Legal: Pros and Cons of Establishing a Charitable Organization

In August, the 1,000-member Fort Collins Board of REALTORS®, Colo., received final IRS approval for its Future of Housing Community Foundation, a 501(c)(3) organization, which aims to raise tens of thousands of dollars each year to support local housing and affordability efforts. 

“We decided to establish a foundation because our budgeted community investments over the years were becoming something we just did because we had always done it,” says association CEO Clint Skutchan, RCE. The foundation will serve to formalize the association’s commitment to community outreach, boost its public profile as a contributor to the community, and enable the association to leverage additional dollars from the state and national levels, he says.

Taking a more focused approach, the Michigan Association of REALTORS®’ new Michigan REALTORS® Relief Fund was established earlier this year to expedite the receipt and donation of charitable aid from Michigan REALTORS® and others to the water crisis in the city of Flint. The new fund, also a 501(c)(3) organization, will be ongoing and provide housing-related assistance to victims of disasters and for other charitable purposes, says association Director of Communications & Marketing Joe Kras.

“Using the foundation approach enables us to better define the scope of our outreach as opposed to raising money for all different kinds of causes,” says Kras.

When an association files its 501(c)(3) paperwork with the IRS, it is required to define a relatively narrow scope of the organization’s purpose.

There are many reasons to establish a charitable giving vehicle such as a public charity, private foundation, community foundation, or a donor advised fund. Usually the most compelling reason to establish a 501(c)(3) is to offer donors a tax write-off. Yet, these organizations also are exempt from paying federal income tax and sales tax on certain purchases.

If you see a 501(c)(3) in your association’s future, there are legal requirements and other important points to consider.

Establishing a Charitable Foundation

Information pertaining to tax and legal issues, fundraising, as well as general tips on how to start a non-profit. 

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Creating a charitable organization

The first step in creating a charity is to determine its purpose. What will the goals of the organization be? Which communities or groups will the organization assist? Some associations have charitable organizations with an educational focus, such as the Illinois Real Estate Educational Foundation, a not-for-profit established to aid and promote the work of real estate education throughout the state. Other associations create housing-related organizations, for example the Lexington-Bluegrass Association of REALTORS®’ 501(c)(3) REALTOR® Community Housing Foundation in Kentucky. Other charities have a broader scope, such as the Santa Clara County REALTORS® Foundation, a 501(c)(3) in California that focuses on giving to housing, education, community projects, social services, and disaster relief.

The purpose of the charitable organization must be one recognized under federal and state law as a permissible purpose for operating a nonprofit. A relief fund that distributes money only to association members, for example, would not meet the criteria for a charity.

The next step is to organize the charity under the state’s nonprofit statutes as either a trust or a corporation. Although state laws differ, generally a trust is used when there is a single donor to the organization, and a corporation is used if the organization is going to solicit multiple contributors. Creating a nonprofit corporation requires drafting articles of incorporation and bylaws, including governance structure, board selection process, general decision-making, required meetings, and conflict-of-interest policies, among others. Also your nonprofit needs a name. Consult your association attorney during the creation of this entity. All of these materials are then filed with your state’s secretary of state. If the entity is going to become a federal 501(c)(3) tax-exempt charity, there is an additional IRS application process that can take several months to complete. 

The structure of the charitable organization is established in its bylaws will determine how the REALTOR® association and the organization interact with each other. Although the association should ensure that the charitable organization operates separately, it may want to establish that it will select directors for the charitable entity or require that all directors be members of the association. Adding such requirements will help ensure that the charitable organization truly represents the association.

Note that charitable your organization must be, through its bylaws, connected to the association to be eligible for coverage through the NAR’s Professional Liability Insurance Program for REALTOR® associations. It also needs to be able fit under the insurance policy’s definition of “foundation,” which is a “charitable trust or corporation … established for charitable, educational, or research purposes that qualifies as an exempt organization under Section 501(c)(3) of the Internal Revenue Code” or that has an exempt purpose as defined by the IRS.

Keep the charity alive

An association considering creating a charitable organization should realize that it takes time and follow-through at the outset, and that there are ongoing responsibilities for maintaining the entity. Associations should make sure they have sufficient staffing to continue operating the charitable organization, including enough people to conduct meetings, solicit donations, promote the organization, and communicate with outside entities that may wish to donate or apply for funding.

“If a local association has very limited staff, I’m not sure I’d advise them to establish a fund,” cautions Kathie Feldpausch, RCE, CAE, Michigan REALTORS® senior vice president and chief financial officer. “It brings with it all of the filings of a corporation, so you’d want to make sure you understand that it’s a living, breathing corporation as much as your association is, but just on a smaller scale.”

Charitable organizations typically have the following annual responsibilities:

  • Annual state corporation filings
  • Federal and state tax returns
  • Annual renewal of charitable solicitation license. About 40 states require an entity that is soliciting charitable donations to register with the state.  After the initial registration, the license is renewed each year if the entity is going to continue to solicit contributions.
  • An annual meeting. As with any corporation, the charitable entity will need to conduct at least an annual meeting and keep corporate records, such as meeting minutes.

Establishing a charity is not right for every association, and not having one doesn’t limit the scope of your outreach.

For more information and guidance on setting up a charity, access NAR’s 22-page guide “Benevolent Funds: A Toolkit to Charitable Giving,” at nar.realtor.

Fundraising on Facebook, Just for Charities

Facebook is moving forward with enabling charitable donations on its platform with a program only for IRS-registered 501(c)(3) organizations. Nonprofits can raise money directly from their Facebook page by applying for a new donate button (different from the older “donate now” button) that enables easy two-tap giving by using a donor’s saved credit card information in their Facebook account—not sending them to an external donation site. Although it is free for organizations to set up their charity page, Facebook takes 3 percent of all contributions to cover credit card processing and an additional 2 percent to cover costs associated with vetting nonprofits, payment support, operational costs, security, and fraud protection, the company says. Sign up your 501(c)(3) organization at donations.fb.com.

Finley Maxson is a senior counsel at the National Association of REALTORS®. Contact him at 312-329-8381 or fmaxson@realtors.org.

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