Sorting Out Nonprofit Pairs
Donors are often confused by nonprofit pairs. These are related nonprofit organizations whose names often look very similar but that are legally separate entities. Some examples of nonprofit pairs are Greenpeace and Greenpeace Fund; Common Cause and Common Cause Education Fund; Human Rights Campaign and Human Rights Campaign Foundation, just to name a few. Such groups often share employees and other resources -- in some cases, the same office space and address. Donors are often confused about the differences between related nonprofits and why it matters which one they donate to.
The types of activities in which a nonprofit engages will often determine how it must be organized under the tax code, its level of transparency and disclosure requirements to the public, and its tax-deductibility status for contributions. Some nonprofits may need to form legally separate entities with different tax designations to comply with IRS rules. For example, a 501(c)(3) public charity nonprofit that is typically eligible to receive tax-deductible contributions may form a related 501(c)(4) social welfare nonprofit for purposes of conducting lobbying or some political activity. A 501(c)(3) public charity risks losing its tax-deductible status if it engages in too much lobbying or in any politics. Conversely, a 501(c)(4) social welfare organization may form a 501(c)(3) public charity so that future donations it receives to fund, say, a research or education program, would be tax-deductible.
Many times the CharityWatch grades of two related nonprofits may be vastly different based on how donor dollars are raised and spent. Nonprofits that are organized as 501(c)(4) social welfare entities, for example, may trend toward higher overall fundraising ratios since they more frequently incur the cost to obtain first-time donors, and because donations to such groups are not tax-deductible. However, since related nonprofits often conduct financial transactions between them, donors may want to consider the grades of both of the nonprofit entities before making a contribution. For instance, a highly inefficient nonprofit may incur high fundraising costs, then grant large sums of money to its related group. This can make the nonprofit receiving the funds appear to be operating very efficiently since it looks to be raising significant contributions with little or no fundraising costs. CharityWatch often analyzes the combined audited financial statements of related nonprofits and makes adjustments for certain transactions between them in order to provide donors with a clearer picture of how efficiently related nonprofits are using their donations. However, the grades of related nonprofits can still vary widely if one entity is operating more efficiently than the other, even after adjustments for related financial transactions are made.
While some donors may think of the related entities of a nonprofit organization as being the same group, related entities are legally separate, and donors must therefore write their donation checks to a specific nonprofit rather than to a combined organizational pair. Nonprofit pairs often have very similar names that differ only in suffix: Foundation, Education Fund, Action League, Trust, etc. While related nonprofits may share resources, they often conduct very different programs that serve different purposes, such as research versus lobbying, within the combined pair's overall mission. Therefore, donors should always check a nonprofit's full name to ensure that their donations are being directed to the types of activities they are intending to support. Generally, donations to 501(c)(3) public charity nonprofits are tax-deductible while donations to 501(c)(4) social welfare nonprofits are not. Since there are some exceptions, before giving, donors that are concerned about tax-deductibility should check with the charity or the IRS to verify a charity's tax-deductibility status.