Schmidt, Designing a Legal Framework to Encourage Nonprofit Success

Section 501(c)(3) organizations in the United States work within a legal framework that was developed more than 100 years ago and that has not changed significantly in over 50 years. These rules are mostly designed to prevent and stop misuse of charitable funds Although that’s a laudable goal, those who write these rules seem to have lost sight of an equally important goal – to ensure that nonprofit leaders have rules that can help their organizations succeed. Nonprofits are more likely to succeed if their leaders understand the rules that guide them and have reasonable certainty the laws will be interpreted consistently. They also need rules that incentivize donors to provide maximum funding as quickly as possible, so that they have the resources to achieve their missions. With those principles in mind, this commentary suggests four major changes in the law: (1) the language in rules governing §501(c)(3)s should be stated more clearly and affirmatively; (2) the distinction between charitable and non-charitable activity should be clarified; (3) the charitable deduction rules should change; and (4) the distinction between private foundations and public charities should be eliminated.