Nationally, regardless of the state, do you first have to become a 501c3 tax exempt organization in order to solicit funds on behalf of a homeschool group?
I am in the process of weighing the pros and cons of becoming a 501c3 and just gathering as much information as I can to make the most accurate decision. Has it stands right now, I am a sole proprietor, starting a small homeschool group, looking to fund raise, but understanding that I might have to become a 501c3 to solicit funds for the group.
Do you have any thoughts on this matter? Thank you again for you time and consideration, I appreciate your assistance!
To answer your question, I have to differentiate between fund raising and donations. Both are considered “soliciting funds.”
Fundraising is not regulated nationally; it is regulated by each state’s Attorney General’s (AG) office or state Charities Division. Typically the state government wants a charity that uses a professional fundraiser to “register” with the state AG office. Some states require annual filings on fund raising activities even without using a professional fundraiser. Usually the reporting is required if an organization raises over certain dollar amounts. I’ve seen $25,000 and $100,000 thresholds for registration and reporting in various states.
This website is helpful in determining what your state requires if your homeschool group holds a fundraiser.
Find your state and click on the state Nonprofit Start Up Guide. Scroll down to “Register for Charitable Solicitation (Fundraising)”
501c3 tax exempt status allow donations to be tax deductible. “Fund raising” is not the same as accepting tax deductible donations. When you say “solicit funds” it could mean either holding a fund raiser or asking for a donation. If by “solicit funds” you mean asking for a donation, then your organization must have 501c3 tax exempt status in order to provide a tax deduction to the donor.
Naturally, a donor can make a non-deductible donation to a group that is not 501c3, but few donors do that. They prefer the organization become 501c3 tax exempt, so that their donations are a tax deduction.
Sole Proprietorships cannot get 501c3 Tax Exempt Status
But you said you’re running the homeschool group as a sole proprietorship (i.e. a for-profit business). Sole proprietorships will not be granted 501c3 status by the IRS. Only qualified nonprofit organizations can be granted 501c3 tax exempt status.
Additionally, Any proceeds from soliciting funds (from a fundraiser or donation) are taxable income to your business; they are not tax free income as they would be for a 501c3 nonprofit organization. And it is extremely rare for someone to make a donation to a for-profit business. So you must report all income from fund raisers and donations on your tax return to the IRS.
For information on how to convert your business to a nonprofit organization consider my webinar