What the Law Requires When Making Grants - Exponent Philanthropy
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What the Law Requires When Making Grants

Photo by Polina Tankilevitch

The law requires very little when making grants to most domestic public charities. Other than knowing a grantee’s tax status—your foundation has a great deal of flexibility. However, I regularly encounter funders, foundation staff and professional advisors who do not know this.

What the Law Requires When Making Grants

A few years ago, Project Streamline had legal experts look into what the IRS requires private foundations to do when making grants to domestic public charities.

The answer might shock you.

According to Project Streamline’s Guide to Due Diligence:

For most grantmaking by funders in the U.S., very little is legally required in terms of due diligence. There is no required paperwork, no process to follow, and no post-grant reporting required to make a grant to most domestic public charities.

For example, of the 504,759 organizations that filed a 990 or 990EZ in 2009–2010, 325,444 fit the criteria of being a 501(c)(3) organization, with a 509(a)(1) or (a)(2) designation.

For these organizations, a funder could simply sit down with a checkbook, pen, envelopes, and stamps and be in perfect compliance with the tax code.

Given that the law makes it extremely easy for foundations to get resources out the door, why do a lot of funders still require elaborate application and reporting processes? In short, what information and documentation do you actually need to decide if a program or organization is a good investment? Alternatively, what do you ask for now that you can do without?

All in all, when funders streamline their giving, they have more time to spend in the field. As a result, they have more time to meet with issue experts and mission aligned organizations. And such conversations offer funders a great deal more in value than whatever they’d receive in writing.

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About the Author

Andy Carroll advises staff, trustees, and donors of leanly staffed foundations in leadership, advocacy, and catalytic philanthropy. He works to empower more small foundations to leverage their unique position and assets to catalyze change on important issues. Andy has an MBA from the University of Michigan Business School and 30 years of experience in management, training, and program development for nonprofit organizations. Follow him on Twitter @andycarrollexpo, and check out his Catalytic Philanthropy Podcast. 

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