Public charities are what most people think of when they use the term “nonprofit organization.” They include youth sports teams, hospitals, disaster relief organizations, community groups and many more. There are 1,409,430 tax-exempt organizations in the United States including:
- 948,769 public charities
- 96,655 private foundations
- 364,006 “other types” of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues
(Source: NCCS Business Master File 12/2013)
Religious organizations and those with an annual budget under $5000 are not required to file for 501 (c)(3) status, but many do for the sake of credibility and transparency. There were an estimated 325,172 congregations in the United States in April 2014.
(Source: American Church Lists)
With so many options, it can be difficult to choose a nonprofit unless you have some sort of personal connection to a cause or organization. Even if you do have a reason to give, it is always wise to evaluate a charity for financial responsibility and good management practices.
1. What is the charity’s mission?
A nonprofit’s mission statement tells who they serve and how they accomplish their goal. The organization’s mission statement also appears in its bylaws as a brief two or 3-sentence synopsis. Every charity must state is purpose in the form of a mission statement when filing its 501(c)(3) application. Most charities include them mission statement in a prominent location on their website and literature.
2. Is the charity a 501(c)(3)?
Many people assume that because an organization is asking for donations of money or goods, that it is an established or legitimate charity. Occasionally, there are incidences where an individual or group forms for less than respectable reasons.
A 501(c)(3) certification provides certainty that the IRS recognizes the organization. It also ensures that your donation is tax-deductible.
Not all contributions to perfectly legitimate organizations are tax deductible. Gifts to an organization designated as tax-exempt under a section of the tax code other than 501(c)(3) may not be tax deductible. Donors can still give these organizations as long as they are aware of the tax status and are sure the organization’s mission.
3. Overhead costs
It is common to hear that 15% of the total budget is an acceptable upper limit for overhead expenses. Overhead is the percent of expenses that pays for administrative and fundraising costs. There is no single standard that applies to every nonprofit, although 15% is a good estimate.
Nonprofits spend varying amounts of their budget on expenses, depending on the nature of their operations. Some beneficiaries may be in remote areas of the world. That may result in high transportation costs, which may cause overhead expenses to exceed the 15% threshold even though the nonprofit is efficiently serving its intended recipients.
How Much is the CEO Paid?
The public and press frequently criticize nonprofit CEOs for high salaries. Recently a Nassau County state Supreme Court Judge threw out NY Governor Cuomo’s pay cap on organizations that receive at least 30% of their funding from New York State. http://www.nydailynews.com/news/politics/state-judge-tosses-cuomo-pay-regulations-non-profit-salaries-article-1.1751778
CEOs generally have an MBA degree and valuable business experience. They are hired for their experience and expertise and are expected to find ways to run the organization efficiently. There is nothing wrong with paying them what they are worth, within reason, or do not expect to attract or retain them when they can make much more elsewhere.
Dan Pallotta’s TED Talk may change your views on money including beliefs in nonprofit compensation.
4. Is it relevant?
Is this nonprofits work relevant to you or someone you know? Are you a cancer survivor looking to motivate others patients. Maybe you want to inspire young women to go into math and science fields. Relevance may be the only factor necessary to motivate you to open your checkbook and give.
5. Impact is important too.
Does this organization have the impact it intends to or claims to? Are they making a difference? Donors want their time and money to have an effect. Think twice before giving to an organization that seems to have little or no impact on the issues listed in its mission statement. Remember, a new organization may need time before it reaches its intended recipients.
6. Who else donates to this organization?
May donors will simply look to see who else donates to a nonprofit. This is the reason why nonprofits list major gift givers in their brochures. Donors may be too busy or not know how to evaluate a charity. They feel a well-known donor’s gift is as good as an endorsement.
7. Charity ratings
The sheer number of organizations to give to is overwhelming. All tax-exempt organizations are required to file a 990 form each year. These are available to the public and are easy to find this information online. Visit one of these rating and information sites to see the breakdown of expenses.