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Are we exempt if we don’t fundraise?

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Are we exempt if we don’t fundraise?

I am the founder of a 501(c)(3). We do no fundraising and all of our income comes from a contract with a state agency to provide residential services to adults with developmental disabilities. Are we really a 501(c)(3) since we don't fundraise? I am CEO and Executive Director. My salary is based on my being ED, but once an ED is hired to replace me, I plan to be paid as CEO. Is that legal?

An organization is classified as a charity under Section 501(c)(3) on the basis of its activities and is not required to raise funds from the general public to qualify. It is classified as a public charity, rather than a private foundation, if it is a church, school, or hospital, or if it obtains a broad base of pubic support in other ways. Grants from governmental agencies help significantly in the determination of public support. (See Ready Reference Page: “Calculating Public Support Percentage.”)
Under some state laws, an organization may not be exempt from certain state or local taxes if it does not subsidize its services, and fundraising is often necessary to provide that subsidy. (For an example, see Ready Reference Page: “Act 55 Defines 'Charity' Eligible for Exemption.”)
As to your compensation as a CEO when there is a separate Executive Director, you can be paid reasonable compensation for services actually rendered. For your own protection, you want to be sure that an independent group of the Board determines that your compensation is reasonable (for either or both positions) so that you avoid the imposition of an excess benefits tax on excessive compensation. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)
Wednesday, February 13, 2008

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