a nonprofit. It is not as hard as it all can seem though it is harder than one initially might think. If you have a purpose and a plan for a nonprofit, one of the wisest things you can do is to consult an attorney who can guide you through the process. While it is not an impossibly difficult task, it is one that can be very detailed and extensive.

There are times in our lives where unexpected accidents or emergencies come up and our normal income and savings just will not cover everything. We can ask friends and family for assistance, but even that might not cover everything. Thanks to the internet, there are donation services that allow us to make a case for help from total strangers, tapping the reserve of empathy and charity of others in order to make ends meet. But even though money received from online donation services are donations, you may be responsible for taxes on that money.

Donations to charities are considered tax-exempt because they are made to organizations who have been designated by the government as charities. They have filed special paperwork that allows them to receive money and not pay taxes on it. You, as a private citizen, are not a charitable organization, and thus are required to obey any and all federal and state tax laws.

However, donations collected through donation services may be considered gifts. Gifts, in the eyes of the IRS, are not taxable because the recipient does not provide something in return to the giver. The size of the gift also comes into play when dealing with taxes. Any gifts over $14,000 are considered taxable, but the recipient does not pay them. The giver of the gift must pay what is called a gift tax.

Gift taxes can be complicated. It all comes down to who is giving the gift. An individual can give a gift of $14,000 without paying a gift tax. However, if a couple gives the gift from a joint account, they can give up to $28,000. The IRS considers the couple as being able to give $14,000 individually. The couple can give one in-law from two different other couples up to $14,000, making the annual limit of a couple giving a gift to $56,000 without paying a gift tax.

There are exceptions to gift taxes. A person giving their spouse money is not considered taxable for any amount of money. The catch is that both spouses must be U.S. citizens. If the spouse is not a citizen, special rules apply. If the gift is directly paid to a medical or educational institution, such as for paying medical bills and tuition costs, then it is not taxable.

Crowdfunding has opened up a whole new way for people to raise money for a variety of things, from starting a business to a creative endeavor. If donations are made in these conditions, the money is taxable because the person receiving the donations is providing a product or service in return for the money. Most donation sites specifically consider money donated for an emergency or problem in time of need as a gift.

There have been cases where large sums of money were collected through donation sites that were taxable. For instance, if a person sets up a donation site for another person, the money could be taxed if the person who set up the site, collects many donations and gives it all to the recipient. Remember, individuals are only allowed to give $14,000 as a gift without it being taxed. If the recipient of the money had set up the site, then taxes can be avoided, as the money is going straight to the person it is intended to help. Also, it is within the tax rules for donation pages that get over $20,000 to be issued a tax form.

There are issues for the donors as well as the recipients. Donations made on crowdfunding sites are not tax deductible. They are considered gifts and not donations, and therefore are not eligible to be deducted. In order for donations to be deductible, they must have been given to a charitable organization with the proper designation.

If you are unsure of what your tax responsibilities are when it comes to crowdfunding donations, consult a tax professional. Crowdfunding is still a very new phenomenon, and accountants and the IRS are still ironing out the legal details of receiving crowdfunding.

There are other situations where donations can be collected. If your employer gives you a bonus at Christmas, it is considered taxable income even though the gesture can be seen as a gift. However, if the bonus was small, such as them buying you lunch or giving you a small physical gift, there is no need to report it.

Another area where donations can be taxed is for political campaigns. If you choose to run for office, there are special rules applied to any money given to you for your campaign. Any money given to you for your campaign must be spent on the campaign, or saved for future campaigns. Any donated money that is used for anything else other than the campaign is considered taxable income.

If you are a campaign contributor, there are tax issues involved there as well. The IRS strictly forbids any campaign contributions from being deducted from your federal taxes. However, at the state level, the rules are a little different. Four states: Oregon, Virginia, Arkansas, and Ohio, all allow you to claim campaign donations on your state taxes up to a certain amount. This is to encourage citizens to participate in the democratic process, but there are many controversies surrounding the practice. Opponents of the practice claim the credits cost states tax revenue.

Whether you are running for office or just need a little hand to get by, charitable donations to individuals have stepped into a new, confusing era. The IRS has yet to catch up with these new trends, and accountants are not fully prepared to handle the paperwork involving crowdfunding. The increased use of donation sites will prompt swift legal changes and the community of crowdfunders will experience some growing pains. Still, the use of the sites is a great way to help people in need who have no other alternative. Whether the money was given to help someone pay a medical bill, start their own small business, or write a book, donating to individuals is always a good investment.

The advent of crowdfunding and the concurrent dramatic expansion in non-profits in both the United States and around the world, has presented many business owners with more than a few not-so-easily-answered questions. At last report, Kickstarter, the leading crowdfunding destination site on the web, has collected more than $3.5 billion for nearly 400,000 projects since 2009.

Many crowdfunding sites don’t accept donations for the traditional kinds of projects non-profit organizations manage. But the truth is that Kickstarter and other crowdfunding sites like it have demonstrated that individuals and businesses are willing to put up funding for a wide variety of causes – provided they are sufficiently motivated to see the project succeed. Even if the sites don’t encourage non-profits to crowdfund, it doesn’t change the fact that there are likely many people who would be willing to contribute.

But complex questions arise when a not-quite non-profit wants to get in on the action. Can someone donate to a for-profit enterprise? How is that donation handled legally and financially? How does it affect the tax situations of the contributor and company? How can a for-profit company solicit donations without looking like they are either performing the digital equivalent of panhandling or staving off bankruptcy?

The answers to these questions are all related. So it is necessary to take a step back and define exactly what all these different situations mean before we can determine the practical answers.

Crowdfunding

From a contributor’s standpoint, crowdfunding is not all that different from straightforward capitalism. A group of investors gets together, pools their capital and forms a company or project with it. The difference between a crowdfunded project and a capitalized business is the “investors” or contributors receive no shares in the new company.

From the business point of view, crowdfunding is more like offering a pre-order than it is a round of capital. There are two reasons for this. First, the amounts in question in a typical crowdfunded project are minimal. Very often new companies and projects will offer contribution tiers in the single digits. The justification for this is an emphasis on the number of contributors rather than seeking high buy-ins.

The second reason businesses see crowdfunding as more of a pre-order is because the rewards offered to their contributors often center around the product or service being proposed as the reason funding is needed. If someone contributes to a new board game, for example, the reward for their contribution is very often a copy of the game itself.

From a legal point of view, crowdfunding does not qualify as a securities offering because no shares in the company are being solicited. Were shares being made available, it would qualify as a securities offering and there would be voluminous regulatory hoops the company would need to jump through. Crowdfunding bypasses this requirement because ultimately, the money offered is a gift. The contributor is promised nothing other than a minimal one-time reward, and there isn’t legally any contract to deliver even that much.

Since a contribution in these circumstances is legally a gift, then it would seem any organization would be in a position to solicit donations. However, there’s one more issue to consider.

Taxes

The chief strength of a non-profit organization is the fact that IRS regulations permit individuals to deduct contributions to a non-profit from their taxable income.

This process is governed under Title 26, section 501 of the United States Code. This law and several others apply certain criteria to an organization seeking non-profit status. It also obligates any such organization to perform certain acts and file appropriate paperwork with various government authorities at both the federal and state level.

An organization that does not meet the requirements for a non-profit can still accept donations, but they can’t promise their contributors any tax benefits as a result of making such donations. Legally, those funds would be considered gifts, and would likely not qualify as a deduction for the contributor.

The organization accepting such a donation would also likely have to pay taxes on it as if it were regular income. This would be true for any crowdfunding income, so it is almost certain it would apply to any donation or contribution, even one that took place outside the scope of a traditional crowdfunding campaign.

Naturally, if a company’s accountant is on the ball, they could make a credible case that any products or services offered to contributors could be deducted from the business’ income as expenses arising from the campaign. While this would mitigate the tax bill somewhat, the status of the original funds wouldn’t change.

Options for Businesses and Nonprofits

It has become clear in the last decade that businesses can not only take advantage of crowdfunding, donations, contributions, and pre-orders like any other organization – but they can do so for a variety of purposes. Even if certain crowdfunding sites restrict project types, there is nothing stopping any company from soliciting donations on its own, even for a purpose traditionally associated with a charity or a non-profit.

Nonprofits with the appropriate tax status, naturally, can continue to take donations and offer tax deductions to their contributors as well.

The key to understanding the specifics of any one situation is recognizing the legal status of the money transfer. Is the contributor getting something in exchange? Then it’s a pre-order. Are they deducting the money from their taxes? Then the organization has to be a non-profit with the appropriate tax classification. Is the contribution being solicited by a for-profit company, but meant for a quasi-charitable purpose? That’s a situation that should probably get the once-over from both a business attorney and an accountant just to make certain there is no confusion on the part of the contributor.

As long as funds aren’t being solicited for one purpose and then used for another, there is little in the way of a legal hazard. That said, it is always good advice to consult a qualified business attorney before engaging in transactions with the public that might lead to uncertainty or confusion. The potential penalties for getting it wrong are too burdensome when compared to the relatively trivial cost of finding out for sure ahead of time.