‘American Friends’ Group:
Do You Need One?
by Ken Hoffman - 6 February 2019
Is the following scenario familiar? Your charity’s leadership has decided it would like to secure a portion of the $410 billion p.a. given away in private philanthropy each year by American individuals, foundations, and corporations. You know you cannot simply ‘register’ a non-US charity and start raising tax-deductible money from Americans. Is the obvious first step to create an ‘American Friends’ group and then begin a fundraising programme?
Not often! Instead, for most non-US charities, the initial foray into US fundraising is best done through two other methods. One is to route the gifts through a US ‘intermediary’. The four best known are The American Fund for Charities, British Schools and Universities Foundation, CAF America, and National Philanthropic Trust-UK. The other route, if you are raising funds solely from US private or corporate foundations, not from individuals, is to establish your non-US charity’s ‘equivalence’ to a US 501(c)(3).
But sooner or later, if your programme grows, you will want to consider whether to create a Friends group. It demands careful consideration. A Friends group is a fully independent charitable corporation. It is not a subsidiary and cannot be controlled by another entity, domestic or foreign. It must be incorporated in one of the fifty states; it needs ‘recognition’ of its tax-exempt status by the federal Internal Revenue Service (IRS); and it must register and report in other states where fundraising from individuals takes place.
There are some tasks that a Friends group performs admirably well. The most important is that Friends can accept gifts from any donor type – individual, foundation, corporation, government agency – and confer maximum tax-deductibility on the gift. In addition, the Friends can make restricted and unrestricted gifts to their foreign beneficiary. They can hold endowments. They can make gifts to any other type of entity – individual or corporate, charitable or for-profit – as long as the gift purpose is within the Friends’ ‘charitable purposes’ as laid out in the articles of incorporation (memorandum of association).
But there are significant drawbacks to creating a Friends group. The two biggest challenges are control and compliance.
A foreign beneficiary cannot control a Friends group. The Friends must be independent: they cannot be a ‘conduit’ or ‘pass-through’. The formal legal standard is that they must exercise ‘discretion’ over funds received and ‘control’ over funds granted out. Despite this, there are some good mechanisms for linking the two entities: through the Friends’ charitable purposes; by having inter-locking board membership; and by licensing intellectual property, such as the logo, from the beneficiary to the Friends. If it all seems a bit contradictory, it is. The Friends exist to advance a foreign beneficiary (usually a single institution), yet at the same time, must exhibit independence. All Friends groups operate with this inherent tension.
The other big challenge is more tangible: compliance. It is critical to stay up-to-date with annual tax filings at both the federal and state levels. ‘The feds’ require ‘Form 990’, the daunting annual tax return with its truckload of related schedules. At the state level, the load varies, sometimes requiring separate filings for a ‘charities’ regulator, a ‘corporations’ office, and a tax division. At a minimum, the Friends must file in their state of incorporation. How many more filings, among the other 49 states, is the vexing ‘state registration issue’ that Friends groups wrestle with. For most states, if you are soliciting gifts from individuals, there is an annual registration requirement.
Failure to file, at either regulatory levels, can generate substantial penalties. Non-filing of a federal return can result in fines of up to $50,000 per return, while two years of non-filing results in automatic revocation of exempt status. Similarly, in many states, two or three years of non-filing will result in cancellation of the Friends’ charter. The key to staying on track is paying attention to filing deadlines. It is advisable for one staff person at the beneficiary charity to have responsibility for the Friends’ ongoing compliance, if only to confirm that the Friends have met the various deadlines.
Other challenges that Friends groups face include the management of gifts with restricted purposes – whether restricted by the original, American donors, or by the Friends themselves as they make grants to the foreign beneficiary. And there is the long-term challenge of keeping the Friends on side. Having a Friends group means taking up a perpetual burden of cultivation of the Friends’ board members and major donors. There is no explicit control over the Friends, only influence and persuasion. As a result, most successful Friends groups receive visits twice yearly from senior staff or volunteers of the beneficiary organisation.
Some of the settings where creating a Friends group makes sense:
When you have a cadre of major individual donors who expect to take up board membership, following the American custom that boards routinely have many major donors
When you anticipate numerous contributions under $500
When your likely donors are individuals, rather than foundations or corporations. For example, most educational institutions’ Friends groups are overwhelmingly supported by individual gifts from their alumni. Sooner or later, most educational institutions will want a Friends group.
And conversely, it is unlikely that you need a Friends group:
When you are just setting out on fundraising in the US and do not have sufficient prospective donors to justify the one-time startup costs, likely in the £6,000-£12,000 range, and the annual running costs, roughly half of that range
When your donors are likely to be foundations or corporations, but not individuals.
Creating an ‘American Friends’ group is a major step with long term gains and responsibilities. In the right circumstances, it is superbly flexible and efficient, giving you access to the largest private philanthropic marketplace in the world.
You may wish to take a look at three related blogs:
It’s that time of year again: your calendar guide to US fundraising
Ken Hoffman shares insights into the rhythms of US generosity to help you plan your fundraising year.
Raising funds in America without your own 501(c)(3)
Ken Hoffman explores alternatives to ‘American Friends’ groups.
Ken Hoffman debunks the top ten myths about US fundraising and ‘American Friends’ groups.
About the author
Ken Hoffman, a US lawyer and fundraising consultant, is a Partner in More Partnership. His specialism is advising non-US, chiefly British, organisations and their American Friends groups, on governance, compliance, and fundraising strategies. Ken can be contacted at email@example.com.
This blog provides legal information for public educational purposes. It is not legal advice, for which you must seek qualified advisors with experience not only with US non-profit organisations, but also with the more specialised world of ‘Friends Groups’ and international philanthropy. A legal advisor will consider all of your particular circumstances and help fashion an appropriate structure to meet your organisation’s needs.