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The director of a 501(c)(3) decides one day she wants to start her own charity and leaves, taking all the money, supplies etc, to start her own organization She uses a very similar name so she can trick people into donating to her new entity. She is now taking in donations without having her 501(c)(3) in place. Is this legal?

There are several issues here.  First, an executive director of a charity may not simply leave and take assets of the charity with her.  Unless she is the sole member of the board of directors (of an organization without voting members) who has authorized the transfer to a new charity, the board (or members) would have to authorize such an action.  It doesn’t sound like that approval has been given here.

Unless you have a noncompetition clause in her employment contract, She can always leave without taking assets and start a new entity in competition with you. You may have a claim against her for usurpation of a corporate opportunity, however.  You may also have some rights in the name and may be able to stop her from using a confusingly similar one.  You may have some intellectual property rights in some of the materials she will use in her new venture. 

You should consult legal counsel to see if you can recover assets or otherwise stop her activities.

As to her soliciting funds without having received a recognition of exemption from the IRS, she can always ask. If she files for exemption within 27 months of the last day of the month in which the new entity was organized, an exemption will be retroactive, and donors will be able to claim charitable contribution deductions for their gifts during the period.  Private foundations are unlikely to provide grants without the letter in hand because they would have to exercise expenditure responsibility if they did so before she was recognized as a public charity.  (See Ready Reference Page: “Outflanking Foundations' Public Charity Defense.”)

Rev. 6/22/2010