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Countless charitable or tax-exempt organizations operate with funds provided by contributors. To ensure funds remain available for the charity's necessities, it's crucial to deposit donated funds into a separate bank account designated specifically for this purpose. This segregation distinguishes donated funds from personal finances. Additionally, enabling contributors to write checks directly to the charitable organization instills confidence that their contributions will support the intended cause. Understanding how to establish a bank account for donations is the professional approach to managing your charity's financial requirements and enhances transparency regarding donated finances.
Procedures
Establishing a Corporation
Establishing a corporation. Prior to opening a bank account for your charity, it's imperative to name it and register it with your state as a corporation. Banks will not permit you to open an account for charitable donations unless you have duly registered with the state. Registration is necessary in the state where you intend to conduct business, as well as in any state from which you plan to accept donations.
- Begin by selecting a business name that complies with your state's regulations. You can verify your state's naming requirements online through the state's filing office website, typically the Secretary of State's office.
- Proceed to file the articles of incorporation. Your state should provide separate articles of incorporation for nonprofit corporations. You can access the requisite paperwork, usually in the form of a fill-in-the-blank document, on your state's website.
- Prior to filing your articles, carefully review the IRS tax exemption documentation. The IRS imposes specific requirements for organizations seeking tax-exempt status. Additionally, their application process mandates that your articles of incorporation incorporate specific language. Familiarize yourself with this language in advance and incorporate it into your articles of incorporation.
Obtain an Employer Identification Number (EIN). This unique identifier is necessary for your organization's IRS recognition, even if you lack employees. Fill out form SS-4, accessible on IRS.gov, and submit it online, via mail, or fax. Specify your organization's donation-receiving status as a church, church-controlled entity, or other nonprofit organization on the form.
- Note: The EIN differs from your tax exemption number.
Seek Federal Tax Exemption. Once your state approves and returns your articles of incorporation, apply for federal tax-exempt status. The IRS has specific criteria for determining eligibility for tax exemption. Your organization's size dictates the required forms for tax-exempt status application. Visit the IRS website to complete an Eligibility Form, guiding you on the necessary documents.
- The Eligibility Form poses 26 questions regarding your nonprofit's size and type. For instance, it inquires about anticipated or past annual gross receipts exceeding $50,000 over three years and total assets surpassing $250,000. Other queries relate to foreign country ties and associations with for-profit and nonprofit entities, such as churches and schools.
- If any question is answered affirmatively, complete Form 1023. Alternatively, if all 26 questions are answered negatively, streamline your application with Form 1023-EZ.
- Larger organizations must submit IRS Package 1023, Application for Recognition of Exemption, with instructions found in IRS Publication 557, Tax-Exempt Status for Your Organization.
- Smaller entities may use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, online.
- Include your articles of incorporation with your tax-exempt status application.
Selecting the Appropriate Bank Account
Analyze Your Financial History. Review your financial records to understand your organization's cash flow. Determine your average monthly account balance and identify peak and low activity periods. Assess recurring transactions, such as deposits, incoming ACH transactions, and check payments.
Forecast Future Financial Trends. If your organization is new without historical financial data, project future cash flows to choose the right bank account. Develop a monthly expense budget and estimate monthly donations and income. Consider seasonal influences and anticipate business growth over the next few years. Use resources like free templates from the Wallace Foundation and budgeting tutorials from the Foundation Center.
- The Wallace Foundation offers budgeting tools and cash flow projection templates for nonprofits.
- The Foundation Center provides tutorials on budget creation.
Assess the bank's offerings. Once you've analyzed your monthly financial patterns, engage with different banks to assess their suitability for your requirements. Compare their services and select the one that aligns best with your needs. Be ready to discuss your financial specifics with each bank. Most banks offer three primary account types.
- Basic checking accounts cater to smaller organizations with limited monthly activity.
- Commercial checking accounts suit organizations with substantial monthly activity, earning credits to offset fees.
- Nonprofit checking with interest accounts enable organizations with varying balances to accrue interest.
Explore treasury management possibilities. These services streamline transactions and provide additional protections. Evaluate the offerings provided by the bank and determine their potential benefits for your organization.
- Remote deposit capture allows check scanning and deposits from anywhere with internet access.
- Automatic Clearing House (ACH) facilitates tracking and receiving automatic payments.
- Overnight repurchase accounts automatically invest balances exceeding a set limit in overnight Government Securities.
- Fraud controls, such as positive pay and ACH positive pay, safeguard against counterfeit checks and fraudulent ACH transactions.
Collect the necessary paperwork. After selecting a bank and account type, gather the required documentation. Banks mandate specific documents to open donation-receiving accounts, including proof of state registration and tax identification, along with copies of articles of incorporation and the IRS-issued Employer Identification Number.
Receiving Donations Online
Establish your online presence. A well-designed website enhances donation rates. Ensure easy access to the “donate” button and provide multiple payment options, including credit cards and electronic check/ACH options. Detail your mission, past achievements, future objectives, and how donations will be utilized.
Decide on an online payment acceptance method. Broadly speaking, you have two options for enabling online payments. The first involves obtaining a merchant account and payment gateway, each provided by different vendors. Alternatively, you can utilize a third-party payment processor like PayPal, which integrates both functionalities.
- The first option entails more setup steps and research, making it suitable for larger nonprofits handling numerous monthly donations. Transactions are transparent, displaying your company name on donors' credit card statements.
- Smaller nonprofits may opt for the second option to avoid paying for separate accounts. However, using a third-party processor redirects donors away from your site to complete transactions, with the processor's name appearing on donors' credit card statements.
Establish an online merchant account. Distinct from your organization's bank account, a merchant account processes credit card transactions, transferring funds to your bank account after approval by the credit card company. You typically need a business bank account before opening a merchant account, requiring your bank account and routing numbers, as well as your EIN.
- Popular merchant account providers for nonprofits include Dharma Merchant Services, Payline, CDG Commerce, and Host Merchant Services, offering tools for processing recurring transactions, donor outreach, and event planning.
Register with a payment gateway. Serving as a bridge between donors and your merchant account, a payment gateway encrypts and authorizes online transactions initiated by donors on your website. It then transmits this data to your merchant account.
- Popular payment gateway services for nonprofits include authorize.net and PayPal Pro.
Utilize a third-party payment processor. Many charities and nonprofits opt for Network for Good, Google Checkout, or PayPal, which offer a combined merchant account and payment gateway service. They provide code for installing a 'donate' button on your site, but donors are redirected to the processor's site to complete transactions, and fees can constitute a significant portion of monthly donations.
- Providers like PayPal offer discounts for organizations with documented 501(c)(3) status.
Meeting Reporting Obligations
Engage a skilled bookkeeper or accountant. Seek out a proficient bookkeeper or accountant familiar with nonprofit reporting standards set by the Financial Accounting Standards Board (FASB). Ensure they can prepare accurate reports promptly and handle tax filings. Additionally, they can oversee monthly financial tasks like bank statement reconciliation and managing accounts payable.
Compile a financial position statement. Similar to a for-profit balance sheet, this document outlines your organization's assets and liabilities. It can be generated monthly, quarterly, or annually, offering a snapshot of your financial standing at a specific moment.
Craft an income and expenditure statement. Also known as a Statement of Activity, this report details your company's financial transactions over a defined period, showcasing monthly, quarterly, or yearly activities. It delineates all income and expenses, calculating whether the company's earnings cover its expenses.
Formulate a cash flow statement. Summarizing available cash and its utilization over a specified timeframe, this report contrasts with the income and expense statement by focusing on actual cash flow rather than accruals. It's crucial for anticipating financial shortfalls when planning significant expenditures.
Construct a functional expenses statement. This report categorizes expenses based on function, such as programs, management, and fundraising. Within each category, expenses are further categorized by type, like salaries, rent, or depreciation. Although not mandated by the FASB, it's recommended for better expense tracking.
Complete mandatory tax filings. Although nonprofits enjoy tax-exempt status, they're still required to submit federal income tax returns. This enables the IRS to assess the organization's financial performance and disclose any potential conflicts of interest or compensation for board members, if applicable.
- Depending on your organization's size, you can file either Form 990, Form 990-EZ, or 990-N.
