What I Look For When Deciding to Donate: An Attorney’s Perspective
The unprecedented social, economic, and public health upheaval of the past few months has led many people across the country to make heart-felt charitable donations (to the extent they are financially able to do so). Many would-be donors are looking to support nonprofits working in cause areas that may be unfamiliar to them, such as organizations providing COVID-19 relief, scientific research organizations, and organizations that combat racism.
The methods donors use to choose the recipients of their gifts vary widely from person to person. Some donate strictly to organizations to which they have a personal connection or those that are recommended by friends and family. Others follow the suggestions of thought leaders or social media influencers, or donate to organizations they see in the news. Charity watchdog websites are popular among some donors who consider themselves to be more careful and selective in their choices. And for some donors, a nonprofit that catches their attention need only to have the right mission and a nice website to make the cut.
I thought I would share some of the methods I personally use when I am deciding whether to make a donation to an organization with which I am not familiar. Being an attorney, and someone who works exclusively with nonprofit organizations, I surely do not fit the profile of most donors.
On the other hand, I am certainly not alone, and there are many people who vet charities very closely like I do, especially if a large gift, a bequest from their will, or another structured estate planning donation is being considered. Many of these people do so professionally, on behalf of foundations or as advisors to wealthy donors. Thus, being aware of the publicly available information that people like me review about your organization can help your organization be ready for higher levels of scrutiny and become more sustainable as a result.
1. Mission and Programs
First and foremost, I look for organizations that are working in the cause areas I am passionate about supporting, and those who approach these causes in ways that seem effective and consistent with my worldview. Clearly, this is a highly subjective factor (especially for donors like me who are not necessarily experts in the particular cause area), and nonprofits cannot entirely control for these individual preferences. Not every organization can be a match for every donor. The best that an organization can do with regard to its choice of mission and programs is use its own expert judgment about how to be as impactful as possible, given the challenges in its field and limited time and resources.
But regardless of mission, organizations should be able to communicate their story in a meaningful and complete manner. I look for a clear and compelling mission statement, and a vivid, detailed description of the organization’s different programs. This should be presented consistently on both the organization’s website and in their Form 990 tax filings. As a donor, I need to be educated about why the organization has selected the programs it is pursuing and how impactful these programs have been. Whether or not I choose to donate often comes down to how persuasively the organization has made this case.
Along with the organization’s website, the Form 990 is the most important public resource donors use to become familiar with an organization and its operations. The Form 990 can usually be downloaded from Guidestar or from the IRS Tax Exempt Organization Search website, although it can take a year or two after submission to the IRS for Forms 990 to show up in these databases.
One of the main things I examine is the breakdown of an organization’s mission and programs in Part III of the Form 990. The more thoughtfully this section of the Form 990 is presented, the more I trust that an organization is being thoughtful in its programs. A single lump sum of program expenses described under a generic label such as “charitable and educational programs” leaves a poor impression and is a wasted opportunity to communicate your most important work to potential donors. Organizations (and their CPAs) should make the effort to break out their program descriptions in detail, describing not only what they do but how they are making progress on their goals, whom they serve, how many people have benefited from their programs, and other powerful metrics that demonstrate impact.
2. Accountability and Transparency
An organization’s commitment to accountability and transparency says a lot about whether it deserves to be trusted with charitable dollars. Simply put, the harder it is for me to find key information about the organization and its leadership, finances, operations, and policies, the more skeptical I will be about whether the organization is capable of delivering on its stated mission goals.
The first thing I do is visit the organization’s website and look for the page showing the organization’s Board of Directors, officers, and staff. Ideally, I want to see a full and current list of the Board members and top leadership, including bios and language that conveys why these people are drawn to the organization and its mission. There is no substitute for a qualified, diverse, and passionate Board of Directors, and this is something an organization should want to show off to the world. If this information is missing or hard to find, I tend to wonder whether the organization is covering up some shortcomings, and this often leads me to move on to considering other organizations instead.
Next, I look for what else the organization provides on its website. Posting easy-to-find and up-to-date annual reports, Forms 990, and/or audited financial statements on the website reflects very well on an organization. Some of these items can be obtained from federal or state databases, but posting this information on the organization’s website makes the evaluation process easier for potential donors and demonstrates that the organization is proud of its efforts. And finding an organization’s Articles of Incorporation, Bylaws, and key corporate policies on its website is a bonus that shows the organization goes above and beyond with its commitment to accountability and transparency.
Occasionally, if I really want to test an organization’s commitment to accountability and transparency, I will reach out directly to an organization to ask for a copy of its latest Form 990 and/or Form 1023 application. While I am able to get relatively recent Forms 990 from Guidestar or the IRS Tax Exempt Organization Search website, organizations generally have an obligation under the law to provide copies of their Forms 990 and Form 1023 in response to a request. If I don’t get a response or the organization hesitates to provide this information, that suggests to me that the organization does not fully understand this obligation.
Lastly, while I don’t personally rely heavily on charity watchdog websites, many donors and their advisers do look to these websites as part of their decision-making process. In my opinion, some of the best work that the charity watchdog websites do involves compiling Form 990 and other data relevant to accountability and transparency. For example, Charity Navigator provides a helpful overview of its accountability and transparency metrics, which include checking an organization’s Form 990 filings to determine whether “independent” Board members comprise a voting majority, whether there have been material diversion of assets or loans to/from related parties, and whether the organization has conflict of interest, whistleblower, record retention, and executive compensation review policies in place.
Planning Tip – Reviewing Charity Navigator’s accountability and transparency metrics is not only a helpful exercise to better understand the importance and relevance of these Form 990 questions, but can also point you to some relatively easy adjustments that will boost your organization’s ratings on charity watchdog websites.
3. Finances
When I review an organization’s finances before choosing to make a donation, I am mainly trying to get a sense of the organization’s size and overall financial health, and make sure there are no glaring discrepancies that conflict with my impression of the organization’s mission and program goals.
Being a smaller organization is not necessarily a bad thing. I and many other donors like to support up and coming organizations that don’t have as much revenue or assets as more established organizations. It is satisfying to help organizations that are trying new approaches and may need my donations more than larger organizations. In fact, I make a point of diversifying my contributions so that a range of organizations of different sizes are supported. Thus, the breakdown of revenue and expenses shown on the first page of an organization’s Form 990 is one of the first items I check.
However, few donors want to give to organizations that are not financially stable. It’s hard to feel like my donation was impactful if the organization cannot stay in business over the long term. The balance sheet in Part X of the Form 990 tells me a lot about an organization’s financial health. Ideally, I want to give to an organization whose “net assets without donor restrictions” (Line 27) is equal to at least 3 months of total expenses. This is a quick basic assessment of operating reserves and one of the key elements in assessing the financial health and sustainability of an organization.
Some donors focus heavily on an organization’s ratio of program expenses to administrative/fundraising expenses, strongly favoring organizations with a minimum of 80% of expenses spent on programs. As a nonprofit professional, I understand that administrative and fundraising expenses can be crucial in keeping an organization well-run and sustainable, and therefore I tend to put less weight on this factor than others in the general public. That said, organizations should be mindful of their program expense ratio because it is generally viewed as important by many donors. With the right accounting support and processes, most organizations can significantly improve their program expense ratio through proper allocations of expenses.
4. Reporting and Registration Compliance
I tend to weigh heavily an organization’s ability to comply with basic reporting and registration requirements. For me, this is the proverbial “canary in the coal mine.” If I find reporting and registration compliance deficiencies, this tends to be a sign that an organization is not run very well, and may signal that there are more serious problems underneath the surface.
When running a compliance check, I always look up the organization on the IRS Tax Exempt Organization Search website. This shows me whether the organization’s tax-exempt status is currently in good standing or whether it has been revoked.
Next, I look up the organization on the applicable state corporation website. I find the applicable state by looking at Line M (State of Legal Domicile) on the first page of the Form 990, which should be the state where the organization incorporated. I then check the state in which the organization’s address on Line C on the first page of the Form 990, if different (an organization should be registered as a corporation both in the state where it incorporated and any states where it has offices or does business). And I also check the state charitable solicitation registration databases of the states listed in Part VI, Line 17 of the Form 990 (which are generally the states where the organization conducts fundraising, and should generally include, at a minimum, the state of incorporation and the state where the organization has its headquarters).
If the state websites show that the organization’s corporation status has been revoked or annual reports or registrations are missing, this isn’t a good sign. Perhaps worse is when I cannot find the organization at all in an applicable state database. This usually means either that: (1) the organization is unaware that they have a registration obligation in a particular state; or (2) the organization is incorporated under a name that is different than the one presented to the public, and has not registered a “trade name” or “DBA” name (a surprisingly common situation). Either way, this suggests that the organization is not being as transparent with the public as it should be.
Planning Tip – An organization should run these same checks on itself every year. Doing so will help the organization catch any mistakes or omissions early (sometimes the mistake is the fault of the IRS or state government rather than the organization) and reinforce the process of keeping up with state filings.
Lastly, I often examine the firms or individuals the organization has hired to help it with its compliance responsibilities. I find some of this information from the organization’s audited financial statements (if available), the name and firm of the Form 990 preparer indicated at the bottom of page 1 of the Form 990, and sometimes from the list of highest compensated independent contractors in Part VII, Section B of the Form 990. After viewing the websites of these firms, I can generally tell whether the firms have a demonstrated expertise and commitment to the nonprofit sector. If they do, this gives me more confidence that the organization is getting good advice generally, and specifically regarding its compliance and ethical responsibilities.
One final note: the criteria discussed in this article should be aspirational rather than discouraging. Few organizations present themselves perfectly, and it takes time for most organizations to develop a strong outward presence. Like most donors, I am often willing to take a chance on a new organization, or one that I know has great people on its Board or leadership team. But when it comes to organizations that I am not familiar with, the information available online is what informs my impression of the organization and whether it is a suitable choice for my donations. It is therefore very important for nonprofits to keep a close eye on this public information and think about how potential donors may be responding to it. Well-run and sustainable nonprofits generally devote significant time, effort, and resources to managing how they are perceived by the general public.
