How to Grow Your Nonprofit’s Credibility Through Compliance
Nonprofits are subject to numerous state and federal regulations. These requirements are necessary for the initial creation of a nonprofit organization, as well as its ongoing compliance, especially as the organization grows. But by adhering to legal regulations, a nonprofit can also communicate its integrity to its supporters.
When a nonprofit follows the rules set forth by the government, it not only stays rooted in its core cause, but also communicates to its supporters that they can trust the organization to steward contributions correctly and use those contributions to better beneficiaries’ lives.
In order to help you grow your organization’s credibility, we’ll walk through three compliance tasks that your nonprofit should prioritize:
To garner the support of donors, volunteers, and advocates, your nonprofit will first have to show why they should give their support. Consider how following these three compliance requirements can prove your nonprofit’s credibility and encourage more support from your community.
1. Securing tax-exempt status
When you first create your nonprofit, your organization will have to prove to the IRS that it has charitable intentions through Form 1023. This is one of the determining factors in being classified as a 501(c)(3) nonprofit and your organization’s first opportunity to demonstrate its credibility.
Before you can apply for tax-exempt status, you’ll need to prepare by taking these steps:
- Establish a nonprofit corporation. File Articles of Incorporation to establish your organization as an entity separate from its founders.
- Obtain a federal tax ID number (FEIN). Apply for an FEIN online through the IRS website. You can only do this after your organization has been legally formed.
After taking these preliminary steps, your organization will be ready to file Form 1023 to apply for tax-exempt status. This form, which is 28 pages long before any attachments and materials required for filing, is like a thorough examination of your organization.
Think of this process as an audit of your organization’s previous or planned activities. The IRS uses this application to ensure your organization aims to fulfill 501(c)(3) services. In doing so, it accounts for the validity of your organization’s work.
2. Defining bylaws
Another requirement of Form 1023 is the inclusion of your nonprofit’s bylaws. This is a set of rules that define how your organization will be governed by its board of directors.
These bylaws will protect your organization against risks and eliminate the guesswork when it comes to carrying out your nonprofit’s mission. These rules will be especially helpful in solving unique situations. For example, if you think of a clever organization name five years from now, you’ll want to have made the provision to allow for changing your nonprofit’s name.
You should include the following in your organization’s bylaws:
- Organizational purpose: Explain what your organization aims to do and how it will accomplish that mission.
- Board member details: Determine the term lengths for board members and the process for board member succession/removal.
- Meetings: Establish the frequency and nature of meetings, as well as any relevant requirements or rules.
- Conflict resolution: How will the organization handle any internal conflicts?
- Changes: Don’t forget to include the provision that bylaws can be amended in the future.
According to Foundation Group, “good governance establishes a foundation for good work.” Clear governing rules allow your organization to be held accountable for its actions, which will ultimately make it more trustworthy.
After you’ve drafted and approved your organization’s bylaws, you may consider making them public. You might publish them on your website or refer to them in blog posts. A good website design will combine stylish branding elements with your most important organizational information so that anyone can access and understand the inner workings of your nonprofit.
Although publishing your bylaws is optional, it’s a valuable step toward transparency. When supporters can see and agree with your organization’s bylaws, they may better appreciate how serious your organization is about following them.
3. Registering for charitable solicitations
According to Double the Donation’s guide to nonprofit fundraising, “individual giving makes up nearly three-fourths of all charitable contributions.” When it comes to donations, your nonprofit will likely consider several methods of raising money that appeal to its supporters. From email outreach to silent auction events, your organization’s fundraising campaigns are essential to supporting your mission.
It’s important to prioritize compliance when requesting donations to show supporters that your request follows all the right protocols.
Before your nonprofit starts marketing its mission and asking for contributions, find out if you need to register for charitable solicitations. Most states require charitable solicitations registration, but there are nine that don’t:
- Delaware
- Idaho
- Indiana
- Iowa
- Montana
- Nebraska
- South Dakota
- Vermont
- Wyoming
If your state does require this registration, it’s important to prioritize it and renew the registration when it’s due, usually annually. You’ll also have to register in multiple states if you plan on soliciting donations throughout the country. Completing your charitable solicitations registration shows supporters that you do things the right way and aren’t just in it for the money.
With the state’s approval of your registration, supporters can see that your organization’s structure and finances were examined before it was granted permission to ask for donations. Then, when they contribute, they’ll have confidence that their donations are going to exactly what your organization promotes.
Just as you’d prioritize supporters’ preferences when it comes to marketing channels or event features, think about how they view your nonprofit’s internal operations. Your donors should be able to trust that their time, money, and advocacy are supporting a good organization with an important mission and the right intentions.
Author: Greg McRay
Greg is the founder and CEO of Foundation Group, one of the nation’s top providers of tax and compliance services to nonprofits. Greg and his team have worked with tens of thousands of nonprofits for over 25 years, assisting them with formation of new charities, plus tax, bookkeeping, and compliance services. He is credentialed as an Enrolled Agent, the highest designation of tax specialist recognized by the Internal Revenue Service. Based in Nashville, Tennessee, Greg and company work with charities and nonprofits all across the country and worldwide.
