To 501(c)(3) or not to 501(c)(3)? That is the question.
It depends. If you’re starting out large and collecting lots of money, then considering starting pursuing a 501(c)(3) immediately.
However, you have alternatives to consider so you can avoid the cost and work of starting and maintaining your 501(c)(3) status.
Disclaimer: I am not an accountant or attorney. You should always get professional advice.
Here are three alternatives to consider before pursuing the 501(c)(3) path.
Direct to Charity
When the giving circle chooses where to donate, members write a check directly to the chosen charity.
Pro: No need to worry about financial reports, checking accounts, or tax returns. Members donations are tax deductible.
Con: Less accountability could mean members donate less or less often than in a more structured giving circle.
Start an LLC
An LLC can be a fairly inexpensive option. You file a document with your state’s Secretary of State that provides the name of your giving circle and the names of its agents (i.e. those responsible for the LLC). The Secretary of State will provide you with a number that you can use to open a checking account in the name of the giving circle (LLC). Members can then make checks payable to the giving circle and the giving circle writes a check to the chosen charity.
Pro: More accountability and credibility can lead to more giving.
Con: While it is a much cheaper option than a 501(c)(3), there are still costs. You will need to pay to create the LLC and to maintain the LLC. You may also incur costs to have a business checking account and to file tax returns for the LLC. Members donations are not tax deductible.
Partner with a foundation
In your community, there may be a charity devoted just to helping that community. They are often referred to as foundations. These foundations already have a 501(c)(3) status and already give lots of money to improve your community. They may be willing to help you out, because it could mean more money into their foundation and the opportunity to build relationships with potential donors. Giving circle members would donate to the giving circle through the foundation.
Pro: Members donations are tax deductible. The foundation can provide credit card processing and take care of all the financial statements and tax returns.
Con: They will often take a percentage of the donation to help cover the costs they will incur by hosting your circle.
Which one will you choose?
You have consulted an accountant and attorney in your area, right? Good.
Now, get started. Start small. Start cheap. Start simple. Give yourself permission to grow into larger and more complicated financial structures as you learn the ropes and discover what will work best for your giving circle.