What the Law Requires When Making Grants: The Answer May Surprise

By Andy Carroll, Exponent Philanthropy

Many people say the U.S. government imposes too many regulations and too much paperwork on our economy. Although everyone doesn’t feel this way, it’s a pretty common refrain.

One arena very free of government requirements is foundation grants to public charities. Yet many people who work in foundations and many professional advisors to foundations—attorneys, accountants, and consultants—are not aware of this freedom.

Project Streamline, a collaborative effort between grantmaker and grantee associations, is trying to get the word out. A few years ago, Project Streamline worked with legal experts to find out exactly what the IRS requires private foundations to do when making grants.

The answer might be shocking.

Project Streamline’s Guide to Due Diligence says it best:

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 that must be followed, 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 grantmaker could simply sit down with a checkbook, pen, envelopes, and stamps and be in perfect compliance with the tax code.

It’s almost as if the U.S. government is saying to foundations: We want to make it as easy as possible for you to get resources into the community where they are needed.

Foundations can use the minimum requirement as a baseline as they consider ways to streamline their grant processes and free up time and labor for grantees and themselves. The key question should be: What documents and information do I truly need to figure out if a program or organization is a good investment for us? What documentation that we ask for now can we do without?

More funders are finding that by focusing their philanthropy and taking time to have conversations with organizations that best fit their missions, they can do without a lot of the paper. Such conversations offer funders rich information that is often more valuable to their understanding and decision making than what they receive on paper.

For more ideas on ways to streamline, visit Project Streamline.

Andy-CarrollSenior Program Director Andy Carroll writes resources, designs workshops, and facilitates seminars for funders. Andy also dedicates a significant portion of his time to managing our Leadership Initiative that defines, validates, nurtures, and celebrates the many ways philanthropists lead. Andy has 25 years of experience in nonprofit organizations, and he enjoys talking with funders about their questions, interests, passions, and plans for making a difference.

4 thoughts on “What the Law Requires When Making Grants: The Answer May Surprise

  1. Great post! I still run into so many grantmakers that say they can’t streamline because their auditors/lawyers/accountants tell them that they “have to” do things like get paper 501c3 letters, treat everyone the same, or get narrative and financial reports for every grant made.

    These types of advisors/professionals play a very important role in foundation management. However, their job is to protect the foundation from risk and so don’t factor in the potential administrative burden of their advice on the grantmaker and certainly don’t consider the grantseeker costs.

    I think it has to up to the grantmaking staff and trustees to really engage in a discussion with their professionals/advisors on those items they are told are “must do’s” and understand not only why they are being told it is a requirement, but what is the real risk for not meeting that requirement. Then, they can decide for themselves if the practice truly is a “must do” and whether the potential risk is worth diverting grantmaker and grantseeker resources from mission.

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