How to Set up an Account for Donations

Setting up a bank account specifically for donations is crucial for maintaining transparency and organization in charitable activities. Here’s a comprehensive guide to help you through the process:

Part 1: Deciding On Account Type

Step 1: Consider Accepting Donations from Family and Friends Only

1. Simple Donation Process: If you’re raising funds for a friend’s medical procedure or similar cause, a simple donation account might suffice.
2. Bank Application: Ask your bank for an application to set up an account. You might also need to apply for a local business license.
3. Explain Purpose: The application will require details about your fundraising purpose and fund distribution. Most banks require at least two co-signers.
4. Register as Charity: You might need to register as a charity through your city or state. The bank can guide you through this process.
5. No Need for Full Charitable Organization: Simple donation accounts usually don’t need to be formally established as charitable organizations.

Step 2: Consider Soliciting the Public for Donations

1. Formally Register as a Charitable Organization: If you plan to ask the public for donations, register as a non-profit entity.
2. Name Officers: Appoint officers like a president, treasurer, and possibly a board of directors who are passionate and skilled.
3. Set Up a Non-Profit Entity: Typically overseen by the secretary of state’s office. Consult with your bank for guidance.
4. Financial Reporting: You may need to submit annual financial reports to the state detailing collections and distributions.

Step 3: Use an Online Application for Collecting Donations

1. Online Donation Systems: Platforms like PayPal make it easy for donors to contribute online.

Step 4: Prevent Fraud

1. Link to Bank Account: Online companies like PayPal will need to see your bank and state paperwork.
2. Reconcile Promptly: Regularly reconcile your bank account to ensure all deposits and withdrawals are legitimate.

Step 5: Use a Crowdfunding Site to Find Interested Donors

1. Crowdfunding Sites: Use platforms like GoFundMe to attract a broad audience.
2. Set Up a Campaign: Clearly explain your fundraising idea and link it to your bank account through PayPal.

Part 2: Applying For Tax Exempt Status

Step 1: Meet the Requirements to Be a Tax-Exempt Organization

1. IRS Application: Apply through the IRS to obtain tax-exempt status under 501(c)(3).
2. Organized for Exempt Purpose: Your organization must be exclusively for a recognized exempt purpose.
3. No Private Benefit: Ensure no private interests benefit from the organization.

Step 2: Comply with the Definition of an Exempt Purpose in the IRS Code

1. Eligible Purposes: Your organization can support causes like aiding the poor, advancing education or religion, or maintaining public monuments.
2. Check IRS Definitions: Refer to the IRS website for a comprehensive list of exempt purposes.

Step 3: Apply for Tax-Exempt Status through the IRS

1. Legal Structure: Your organization must be a trust, corporation, or association.
2. Consult Professionals: Seek advice from an attorney and accountant.
3. IRS Publications: Use IRS Publication 557 and Publication 4220 for guidance on applying for 501(c)(3) status.

Expert Q&A

Do We Need a Bank Account?

Expert Answer: Unless all donations are in cash and donors don’t require tax deductions, you need a bank account in the name of the entity receiving donations to handle deposits and withdrawals.

Does the Person Receiving the Donations Have Rights to See the Deposits and Withdrawals?

Expert Answer: Typically, the recipient does not have access to the banking records of the donating entity. Legally registered charities with tax-exempt status must make certain operational aspects public.

By following these steps, you can efficiently set up a donation account, ensuring transparency and proper management of funds for your charitable cause.