Thank you goes to Dr. Stephen Urich, CEO of Labyrinth, for today’s post.
Dr. Stephen Urich is the CEO of Labyrinth, Inc., an organization that assists charitable organizations with all aspects of charity state registration and compliance. He is also a Certified Public Accountant and specializes in nonprofit accounting. He has been working in the nonprofit sector for 25 years.
As a nonprofit, your number one priority every day is championing your cause and pushing your mission forward. You spend the majority of your time building trust and relationships with your supporter base and planning programs, events, and campaigns. Even though this is the true “work” of your nonprofit, the reality is that one aspect of your job is to make sure your organization is following government rules.
You’re likely familiar with the federal requirements you must follow to comply with government regulations. When your nonprofit was created, your founders had to file a Form 1023 with the IRS to gain 501(c)(3) status. And to maintain your nonprofit status, you file a Form 990 with the IRS each year.
Remaining compliant with federal government regulations takes work, but the process of proving your organization is doing what it should is easy to understand (it mostly just takes time to do some paperwork).
However, complying with regulations at the state level is a complex, ongoing task for every nonprofit. The exact process can vary drastically from state to state, and if you’re fundraising in multiple states, you have to register in each of them.
That might give you a headache, but don’t worry. With a general understanding of what’s required in each relevant jurisdiction, the process of staying compliant across the country gets a lot easier.
That’s why we compiled this quick guide to provide you with four things your organization should consider when working to comply with state requirements:
- Charitable solicitation registration
- Financial reporting requirements
- Corporate registration requirements
- Seeking outside support
As you follow this guide, you’ll be able to ensure that you’re covering all of your bases at the state level. That means you’ll have more time to do the nonprofit work that you actually want to do—making a difference and giving back to the community through successful fundraising.
1. Charitable solicitation registration
In most states (currently 41 plus the District of Columbia), you’re required to register as a fundraising organization before you can start soliciting donations from the residents of that state.
You’re hopefully already familiar with this process in your home state, but anytime you expand your reach or start a campaign somewhere new, you’ll need to check that you’ve registered so you can legally collect donations in that new state.
To register in a new state, you’ll need documentation (specifics vary state by state) and an application. Read through the Labyrinth charitable solicitation registration guide to get into the nitty-gritty details of what this process will look like.
Also note that even if you aren’t physically operating in a state and are just accepting donations with online tools, you’re technically required to be registered in that state.
You may also be familiar with the Unified Registration Statement (URS). Put simply, the URS is a consolidated registration form designed to streamline the registration process across multiple states. It compiles all the needed documentation into one place, but it has some downsides, so we don’t recommend it in most cases.
For one, state charitable solicitation registration requirements are always changing, so the URS can usually end up causing more problems than it solves, which is especially frustrating when your nonprofit gets rejected for not meeting the right requirements. It’s also a whopping 85 pages long and difficult to file online.
While the URS was designed with good intentions, it adds more complexity to an already complex process. So, what should you do? Usually you can complete the registration process on your own if you focus on the requirements and paperwork for each specific state to ensure that you’re registering properly. But if you’re planning to expand into multiple states all at once, consider working with a compliance expert.
2. Financial reporting requirements
You value data about your nonprofit’s financial performance, and the government requires it. But what do you need to do to accurately report on the financial status of your organization? According to Labyrinth, this is what’s required of you on the federal and state levels:
The Federal Level:
- Form 990—You file a Form 990 (or one of its variants) with the IRS each year by your nonprofit’s deadline to remain exempt from federal income tax. (Note: You’ll also need to provide the Form 990 at the state level much of the time.)
The State Level:
- Income Tax Exemption Requirements: In most states, your nonprofit becomes automatically exempt from income tax when you receive 501(c)(3) status from the IRS. But do note that some states require additional steps. However, some states will still require you to pay unrelated business income taxes (UBIT).
- Sales Tax Exemption Requirements: Each state has its own application process for sales tax exemption. Note that most of the time, your organization will have to pay tax on any purchases and charge sales tax on anything you sell.
- Other Reports: Some states will require you to provide a Statement of Financial position. Think of this as a balance sheet for nonprofits. Another common report is a Statement of Activities, which shows the relationship between expenses and revenue, much like a for-profit income statement. Additionally, you might have to provide grant receipts or report operating expenses and incoming donations.
Admittedly, there’s a lot of opportunities for making mistakes when it comes to financial reporting for your organization. So we recommend two things:
- Stay organized. Life will be much easier when deadlines start to loom if you are keeping up with your finances in a tidy and consistent way. Remember, the financial side of running your organization is as essential for furthering your cause as fundraising and programming.
- Hire a nonprofit-specialized CPA. When in doubt, turn to an expert. It’s their job to understand the ins and outs of financial reporting and nonprofit tax forms. In many cases, you’ll be required to provide CPA-prepared reports to state agencies anyway, so it’s worthwhile to build a relationship with a reliable professional.
Going through the motions of providing accurate financial reporting for the government is tedious, but it’s just another way you’re able to continue doing what you do. Plus, financial reporting serves as a continuous reminder to continue being transparent and trustworthy so you can grow and retain a strong community of supporters.
3. Corporate Registration Requirements
In some states, you’re required to register as an incorporated organization that does business in that state. You’ll always have to do this in your home state (where your nonprofit is incorporated), states where you have paid staff, and a handful of states that require specific corporate registration (currently North Dakota and the District of Columbia, if you’re registered to solicit donations there).
In any state where you file corporate registration, you’ll need to appoint a registered agent. What is a registered agent? This individual resides or works in the relevant state and is responsible for:
- Representing your organization in that state
- Accepting tax and legal documents on your behalf
In states where you already have paid staff, you can appoint a staff member to be your registered agent. Or you can use a commercial registered agent service, which will provide one for you. A professional registered agent can be a great option if you’re looking for a reliable person to be your liaison with the government in a state where you don’t yet have on-the-ground operations.
4. Seeking outside support
If you’re overwhelmed by the amount of reporting and filing you need to do, you aren’t alone. Remaining in compliance is a big job, whether you’re an organization with a small staff or a growing nonprofit expanding your reach. In many cases, the best thing you can do to mitigate the stress of adhering to government regulations is to seek outside support.
There are a number of resources that can help you with all the logistics of keeping your nonprofit in good standing with the government, including:
- A nonprofit CPA whom you trust
- Nonprofit attorneys who can advise you and help you prevent legal problems before they happen
- A commercial registered agent service that can provide you with representation in multiple states
- Reliable tech that can help you track important financial data
To take all the guesswork out of the registration and renewals processes, a nonprofit compliance firm can manage everything for you. They make sure that you don’t have to deal with late fees, the revocation of your 501(c)(3) status, or worse, criminal or civil charges. Put simply, a compliance firm’s services are well worth the investment.
Ensuring that your nonprofit is meeting all the governmental requirements in each state it operates within is no small task. However, when all of this work is done right, you’re able to maintain a strong reputation within your community and keep doing important work to further your mission.
With the right people working for you and attention to detail, you can succeed in complying with all government standards and keep doing good far into the future.
