501(c)(3) Charitable Operating Guidelines
Change for Chance (operating as Changement pour la Chance, or CPC) is the charitable arm of The Make a Difference Movement Foundation.
In order for a nonprofit to be eligible for tax exempt status under section 501(c)(3) of the Internal Revenue Tax Code, the organization has to prove that it “serves a public rather than a private interest.” No organization whose donations or assets directly or indirectly benefit an individual or for-profit entity is eligible for tax exempt status.
Public Vs. Private Interest
It’s helpful to think of what we know about businesses in general — the private sector. Simply put, businesses operate for the purpose of making money for their owners, investors and shareholders. These people, and the businesses themselves, are operating for private interest. And as we all know, businesses and individuals are required to pay income taxes by the IRS.
501(c)(3) organizations like Change for Chance have an exemption from paying income taxes because they are charitable in nature — they are not-for-profit. We operate for the benefit of the public interest by striving to fulfill a charitable mission as defined by the IRS. It’s pretty cool that nonprofits get to use more of their resources to do good, right? We think so too!
So, to make sure that all 501(c)(3) charities are actually organized and operating that way, the IRS has created private benefit and inurement rules. At The Make a Difference Movement Foundation, we want to do everything we can to help people in need, and for us to effectively do that, we need you to understand what we do and how we operate.
The Rules On Private Benefit
The private benefit rule is pretty much exactly what it sounds like. Charities are not allowed to use their tax-exempt status, charitable funds, programs, etc. to benefit private parties that do not fall within a charitable class. The problem with this rule is that it’s deceptively simple. It is a lot easier to break than you’d think. However, only Change for Chance and Difference 38 is registered as either a 501(c)(3) non-profit project or a benefits corporation. The Make a Difference Movement Foundation, although being the owner and operator of the above mentioned organisations, isn’t registered as a non-profit.
The Rules On Private Inurement
The insider rule. It is illegal for a charitable organization’s income or assets to disproportionately benefit a private entity that has “significant influence over the organization” or is otherwise “closely related” to it. Basically, no one should be profiting simply because of their connection to a nonprofit. Makes sense, right?
Let’s Break It Down…
Paying EmployeesNonprofit employees can (and should) be fairly compensated for their work with an appropriate, competitive salary. The key takeaway related to paying employees is to avoid excesses. We need happy, well-paid employees to facilitate the delivery of our charitable mission. But our employees don’t usually need a first class plane ticket for their business trip. The difference is pretty clear, right?Selecting Vendors & Paying ExpensesThe key to understanding private benefit as related to vendors and expenses lies in the concept of fair market value. The Make a Difference Movement Foundation, Difference 38 and Chance for Chance will need to pay for expenses in order to host a fundraising event or run our charitable programming, and this is totally acceptable under the law. The only caveat is that we must spend our charitable funds responsibly, ensuring that we are paying at or below fair market value for any expense. How do we ensure we’re making a purchase at fair market value? Our best practice is to get at least three quotes (in writing) from different vendors to confirm that we’re getting the best deal. This is often called getting an RFP (request for proposal).Relationships With Other Individuals and BusinessesThe concept here is that because Difference 38 and Change for Chance, being a 501(c)(3), is a public charity (that serves the public’s benefit), 501(c)(3)s can’t endorse, promote, or generate revenue for a private gain. Even though these activities may seem harmless (like linking to a vendor page selling products) this rule ensures that nonprofits are focused on the greater good rather than supporting or endorsing specific individuals or businesses.
Quick Tips
- When any situation involves people or businesses related to our nonprofit, we will take extra caution. For example, if we are using a friend or family member’s catering company for our fundraiser. Actions that do not constitute private benefit with unaffiliated parties may constitute private inurement with an affiliated party, which is what we try our absolute best to avoid.
- Although nuanced and specific, private benefit and inurement rules truly boil down to ensuring that all of our organization’s operations and expenses are being allocated toward our charitable purpose. If we are questioning whether an activity may constitute private benefit, we ask ourselves, “Is the activity is in the best interest of our nonprofit’s charitable mission and class? Will it maximize our impact? Is it truly benefiting the public?”
- We will err on the side of caution. If we are questioning whether something is private benefit or private inurement, we will investigate further… or avoid the activity all together.
Important Disclosure
Our Foundation is a fiscally sponsored charity, meaning that in order to cut down on administrative costs, an external organisation audits, reviews and holds our Foundation's funds.
Want More?
We will provide information and answers shall you be interested in learning more about our operations. To get more information, please contact us.
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