How to Set up a Bank Account for Donations

Setting up a bank account specifically for donations is a professional way to manage your charity’s finances, ensuring clarity and security. Here’s a detailed guide to help you through the process.

Part 1: Creating a Corporation

Step 1: Form a Corporation

1. Choose a Business Name: Ensure it meets your state’s requirements. Check the state’s filing office website, typically the Secretary of State’s office.
2. File Articles of Incorporation: Use the specific forms for nonprofit corporations available on your state’s website.
3. Include IRS Language: Read the IRS tax exemption paperwork and include the specific language required for tax-exempt status in your articles of incorporation.

Step 2: Get an Employee Identification Number (EIN)

1. Complete Form SS-4: Find this form on IRS.gov and submit it online, by mail, or by fax. Choose “other nonprofit organization” under the entity type.
2. Note: The EIN is different from your tax exemption number.

Step 3: Apply for Federal Tax Exemption

1. Determine Your Form: Complete the IRS Eligibility Form to see if you need to file Form 1023 or the streamlined Form 1023-EZ.
2. Include Articles of Incorporation: Submit your articles of incorporation with your tax-exempt application.

Part 2: Choosing the Right Bank Account

Step 1: Review Historical Financial Activity

1. Evaluate Financial Data: Understand your average monthly account balance, busiest months, and recurring transactions.

Step 2: Project Future Financial Activity

1. Create a Budget: Estimate monthly expenses and income from donations, considering any seasonal influences.
2. Use Tools: Utilize free templates and tutorials from resources like The Wallace Foundation and The Foundation Center.

Step 3: Evaluate the Bank’s Services

1. Compare Banks: Meet with different banks and discuss your specific financial needs. Consider the three standard types of accounts:
   • Basic Checking Accounts: For smaller organizations with minimal activity.
   • Commercial Checking Accounts: For high-activity organizations, where balances earn credit to offset fees.
   • Nonprofit Checking with Interest Accounts: For varying balances that earn interest.

Step 4: Consider Treasury Management Options

1. Explore Services: Look into services like remote deposit capture, Automatic Clearing House (ACH), overnight repurchase accounts, and fraud controls.

Step 5: Gather Required Documentation

1. Prepare Documents: Collect your articles of incorporation, EIN, and proof of state registration to open the account.

Part 3: Accepting Donations Online

Step 1: Set Up Your Website

1. Design for Donations: Make it user-friendly, with a visible “donate” button and multiple payment options. Include mission details and usage of funds.

Step 2: Choose an Online Payment Option

1. Merchant Account and Payment Gateway: Ideal for larger nonprofits with frequent donations.
2. Third-Party Payment Processor: For smaller nonprofits, consider services like PayPal for a simpler setup.

Step 3: Open an Online Merchant Account

1. Choose a Provider: Popular options include Dharma Merchant Services and Payline. Provide bank account details and EIN for setup.

Step 4: Sign Up with a Payment Gateway

1. Select a Gateway: Options like authorize.net and PayPal Pro facilitate secure transactions between donors and your merchant account.

Step 5: Use a Third-Party Payment Processor

1. Simple Integration: Services like Network for Good and Google Checkout offer easy setup but may redirect donors away from your site and involve fees.

Part 4: Fulfilling Reporting Requirements

Step 1: Hire a Bookkeeper or Accountant

1. Expert Assistance: Ensure they are familiar with nonprofit reporting requirements, including reconciling bank statements and managing accounts payable.

Step 2: Prepare a Statement of Financial Position

1. Report Assets and Liabilities: Provide a snapshot of the organization’s financial position at a specific point in time.

Step 3: Create an Income and Expense Statement

1. Detail Financial Activity: Show income and expenses over a specific period to calculate net income.

Step 4: Develop a Statement of Cash Flow

1. Summarize Cash Availability: Report actual cash on hand, helping in planning for large expenses.

Step 5: Create a Statement of Functional Expenses

1. Categorize Expenses: Separate expenses by function (e.g., programs, management, fundraising) for detailed financial reporting.

Step 6: File Required Tax Returns

1. Submit Federal Income Tax Return: Use Form 990, 990-EZ, or 990-N based on the size of your organization, to comply with IRS requirements.

By following these steps, you can effectively set up and manage a bank account for donations, ensuring transparency and trust in your charitable organization.