How Charities Can Avoid Legal and Reputation Risks of Crowdfunding

PROTECT YOUR BRAND.

Establish guidelines about how people can raise money on your behalf, and be sure your supporters know about them.

RESEARCH THIRD-PARTY SITES.

Some sites include charities in databases without their knowledge. Check to make sure they are presenting your organization in an accurate way and have correct contact and bank-account information.

Investigate what the sites do with donor information and what steps they are taking to prevent fraud.

KEEP DONORS INFORMED.

Tell them how much money will go to your cause after third-party sites deduct fees. Spell out what happens if you don’t meet your fundraising goal.

CLARIFY THE TAX SITUATION.

Crowdfunding campaigns often offer perks to donors who give certain amounts, but the value must be subtracted when donors apply for a charitable deduction.

The IRS does not allow tax deductions for gifts to help individuals. For example, Modest Needs, a charity that raises money for individuals whose stories are featured on its website, explains on the site that donations actually go to the charity, which cannot guarantee that the money will be passed on to any specific recipient. (Upon prompting by the BBB Wise Giving Alliance, Modest Needs recently agreed to make that disclosure more prominent.)

COMPLY WITH STATE LAWS.

Since crowdfunding generally reaches donors across the country, be sure you are registered in all states that require it.

THINK ABOUT FINANCIAL REPORTING.

The transaction fees deducted by third-party sites should be counted as fundraising costs, said Laurie Arena De Armond, a nonprofit expert at the tax and financial consulting firm BDO. Charities that conduct in-house crowdfunding efforts might be able to allocate expenses to both fundraising and programs, she says.

Sources: BBB Wise Giving Alliance, “Crowdfunding for Charitable Causes”; The CrowdfundingBill of Rights; National Association of State Charity Officials, “Internet and Social Media Solicitations: Wise Giving Tips.”