Clients frequently ask me to assist them in establishing charities, sometimes for a specific cause and sometimes for general community benefit. Usually, clients desire that contributions made to that charity be tax deductible for those making contributions or donations.
Unfortunately, charities and non-profit entities can be manipulated for personal gain by dishonest people. The typical scheme is that a couple or group of people will establish a charity and hire themselves to manage the charity. Some donations may go to charitable causes, but often the primary purpose is for the organizers to profit.
Therefore, the process to create charities in Ohio, and especially to have donations to those charities potentially considered to be tax deductible, is lengthy and intricate.
Charitable organizations are most often organized with the Ohio Secretary of State as non-profit corporations. There is a myriad of requirements for non-profit corporations in Ohio, including having at least three directors to govern the corporation and having an annual meeting for all members of the corporation. Notably, those having interests in non-profit corporations are called “members” rather than “shareholders.”
Regardless of whether an organization is officially organized as a non-profit corporation, if a formal or informal group has any sort of charitable purpose, the group must file regular reports with the Ohio Attorney General. The definition of charity in this context is very broad, and it includes any and all groups that hold themselves as doing something that can be described as “benevolent, philanthropic, patriotic, educational, humane, scientific, civic, eleemosynary” or promoting public health or environmentalism. In case you are wondering, “eleemosynary” means “related to charity.”
Once an entity is properly established and legally operating in Ohio, the entity may desire to have its contributions or donations deductible from the federal taxable income for those making the contributions or donations. This designation is called “501(c)(3)” based upon the federal law that allows for the designation.
To have a 501(c)(3) designation, an organization must have an exclusive purpose of religion, charity, science, literature, education, public safety or prevention of cruelty to animals. The IRS confirms the purpose exists on paper and in practice. If the purpose of an entity, in its filing at the state level or in its actual day-to-day activity, does not exclusively serve one of the enumerated “tax-exempt purposes,” the 501(c)(3) will not be granted or may be revoked. Political activity or personal profit are almost always activities that will jeopardize an entity’s 501(c)(3) status.
Several decades ago, the process to become a 501(c)(3) organization was largely based upon the “honor system.” The IRS seldom confirmed that organizations were actually organized or operating for exclusively tax-exempt purposes.
Now, the IRS scrutinizes every application for 501(c)(3) designation and utilizes a consistent analytical process in doing so. Recently, the IRS was under fire for disproportionate scrutiny of certain patriotic organizations that included the words “tea party” in their names.
Acquiring 501(c)(3) status involves lots of documentation and can take a very long time to accomplish, sometimes longer than a year.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.