Our group of architects, designers, and others has been working to support Palestinians build open space, schools and other amenities in their villages. We have been working through a U.S. charity, but they have suggested that we become a separate legal entity while they remain as a fiscal sponsor. We are a totally volunteer group and have not taken any donations directly. Should we create a new entity? Should we seek recognition as a 501(c)(3) charity? What are the risks of personal liability if we don’t create an entity?
If you are being “disowned” by the charity you have been working with and are no longer volunteers working for their program, you may already be a separate entity. If your group has any sort of governing structure, like officers or a group of leaders who make decisions about your activities, you may already be an unincorporated nonprofit association. Since you are located in one of the states that has not adopted some form of the Uniform Unincorporated Nonprofit Association Act (See Ready Reference Page: “Revised Uniform Unincorporated Nonprofit Association Act Provides Clarification for Rules of Conduct”), you are probably operating in the worst possible legal structure. Each of you is likely to be personally liable for any obligation of the association, whether created by contract or by liability for injury. Your association may not be permitted to hold property under state law or to sue to enforce its rights in commerce. It makes no sense legally to operate that way.
If you want to continue your activities, particularly if you intend to do so on a long-term basis, you should create a state nonprofit corporation for your charitable purposes. One of the major benefits of any corporation is the limited liability for its shareholders or members. You could decide not to seek a 501(c)(3) exemption and could raise funds for a fiscal sponsor to support your services. But I would be hesitant to work with a fiscal sponsor that had already disowned me. The money you raise for a fiscal sponsor would belong to the sponsor and they could decide whether or not to grant it to you for your program. I would want more control over my own destiny than that.
It makes more sense to me to incorporate, obtain your own (c)(3) exemption, and raise funds for yourself. It eliminates the requirement to pay taxes on income of your non-exempt organization. And it allows your members to deduct their contributions and out-of-pocket expenses of participating in your work, including things like air fare for travel to a foreign village. As a volunteer, you would also have some protection under the federal Volunteer Protection Act. (See Ready Reference Page: “Federal Law Protects Nonprofit Volunteers”) Running a corporation does require some money and effort for on-going administration and governmental filings, but if you are going to continue to do this kind of work for the foreseeable future, the cost seems minimal in relation to the benefits of independence and protection.
One more suggestion: don’t include the word “Palestine” in your new corporate name. The IRS might assume it means you are assisting “terrorists” and deny an exemption now or revoke it later. A more generic name about building villages would be a lot less risky.
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