Nonprofit Crowdfunding 101

December 2019

Whether you’re an established nonprofit, a concerned family member, or just someone with an idea and the drive to achieve it, crowdfunding can be an effective way to raise money and awareness. These days all it takes is a cause, an email address, and social media to start raising funds. If done properly you might find yourself meeting your goals in no time. But before you get started with your crowdfunding endeavor, especially as a nonprofit organization, there are a few tips and tax considerations to consider.

Getting Started: What is crowdfunding?

Crowdfunding allows people to raise awareness and money for an organization’s cause via online campaigns designed to attract support and donations. But it’s not exclusive to nonprofits – crowdfunding websites can be set up for start-up companies, entrepreneurs, and established businesses too. So, if you’re a nonprofit looking to crowdfund, be sure to pick an online platform that is geared toward or entirely dedicated to nonprofits. You’ll want to make sure the platform speaks to your intentions and your potential donors.

In order to create a crowdfunding page, you will need to be vetted by the sponsoring platform by describing your cause and intentions. You will also have to provide personal information so that they can hold someone accountable for the actions of the site. Many of the available crowdfunding platforms charge a basic fee and the fees vary across providers. Some platforms also share donor information with other businesses so be sure to investigate which platform fits your cause, budget, and donor needs before making a final decision. 

Keeping the Momentum: How can I maintain my crowdfunding?

Creating your page is only the first step. In order to increase the reach and impact of your campaign, you must also share the crowdfunding site across the multiple social media outlets you belong to such as Facebook, LinkedIn, Instagram, etc. Consider other ways that you can spread your message such as an email blast to your existing supporters or a direct mail campaign. Sharing your cause with as many people as possible will help it gain traction as your message is exposed to more and more people. You never know who may come upon your page and feel as passionate about your cause as you are!

Reading the Fine Print: What are crowdfunding regulations?

Once donations start rolling in, you should set up a separate bank account to segregate all the money raised from the crowdfunding site. Do not comingle any of the funds with a personal or individual account. This can be construed as fraudulent and misleading by donors and potential authorities. Many crowdfunding platforms set up protocols to prevent these types of actions and deter fraudulent people.  You should also note that there is normally an adjustment/waiting period for withdrawing the money raised. Sometimes crowdfunding platforms require you to reach your goal before any funds can be withdrawn.

Most states require fundraising registration for any organization or person that plans to solicit the general public for donations in their state. In Illinois you must register with the Attorney General even if you only plan to raise $1.00. However, there are some exemptions for medical or personal funds raised on behalf of a singular individual. All other organizations soliciting donations must apply for charitable status whether raising funds in-person or online. Unfortunately, this will be the case for many states until they revise their laws for online crowdfunding.

In most cases the funds you raised will not classify as a charitable donation. You need to go through a very formal process of registering your organization (or cause) as a tax-exempt entity with the IRS and the related state agency in order to receive charitable status. If you haven’t registered for tax exemption, then the revenue raised on the crowdfunding site will be considered gifts with no tax benefit to the donors. Also, if any one donor contributes more than the gift tax exempt threshold (currently $15,000) they will be required to file a gift tax return. This may not be an issue if you are only trying to raise a limited amount of funds. However, if your goal is to turn your cause into an established organization you may want to consider registering for tax exemption.

If you are preparing your own crowdfunding imitative and would like assistance with registering your tax-exempt organization or making sure your crowdfunding is properly setup, please contact RBI member Cray Kaiser today. Our team would be glad to help you make your crowdfunding efforts as impactful as possible!