(Adapted from a recent post on Philanthropy Front and Center—Washington, DC)
One of our most popular and frequently asked questions regards nonprofit startups that have not yet incorporated and/or been recoginzed by the IRS as a 501(c)(3) tax-exempt organizations. Here's the usual phrasing:
Q: Can I get funding for my nonprofit while I am in the process of incorporating or getting tax-exempt status?
A: Technically, yes. However, your initial support probably will not come from foundation grants since most institutional funders generally require proof of 501(c)(3) status and prefer to support organizations with a proven track record of fiscal responsibility and programming successes.
Most of your startup funding will likely come from your nonprofit's founders, board members, volunteers, community members, or other interested individuals. Be aware that any contributions you collect prior to receiving tax-exempt status may be considered personal income and therefore subject to taxation.
You will therefore need to think creatively about how to finance the initial stages of your organization’s growth. Here are a few ideas:
- Create a list of family, friends, businesses, and other potential supporters who might be interested in your organization’s mission, and think of ways to get them involved.
- Investigate fiscal sponsorship.
- Consider bank loans or other financing options.
- Identify types of support other than money that might assist your startup venture. In-kind gifts, such as free services, space, equipment, and other non-financial donations, can come from local businesses, professionals (i.e., pro bono legal or accounting help), or other community entities.
Are contributions tax-deductible?
If your charity does not have 501(c)(3) status, you should inform donors that their contributions are not tax-deductible. Be aware that some potential donors may not be comfortable giving money to an organization that is not officially exempt.
If your 501(c)(3) status is pending, you should also inform donors of that. Once you receive your exempt status, donations received while your application was pending may be treated as tax-deductible contributions retroactive to the date of your organization's formation. However, if your application is not approved, contributions would not be considered tax-deductible.
If you can locate a nonprofit that will serve as your project's fiscal sponsor, this arrangement would enable you to apply for grants and solicit tax-deductible charitable contributions under your sponsor’s exempt status. Learn more with our FAQ: What is fiscal sponsorship? How do I find a fiscal sponsor?
State agencies, like the secretary of state or the attorney general’s office, generally require organizations to register before soliciting charitable contributions, and will impose fines on unregistered fundraisers. Check their Web sites for guidelines and registration information.
Looking for more?
For an overview of startup issues, sign up for our upcoming Is Starting a Nonprofit Right for You? class on April 2, 6:00-7:30pm. You can also watch "First Fundraising Strategies for Startup Organizations". This free webinar discusses how to identify early donor prospects, recognize key factors when pursuing charitable contributions, earned income, government funding, and more. Watch now>>
Adapted from a GrantSpace Knowledge Base article.