Charitable Solicitation Registration: Closing Licenses vs. Letting Them Lapse
At times, nonprofit organizations may want to end their charitable solicitation licenses in one or more states. To accomplish this, many consider letting the registrations lapse by no longer submitting renewals and other maintenance filings. This decision is often rooted in an organization’s financial situation but could arise from shifts in its programs or fundraising strategy.
Delinquent fundraising registrations can adversely impact an organization’s financial and operational standing. It is far better to maintain registrations and preserve the organization’s credibility with donors and the general public. Alternatively, each state provides procedures for organizations that no longer operate or solicit to close their registrations. This effectively ends the organization’s ongoing reporting obligations and demonstrates its adherence to the complete rules of each state.
Below, we’ll explore reasons why an organization might need to end its registrations. We’ll cover what it means to stay in good standing and briefly review the consequences of lapsed registrations. And, we’ll discuss alternative options for nonprofits considering ending their state registrations.Jump To:
- The Rules of State Registration
- Legitimate Reasons for Ending State Registrations
- Other Reasons for Wanting to End State Registrations
- How (and Why) to Maintain the Good Standing of Charitable Solicitation Licenses
- What Happens When a Charitable Solicitation License Lapses? (And Why Organizations Should Avoid It)
- Alternatives to Letting a Registration Lapse
The Rules of State Registration
Before we explore the reasons why an organization would wish to end its registrations, there are two ground rules to remember:
- Before soliciting in a given state, an organization generally must register, unless otherwise exempt or excluded from the requirement. For as long as the organization solicits in that state, it must maintain registrations by filing renewal applications and all required fees and attachments.
- States do not view the cost of statutory filing fees and ancillary requirements, such as independently prepared financial statements, as a valid reason not to register or maintain registration.
Organizations that cannot or choose not to maintain registrations should examine their solicitation activities and determine an appropriate course of action with their legal counsel and CPA.
Legitimate Reasons for Ending State Registrations
Typically, states view the following circumstances as legitimate reasons for no longer needing to maintain registrations, including:
- A permanent decision to end select programs or to close the organization entirely.
- A change in the organization’s exempt status, and therefore how the organization is funded. For example, going from a 501(c)(3) to a 501(c)(4) or from a public charity to a private foundation.
- A demonstrable, strategic decision to stop solicitation methods that reach residents of a given state. However, it is highly uncommon that a 501(c)(3) public charity would remain in existence and “stop soliciting” altogether.
Other Reasons for Wanting to End State Registrations
Occasionally, organizations will want to end their registrations for reasons that are not feasible. These requests are usually made in good faith, and often stem from budgetary challenges. At times, organizations overlook how closely their registrations and solicitation activities tie together. For example:
- The organization is experiencing reduced funding and wants to cut costs (either state filing fees, service fees, or both).
- The organization is required to obtain reviewed or audited financial statements to renew in one or more states and does not wish to incur the additional expense of a CPA engagement. Ironically, this usually occurs when the organization sees sizable growth in its year-over-year contributions or revenues.
Organizations must follow the statutory requirements for maintaining registrations and the ability to solicit and raise mission-critical funding. As mentioned above, the cost of statutorily required financial statements or filing fees does not exempt an organization from registration. By ignoring its responsibilities, an organization can incur far greater costs than the perceived savings they hoped to achieve.
How (and Why) to Maintain the Good Standing of Charitable Solicitation Licenses
Organizations (and their leadership) have a duty of care to ensure they meet all legal requirements. By registering, an organization builds trust with—and demonstrates a commitment to—its funders, beneficiaries, and other public stakeholders. At a higher level, state charitable registration is vital to safeguarding the public’s trust in the charitable sector.
“Good standing” means that the organization has met its obligations with a given state’s charity official.* In general, this includes the following:
- Registering to solicit and maintaining registrations by filing extensions and renewal forms on time each year.
- Having compiled, reviewed, or audited financial statements prepared on an annual basis as required.
- Including fundraising disclosures in all solicitation materials, including its website.
- Maintaining current information with the state, such as organization name, address, and registered agent.
- Meeting other state requirements for governance and recordkeeping, which may need to be reported on state filings (or available in the event of a state investigation).
- When no longer soliciting or operating in the state, following the procedures to properly close the registration. By doing so, an organization maintains good standing up to and including the time the state officially closes the file.
* Organizations may have other legal entity, tax, and licensing obligations with other agencies. These are not covered in detail in this article, but are covered in our Nonprofit Compliance Guide.
What Happens When a Charitable Solicitation License Lapses? (And Why Organizations Should Avoid It)
Organizations should seek to preserve their credibility with savvy donors. They can achieve this partly by keeping their state registrations in good standing. As the name suggests, a “lapse” occurs when an organization falls short of its obligations in a given state.
Most lapses are preventable. And, the vast majority of nonprofits will not experience the escalating consequences mentioned here. However, organizations should be aware of what it means to let a charitable solicitation license lapse.
Late Registration Filings
A majority of registrations fall out of good standing simply due to a late extension or renewal filing. With so many state deadlines occurring on the same day as Form 990, this is fairly commonplace for organizations that wait to file their 990 until the last possible moment.
In the eyes of the state, a single filing arriving a few days late is rarely problematic. The state may impose a modest late fee, but the organization’s good standing is restored upon receipt of the renewal application and payment.
The best way to prevent this from happening is to file the organization’s Form 990 and complete any necessary financial statements proactively, i.e., well before the federal deadline.
Organizations that allow their registrations to lapse intentionally (or even unintentionally, such as following personnel turnover) tend to face more issues. Prolonged periods of unresponsiveness to state letters or repeated infractions can trigger additional penalties. These might include additional fines and cease and desist (C&D) orders against soliciting. Of course, states can open full civil and criminal investigations into fraudulent or unlawful charitable solicitation activity.
Again, a simple late filing will generally not cause any of these issues. While issues resulting from late filings can usually be corrected quickly, lapsed registrations are more difficult to clean up. For example:
- To restore its good standing, the organization must submit any historic filings and fees incurred during the time of the lapse. If the issue is related to a lack of properly prepared financial statements, the organization may be required to redo those statements (sometimes encompassing many years)—a costly endeavor.
- If the state issued a C&D or took other legal action, the organization might need to report the action in other states. If the action is outstanding, the organization may be prohibited from soliciting elsewhere until the action is resolved.
- Many states maintain public lists of delinquent, lapsed, and suspended organizations. It is not difficult to imagine the damage this can do to the reputation of the organization, its board members, and its funders.
Notably, states do understand the consequences that penalties have on an organization’s reputation. For that reason, states try to resolve matters informally as often as possible. In all cases, organizations should choose a course of action that is proactive, responsive, and which avoids lapses—unintentional or not.
Alternatives to Letting a Registration Lapse
Nonprofits have evolving fundraising and program strategies that determine when and where the organization must register. Rather than let the registration lapse, most states offer two alternatives:
Maintain State Registrations
In some instances, keeping the registration active may be a less costly option, especially for organizations experiencing only temporary shifts in their programs or funding conditions.
For example, an organization that closes its registration and then wishes to solicit again in the future will have to go through a process of re-registration. If the license had lapsed during that time (i.e., it was never properly maintained or closed), the organization may face additional fees. Larger and high-visibility organizations should consider that the public might continue to look them up in state records during that time, possibly leading to questions of credibility.
And, with active registrations, the organization can still solicit by any lawful means. This means even after a temporary hiatus in fundraising or shift in strategy, the infrastructure is still in place.
Properly Close State Registrations
When an organization no longer solicits or operates in a given state, there are procedures to close the registration and avoid the penalties associated with a lapse. While the process varies in each state, typically, the following must take place:
- The organization must be current in its reporting. If the organization is missing any past filings or documents, it will need to submit them before the state can close the registration. This includes submitting any required reviewed or audited financial statements for the years in which they were required.
- The organization must submit a signed, written attestation that it no longer operates or solicits in the state. The request usually must include the date that the activity ceased and must specifically request the registration be closed.
- Depending on the date activities ceased, the state may require a final renewal, Form 990, and financial statements for that tax year. This can extend the time it takes to close registrations by weeks or even months until the financial information is readily available.
Of course, the state may require additional information on a per-case basis to close the file. Once the registration is closed, the organization generally cannot solicit in that state. If the organization wants to solicit again, it will have to re-register.
Closing registrations is an action that conveys a sense of finality to the state. Organizations should work with their CPA and legal counsel before making any decisions to end their state registrations. By doing so, the organization will have taken the proper steps to protect its good standing and that of the general public.