Most foundations require grant recipients to hold 501(c)(3) status. This is because the IRS requires advance approval for grants made to individuals or to organizations that do not hold the status of a charitable organization, according to the webiste Grant Space. As an organization without 501(c)(3) status, or as an individual, you may have difficulty finding grants for which you are eligible, and the competition for these grants is very stiff.
Definition of 501(c)(3) Status
The IRS grants 501(c)(3) status to what it calls charitable organizations -- corporations formed with the purpose of performing a beneficial activity or service, either for a particular population or for the general public. Unlike for-profit corporations, organizations that have 501(c)(3) status do not accumulate profit nor do they distribute dividends to stockholders. Organizations that have 501(c)(3) status are exempt from paying federal income tax. Along with tax-exempt status, 501(c)(3) organizations may receive financial and other contributions, which are tax deductible for the individuals or organizations that make the donations. Before soliciting charitable contributions, a 501(c)(3) organization must register with the attorney general's office or the secretary of state. Organizations that fail to register risk being fined for noncompliance, according to Grant Space.
Grants for Non 501(c)(3) Organizations
If your organization has tax-exempt status but has a designation other than 501(c)(3) from the IRS, you must demonstrate what the IRS calls "expenditure responsibility." This means that you must prove that your organization uses any grant money it receives for charitable purposes. Many foundations do not make these kinds of grants. If your organization is in the process of applying for 501(c)(3) status, you may apply for grants, although most foundations require proof of 501(c)(3) status before distributing any funds. You may have better results soliciting in-kind contributions such as rent-free office space or free equipment, according to Grant Space.
Fiscal sponsorship represents one possible alternative for obtaining grant funds. With a fiscal sponsorship arrangement, an organization that has 501(c)(3) status serves as a sponsor for a project that would otherwise not qualify for tax-exempt status. A fiscal sponsorship arrangement allows you to apply for grants that would otherwise be closed to you. The key to a successful fiscal sponsorship arrangement is to choose a charitable organization that has a mission compatible with your own. Sell the charitable organization on your idea by demonstrating how the project would advance its mission, Grant Space suggests.
Individuals seeking funds are often tempted by ads that promise "free" grant money. They are usually scams. Other misleading promotions offer "valuable" information about where to find scholarship and grant money for a fee. However, much of this information is freely available at your local public library or through Internet searches, Grant Space writes. Signs that a so-called grant source may be phony include statements like "guaranteed or your money back" or "you cannot find this information anywhere else," the Better Business Bureau warns.
- Grant Space; Can I Get Funding for My Nonprofit While I Am in the Process of Incorporating or Getting Tax-Exempt Status?
- Grant Space: Can Non 501(c)(3) Organizations Get Foundation Grants?
- Grant Space: What Is Fiscal Sponsorship? How Do I Find a Fiscal Sponsor?
- Grant Space: How Can I Recognize and Avoid Grant or Scholarship Scams?
- Better Business Bureau; BBB Warns College-Bound Students and Parents to Beware of Financial Aid Schemes; August 2007
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