What Happens When A Registered Agent Discontinues Working With Your Nonprofit

April 25, 2022
Management/Operations

One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle coin wisely. A nonprofit is no unlike than any other business in that you must make ends meet. Otherwise, your charity will finish to exist. And, equally many nonprofits before long learn, information technology doesn't really affair whether the economy is in recession or is booming…being wise nigh your organization'southward financial resources is essential.

Could You Be Misappropriating Funds Without Realizing It?

But here'southward a question yous probably haven't considered: In all of your efforts to continue your program running stiff, could it be that you are misappropriating funds without knowing it? Is information technology possible that you lot committing a serious violation of the law? If you do not understand what the IRS and state regulations require regarding restricted funds, you might be.

Unfortunately, this is a situation where we frequently run across nonprofits getting information technology wrong. Near of the fourth dimension, it is an innocent attempt past a board or by an Executive Director to exist good stewards of the money people have donated. With completely innocent and positive intent, they proceed to human action in a mode that is totally confronting the rules.

For instance, suppose things are actually tight at the local homeless shelter. There isn't enough greenbacks in the full general operating fund to buy all the food that is needed for the upcoming Christmas season. There is, however, a few thousand dollars sitting in the fund designated for edifice a new facility. And, in truth, the food shortage is a far more pressing need. Information technology is unlikely a building projection will be started for at least two years, possibly more. Is it OK to divert some of the edifice fund money to the food fund?

Maybe…or maybe not.

Understanding Restricted and Unrestricted Funds

There are two types (or buckets) of funds, restricted and unrestricted. Allow'southward take a expect at each:

Restricted Funds: These are funds that are prepare aside for a particular purpose. Sometimes it'southward temporarily restricted , meaning that the brake could end due to a specified time limit, or more probable, past the completion of a project, such as the construction of a facility. Funds that are permanently restricted are usually meant for projects or activities that are ongoing and have no time limit. Alternatively, a permanent restriction could as well be tied to coin that is to be saved or invested in an endowment fund, the interest earnings of which tin can be used for a particular activeness or full general operations.

And, restricted means RESTRICTED! This is not a petty thing. Donors can take legal action against a nonprofit that information technology believes is misusing restricted donations. The last thing your charity wants is to exist in the cross-hairs of the state Attorney General'south office.

Unrestricted Funds: As the name suggests, unrestricted funds don't have strings attached and may be used past the nonprofit for whatever purpose it deems necessary. This money typically goes toward normal operating costs.

Only Donors Can Restrict Funds

Before we go any farther, nosotros have to talk about how coin gets restricted. This point is primal to the entire discussion: Only a donor can restrict funds past designating their contribution to a detail use.

We frequently come across nonprofits set aside coin to be used for a detail purpose, so track those funds as restricted. That is fundamentally incorrect. It is perfectly fine to budget money for a purpose, and even move those funds into a protected account. But restricting the use of funds is not the aforementioned as restricted funds. I know it sounds like a game of semantics, but information technology'south not. That'due south why information technology is and so of import for nonprofit leaders to sympathise legal definitions, not just learned lingo. Once more, just a donor can apply restrictions to gifts. If you demand to protect the future apply of unrestricted funds the nonprofit already has in its general operating account, phone call information technology a set-aside, a protected fund, or a budgeted fund. Simply don't call information technology restricted.

Then back to the real thing: truly restricted gifts. They can be received either in response to a specific solicitation entrada, or they could be offered by a donor without a prior targeted solicitation. Allow'southward look at an case of each.

NOTE: Though many nonprofits continue to track permanently restricted funds and temporarily restricted funds separately, accounting rules in the United states by and large practice not differentiate betwixt the two. Nearly normally, one equity account is used to track all restricted funds.

Solicited or Unsolicited Designated Gifts: The Understanding Betwixt the Parties Impacts How The Money Tin Be Used

Solicited designations. A solicitation ways that your organization asked for donations for a particular crusade. Perhaps it was by letter, email, website, radio spot…it doesn't actually matter. What matters is that donations given in response to a directly solicitation are to be dedicated to that purpose. In our homeless shelter example, the board cannot just redirect the use of the money from the facilities account to the food account, no matter how dire the circumstances, if those funds are the result of a solicitation.

Unsolicited designations. These are donated funds that the donor designates without having been solicited by the clemency. For example, Bob decides to donate $100 to the shelter, but on his own decides to "designate" that those funds be used for future expansion. Is that also a restricted souvenir? Tin can the charity legally divert that coin to its food fund?

If the organisation agreed to the designation at the fourth dimension of the gift, then it's a restricted souvenir. 1 manner to expect at information technology is this: Donations go restricted when both parties agree to the brake. In our example, we're bold the shelter accepted Bob'south designation. That makes it a restricted gift. All the same, there are manner to avoid this trouble in the future.

Tell Your Donors Upfront That Y'all May Repurpose Gifts

Provide a Disclaimer. Provide a disclaimer with your solicitation that the organization reserves the correct to utilize money as information technology sees fit. Or, if it is a budgeted purpose, permit your donor know that any funds received over and higher up the budget of the solicited purpose will be put into the full general fund for operating expenses. Make sure your donation receipt reiterates that point.

Ask Permission From the Donor to Re-purpose Their Souvenir. In a situation where information technology's too late for a disclaimer, you lot can get dorsum to donors and ask permission to re-purpose their gift. About of the time, donors volition agree when information technology makes sense. Keep in listen that donors have the legal correct to say no, and we accept seen donors refuse to allow such. In these situations, charities may have to refund the donation if information technology cannot be used for its original intended designation.

Accounting For Restricted Funds

Past at present, it should be articulate that restricted funds is a serious subject field. Then too is the tracking of restricted funds. From an accounting perspective, it'south non a simple matter. Most accounting software packages are not specifically designed for nonprofit use. Very few accept the ability to track restricted funds natively, including the virtually popular accounting software used past nonprofits nationwide. There are creative workarounds, simply it isn't easy to exercise.

Even if you happen to utilise accounting software that can track restricted funds, the accounting rules associated with it is complicated. We rarely see it done correctly by those nonprofits trying to track it on their ain, fifty-fifty though accurate tracking and reporting is legally required. For that reason, most nonprofits with any restricted fund activity should seriously consider outsourcing their bookkeeping to a professional person.

Concluding Thoughts

Handling the finances of a nonprofit is always a challenge. Knowing what constitutes restricted funds (and so handling them correctly) is crucial to staying out of trouble with your donors…and the constabulary.

Bring together more than 45,000 others

who subscribe to our free, e-mail newsletter. Information technology'southward information that volition empower your nonprofit!

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other revenue enhancement exemption problems.