Most 501(c)(3) nonprofits rely on public support for a sizable portion of their annual income. For any organization, a comprehensive and well-planned fundraising strategy is essential to acquiring and renewing commitments from individuals, corporations and foundations.
Charitable solicitation activity is independently regulated in each state. A majority of states require annual registration, donor disclosures, independently prepared financial statements or a combination of the three. Because each state’s requirements vary, nonprofits and their accounting firms are tasked with navigating a complex regulatory landscape.
Despite logistical challenges, charitable solicitation compliance should underpin any organization’s fundraising strategy and be viewed as a way to safeguard public trust in the sector.
State registration and reporting
Forty-one states require nonprofits to
- Form 990, 990-EZ, 990-PF, or 990-N;
- Unredacted Schedule B, if applicable;
- Financial statements, which may need to be audited, reviewed or compiled;
- Charter documents, such as articles of incorporation and bylaws;
- Copies of federal determination status;
- Copies of contracts with paid fundraising professionals and co-ventures; and,
- A filing fee, typically based on the organization’s annual income.
Additionally, the nonprofit may be required to foreign qualify and appoint a registered agent for service of process.
In every state except California, it is the act of soliciting, not necessarily the receipt of funds, that generally triggers the registration requirement. The term “solicitation” is defined at the state level, but it broadly refers to any variety of direct or indirect appeals. In the modern era, the definition has expanded to include online methods such as “Donate Now” buttons on websites, emails and social media.
As part of their fundraising strategies, nonprofits use a wide range of solicitation methods, including broad-reaching technology to solicit and manage donors. As a result, organizations should be aware of triggering registration requirements in multiple jurisdictions, and potentially nationwide.
Registrations must be renewed on an annual basis, with the exception of the District of Columbia and Georgia, which have a two-year renewal period. During renewal, organizations can expect to submit an updated application, recent financial statements and their Form 990, and to pay a filing fee based on annual income.
State reporting deadlines vary greatly but are often based in relation to the organization’s original date of registration or tax year end. Organizations that register in multiple states are tasked with managing reporting deadlines throughout the year, particularly if extensions of time to file are needed.
Exemption from registration
Exemptions or exclusions from registration exist for certain types of organizations, such as bona fide religious organizations, educational institutions and hospitals. Exemptions may also be available for organizations that fall below a modest income threshold and which have no paid fundraisers or employees.
Like registration, exemptions are independently issued and must be maintained in each state. An organization may qualify for an exemption in one state, but not in another. Additionally, if the organization grows or has a shift in its federal exempt status or operations, it may no longer meet the exemption requirement and may need to register.
However, most 501(c)(3) public charities — particularly those with the capacity to solicit on a broad basis — will not be exempt in most states and should plan to register.
Donor disclosure statements
Twenty-five states require nonprofits to include disclosure statements on their solicitation materials. These statements serve to educate prospective donors about the organizations soliciting them, often mandating that the organization provide contact information of an officer or even a state registration authority.
State disclosure requirements are separate from any
State financial statement requirements
State financial statement requirements present a unique area of complexity for nonprofits and their partner accounting and CPA firms. In order to register and report successfully, organizations must submit both annual financial statements and their Form 990 in most states. Once an organization reaches a certain level of income, it should expect to submit statements that have been reviewed or audited by an independent CPA.
An organization that fails to submit the proper financial statements will find its registration application rejected. Moreover, the state charity official may attempt to require the organization to have proper statements prepared on a retroactive basis, creating a large unanticipated expense.
As a result, organizations should carefully plan the type of financial statements needed to register and report on an annual basis. CPAs and accountants play an important role in advising their clients on which statements are needed to comply.
The
State financial statement thresholds are not based on either of the following:
- Contributions or income from an individual state; or,
- The number of transactions in a particular year.
Organizations that seek to register across multiple states for the first time should first review their income and, with their CPA, expect to produce financial statements that meet the requirements of each.
During subsequent reporting, the organization will need to submit financial statements that again comply with the income threshold for the previous tax year. Nonprofits that see year-over-year growth can expect to need financial statements with increasing levels of assurance. Boards and executive leadership should closely monitor their requirements, and with their auditor, budget for the added
Waivers from financial statement requirements
Organizations that have not met the requirement for audited or reviewed statements frequently inquire whether a waiver is possible. Because the requirements are set by statute, waivers are highly unlikely, and in many cases, not possible.
A waiver might be granted by a single state for a single tax year, and usually only in extenuating circumstances. Notably, no state grants a waiver on the basis of ignorance of a requirement or the cost of an auditor’s engagement. In some states, like New Jersey, waivers are not permitted in any circumstances. Organizations must submit the required statements during registration or be perpetually in noncompliance until they do.
For this reason, organizations should seek the advice of their accountants and work to have any required financial statements prepared before attempting to register.
Strategies for complying
Modern nonprofits face the prospect of registration, disclosure and financial statement requirements in multiple states, if not nationwide. Understandably, the expense and administrative work involved in complying with each individual state’s requirements can be intimidating. While each nonprofit is different, it can consider a basic framework to inform its compliance strategy:
- Review the “fundraising footprint.” Organizations should first examine where their solicitation activities take place. Remember, this is not confined to only places from which donations are received.
- Determine registration, exemption and financial statement requirements. Across the states where the organization solicits, it should assess where registration must take place, where exemptions apply, and which financial statements are needed.
- Take action. The organization should work with its outside accountant to have the necessary financial statements prepared and then submit registration applications to state charity officials. Many nonprofits may likewise wish to hand off their state registrations to a qualified service provider. Once registered, the organization should ensure any solicitation materials include the necessary state disclosure statements.
- Regularly review the strategy. As an organization grows and its fundraising activities evolve, it becomes necessary to review its compliance program. For example, an organization that plans to solicit in more states may need to pursue additional registrations. If the organization’s annual income surpasses the threshold for reviewed or audited financial statements, it should be prepared to meet the new requirement.
Accountants play a vital role in helping their client organizations navigate the current regulatory landscape. Along with nonprofit leadership, they ensure organizations comply with state laws and adhere to their duty of care. By doing so, they foster a sector of transparency and trust.
