6. Keep Your Legal House in Order

Some aspects of online fundraising are especially exciting. The little thrill when an email notifies you of another donation, the satisfaction of seeing your thermometer creep ever closer toward your goal—those are fun, rewarding reminders of your hard work.

But along with the fun comes a healthy dose of housekeeping to be filed under “dull but important.” There are legal requirements that you absolutely have to meet (tax forms! registrations!) so you can get and keep your tax-exempt status.

Let’s go over those, along with some ethical guidelines, to help you earn—and maintain—your donors’ trust.

Guidelines for Individuals

We’ve focused a lot in this book on the work of small nonprofits because they’re such prolific fundraisers. But we haven’t forgotten that millions of people each year launch individual fundraising drives that aren’t affiliated with a nonprofit organization. Often these are short-term efforts for the scenarios we’ve mentioned before: raising money for someone who’s sick or suffered a loss in a fire or accident or other crisis.

It’s perfectly legal for an individual to raise money and for a recipient to accept it—you don’t have to be a 501(c)(3) nonprofit organization to solicit such donations.

The IRS considers income from donations to be a nontaxable personal gift to the recipient. It’s actually donors, not recipients, who pay gift taxes, but those don’t kick in unless someone gives more than $13,000 to an individual in a given year. We’re not tax experts, so talk to your tax adviser about your specific situation.

When you raise money for an individual though, you’ll need to make sure donors understand that their contributions aren’t tax deductible, as they would be if they were funneled through a nonprofit. This probably won’t matter within a small circle of donors—an accident victim’s friends and coworkers, for example—but if you solicit a broader group, it’s likely that some people will want to know if their contribution is deductible.

Individuals as well as nonprofits can accept payments online through a PayPal Donate button—again, it’s not only for charities. Individuals just pay regular PayPal fees rather than the discounted nonprofit rate. GoFundMe, Fundly, FundRazr, and other services are also set up for individual fundraisers (see the Resources in the Appendix for more information).

Some payment services, including PayPal, may limit the amount of money account holders can send, especially for new accounts. Check your service’s policies so you don’t encounter unnecessary delays when you transfer donations to the recipient.

Complete and Maintain Required Forms

If you have your hard-won 501(c)(3) tax-exempt status, it means that you’ve made it through a considerable (and possibly somewhat painful) process at both the state and federal levels.

States approve nonprofit status, while tax exemptions are governed by federal law. Once you’re declared a 501(c)(3)—basically a public charity or a private foundation—not only is your organization exempt from federal and (most likely) state taxes, but your supporters’ donations are tax deductible as well.

Here are six major benefits of 501(c)(3) status:

1. Exemption from federal income tax

2. Tax-deductible contributions for donors

3. Possible exemption from state income, sales, and employment taxes

4. Reduced postal rates

5. Exemption from federal unemployment tax

6. Tax-exempt financing

You’ve probably done some offline fundraising, so we’ll assume you’re registered with the Attorney General’s Office in your home state, and any local jurisdictions as required.

When you extend your fundraising online, though, you trigger yet another layer of bureaucracy, because the beauty of being able to collect donations from people in other states means, well, you’ll be collecting donations from people in other states. And that means you have to comply with those states’ regulations before you start fundraising.

The same tools that make it so easy for the good guys like you to raise money for worthy causes also make it easy for the bad guys to pull off scams under the guise of charity. Attorneys General, naturally, work hard to prevent that, so in most states they require at least baseline information about any organization that collects money from their citizens. Can’t blame them for that, right?

Registering isn’t quite as onerous as it could be, thanks to a form called the Unified Registration Statement, available at www.multistatefiling.org. Two agencies—the National Association of State Charities Officials and the National Association of Attorneys General—created the form so nonprofits could register with multiple states (currently 36 plus the District of Columbia) at once.

Three states (Colorado, Florida, and Oklahoma) don’t accept the form, and the rest don’t require registration. Yet another condition to track: Some states require one-time registration only, while others require annual renewal. (If your donations from residents of a particular state total less than $5,000 a year, or other designated amount, you could be exempt from registering in that state. Check the state’s guidelines to be sure.)

No question, it’s complicated, so someone in your organization will have to pay close attention.

Satisfy the Feds, Too

The number of 501(c)(3) charities in the United States dropped from 1.28 million to 1.08 million from 2010 to 2011 (Figure 6.2) as a result of a 2006 requirement that even small nonprofits file reporting documents with the IRS. In 2011 more than 200,000 charities lost their tax-exempt status for not filing Form 990 for three consecutive years. Most are believed to be small organizations that were defunct.

Figure 6.2. The number of 501(c)(3) charities in the United States dropped from 1.28 million to 1.08 million from 2010 to 2011

Credit: GivingUSA Foundation

While 501(c)(3) status exempts your organization from taxes, it doesn’t exempt you from having to file certain information each year with the IRS (unless your gross receipts are less than $5,000, or you’re a qualified religious organization—then you’re off the hook). Don’t skip filing if you think you’re too small for Uncle Sam to notice, because (a) he’ll notice, and (b) failure to file three years in a row is grounds for revoking your tax-exempt status (Figure 6.2). To be reinstated, you’d have the hassle and expense of starting the whole application process again from scratch.

So then, how do you keep your nonprofit’s nose clean? Get to know and love IRS Form 990. Organizations with gross receipts of $50,000 or less file the 990-N, an electronic e-postcard that asks for the following eight pieces of information:

1. Employer identification number (EIN), also known as a Taxpayer Identification Number (TIN)

2. Tax year

3. Legal name and mailing address

4. Any other names the organization uses

5. Name and address of a principal officer

6. Website address, if the organization has one

7. Confirmation that the organization’s annual gross receipts are $50,000 or less for tax years ending on or after December 31, 2010

8. If applicable, a statement that the organization has terminated or is terminating (going out of business)

If your gross average receipts are higher than $50,000, you’ll file either a Form 990 or 990-EZ.

Ethical Conduct Builds Trust

Honoring legal obligations is one way for nonprofits to demonstrate their commitment to conducting business with integrity. Equally important are an organization’s ethical standards.

When donors give to a charity, especially online, they’re placing their trust in you on several levels. Of course they trust that their donation will be spent the way they intend, but they also trust you with personal information and possibly financial information. It’s up to you as an organization to respect donors’ privacy and security, and to prove yourself a worthy steward of their gifts.

Let’s examine some of the ethical issues that are especially relevant in the online arena.

Privacy

Email addresses are extremely valuable in fundraising, so nonprofits are wise to gather them on their website, at events, during phone calls—wherever they can.

But if you sell your mailing list and your constituents are suddenly inundated with spam—or worse, if you blast them with too many emails yourself—you’re going to turn off the very people you’re courting.

To allay their concerns, tell them on your sign-up form how you will and won’t use their email address (hint: don’t sell it).

Note also that nonprofits are subject to the federal CAN-SPAM act. Follow these rules and you’ll be in good shape legally and ethically:

• Your “From,” “To,” “Reply-To,” and routing information—including the originating domain name and email address—must be accurate and identify you or your organization as the sender.

• The subject line must accurately reflect the content of the message.

• Clearly identify the message as an ad (marketing) if the recipient is likely to view it that way.

• Your message must include your valid physical postal address: your street address, PO Box, or commercial mailbox.

• Tell recipients how to opt out of future emails. Give a return email address or an unsubscribe link in the email footer to allow people to communicate their choice to you. You can create a menu so they can opt out of certain types of messages, but you must include the option of stopping all emails.

• You must honor opt-out requests within 10 business days.

Be clear with supporters about how you might use their information. Obviously their giving history and details shouldn’t be shared with anyone who doesn’t have a specific need to know.

But you might want to draft a website privacy policy to address other scenarios, such as posting photos of donor events, listing donors’ names on a thank-you page, or posting detailed meeting minutes with names of speakers. Offer an opt-out for those cases, too.

Security

Data security breaches still make news all too frequently, so it’s understandable that not everyone is completely comfortable using a credit card online.

For a small nonprofit, the easiest approach is to engage a professional payment processor. That way you can assure your donors that their credit card transactions comply with Payment Card Industry (PCI) security standards (see sidebar), and that you don’t store their credit card numbers in your database.

Transparency

Another way to build trust in your organization is to be transparent about your finances.

One of the requirements for 501(c)(3) charities is that they make their Form 990 available for public inspection.

Why not post it online, where it’s available to anyone, 24/7? You can do the same with your annual report, audited financial statements, and IRS letter documenting your tax-exempt status.

Will anyone actually read them? Not as much as your gripping homepage tales, perhaps, but even so, these small gestures convey organizational openness and accountability that donors appreciate.

Stewardship

Kivi Leroux Miller, a blogger and president of Nonprofit Marketing Guide.com, conducts an experiment she calls “What I Got When I Gave,” where she donates $25 to 10 national nonprofits at the end of the year, and then monitors how long it takes each group to acknowledge her unsolicited gift. One year, Miller received only three thank-yous after more than a month.

Take that as a powerful lesson in how not to treat your donors.

Stewardship is much more than saying thank you, of course. It’s about nurturing your relationship with donors on a personal level. That means spending their contributions wisely, letting them know how their gifts were used, keeping them informed about your plans, and perhaps even inviting them to meet those whom their donations have helped.

In fact, according to research by Penelope Burk, author of Donor-Centered Fundraising, one of the main reasons donors stop giving is because they don’t like the way they were treated after they gave. Some cite inadequate communication about where their money is going, or too-frequent appeals, but in many cases, donors—like Leroux Miller—didn’t feel they were adequately thanked.

Be sure to show your gratitude by sending donors a thank-you letter within a few days of receiving a gift. Personalize your note as much as you can: Address the person by name (spell it right!) and refer to the specific gift amount, or the event that inspired the gift. Consider enclosing a photo or a short anecdote about a client. Sign the letter in ink. And whatever you do, don’t use the thank-you to ask for another donation.

Katya Andresen of Network for Good recommends thanking donors three times for every one time you ask for money. Even if you don’t quite achieve that rate, always say thank you promptly and sincerely, and you’ll continue building relationships.

A Code of Ethics

Network for Good, which provides online fundraising services and resources for nonprofits, offers the following guidelines to promote high ethical standards for online fundraisers and marketers.

Philanthropic Experience

1. Clearly and specifically display and describe the organization’s identity on the organization’s website.

2. Employ practices on the website that exhibit integrity, honesty, and truthfulness and seek to safeguard the public trust.

Privacy and Security

1. Seek to inspire trust in every online transaction.

2. Prominently display the opportunity for supporters to have their names removed from lists that are sold to, rented to, or exchanged with other organizations.

3. Conduct online transactions through a system that employs high-level security technology to protect the donor’s personal information for both internal and external authorized use.

4. Provide an opt-in or opt-out mechanism to prevent unsolicited communications or solicitations by organizations that obtain email addresses directly from the donor. Should lists be rented or exchanged, only those verified as having been obtained through donors or prospects opting in will be used by a charity.

5. Protect the interests and privacy of individuals interacting with the organization’s website.

6. Provide a clear, prominent, and easily accessible privacy policy on the organization’s website telling visitors, at a minimum, what information is being collected, how it is being collected, how it can be updated or removed, how it will be used, and who has access to the data.

Disclosures

1. Disclose the identity of the organization or provider processing an online transaction.

2. Guarantee that the name, logo, and likeness of all parties to an online transaction belong to the party and will not be used without express permission.

3. Maintain all appropriate governmental and regulatory designations .or certifications.

4. Provide both online and offline contact information.

Transactions

1. Ensure that contributions are used to support the activities of the organization to which they were donated.

2. Ensure that legal control of contributions or proceeds from online transactions are transferred directly to the charity or expedited in the fastest possible way.

3. Ensure that companies providing online services to the organization provide clear and full communication on all aspects of donor transactions, including the accurate and timely transmission of data related to online transactions.

4. Stay informed regarding the best methods to ensure the ethical, secure, and private nature of online donations.

5. Adhere to the spirit as well as the letter of all applicable laws and regulations, including, but not limited to, charitable solicitation and tax laws.

6. Ensure that all services, recognition, and other transactions promised on a website, in consideration of [a] gift or transaction, will be fulfilled on a timely basis.

7. Disclose to the donor the nature of the relationship between the organization processing the gift or transaction and the charity intended to benefit from the gift.

Helping Hand

In summary, tax-exempt status has numerous advantages for nonprofit organizations and their donors, but it also brings with it a lot of recordkeeping responsibilities to bear in mind, including:

• Nonprofits that bring in more than $5,000 a year must file a Form 990 with the IRS. Organizations that don’t file for three consecutive years can have their tax-exempt status revoked.

• If you expect to receive donations from people outside your home state, you’ll need to register with those states before you fundraise. A form called the Unified Registration Statement allows you to register with multiple states at once.

• Ethical conduct is essential to building and maintaining donors’ trust. Show them that you respect their privacy and treat their financial information securely. Be open with information about your organization. Thank donors promptly and genuinely, and let them know how their gifts are making a difference.

Starting with Chapter 7, we’ll begin a more in-depth look at the types of online fundraising, starting with email campaigns.