“What do you mean that Israeli charities can be registered as companies?”

That was the question someone asked me last year that that had me thinking to myself, yet again, that Israeli charity legal/tax structure is a language onto itself and should require its own Ulpan.

Towards this end, I hope to clarify in this post the somewhat contradictory concept of a Chevrah LeTo’elet Hatzibur [Public Benefit Company].

TERMS

A charitable organization has a choice of registering in one of two ways: (1) with the Rasham Ha’amutot [Registar of Charities] as a amutah [charity] or (2) with the Rasham HaChavarot [Registrar of Companies] as a Chevrah LeTo’elet Hatzibur [Public Benefit Company].

In Hebrew, the Chevrah LeTo’elet Hatzibur [חברה לתועלת הציבור] is more commonly called by its acronym, Chalatz [חל"צ].

REGISTRATION & DOCUMENTATION

As the name implies, a Chalatz [Public Benefit Company] is formed as a company, complete with definitive shares and rights of ownership. This is one of the reasons why a nonprofit might choose to register as a Chalatz, as opposed to a charity (the exact pros and cons are beyond the scope of this piece).

Once registered as such, this company must adhere to the same standards, protocols, and certifications if it wishes to be recognized as a nonprofit organization. This means, that a Chalatz must apply to the Registar of Charities for Nihul Takin [Certificate of Proper Management] to receive government grants and obtain a Se’if Arba’im VeSheish [Paragraph 46a] from Mas Hachnasah [Tax Authority] to be considered tax-exempt.

Because it is registered with the Rasham Hachavarot [Companies], a Chalatz will have a different registration prefix than an amutah. The registration number for amutot, registered with Rasham Ha’Amutot [Charities], begins with a “58.” In contrast, a Chalatz will start with a “51.”

Additionally, the names of these corporations in English will generally end with (or contain in parenthesis) the acronyms of PBC (Public Benefit Company) or CC (Charity Corporation).

UNITED STATES COMPARISON

For those readers familiar with United States law, the best comparison to a Chalatz is the newly established L3C type company:

“The L3C’s primary purpose is to conduct activities that further a charitable or educational purpose. Earning a profit is its secondary purpose…the L3C statutes require the managers to pursue the accomplishment of a charitable or educational purpose. They can earn a profit while pursuing their mission, but earning a profit can’t be a significant purpose.” – CharityLawyerBlog

However, while L3C is not eligible for tax-deductible gifts, a Chalatz certainly can be.

STATUS CHECK

Again, it is important to stress that a charitable organization designated as an amutah or a Chalatz does not automatically qualify for tax-exempt status.

With that said, there is a way to check if a company is at least defined as a Chalatz…as long as you understand one basic concept: The databases for amutot and PBCs are separate. Thus, any person doing research must first know with which government body – Rasham Ha’amutot [Charity] or Rasham Hachavarot [Company] – the organization is registered.

Assuming that the said organization is registered as a company, basic information can be found at the Ministry of Justice site for the Registrar of Companies: http://ow.ly/2GAk7. Information can be found through either the company’s name in Hebrew or its mispar chevrah [company number].

1. When found, after the company’s name in Hebrew will be the acronym חל”צ, generally in parentheses.
2. When clicking on the company’s number, the reader will be taken to another page that provides additional details of the company. The lowest row of the table lists תיאור החברה [Company Description]. The description will start with the words: מטרות ציבוריות בלבד [Public Purposes Only] and will then be followed by the now familiar phraseחברה לתועלת הציבור [Public Benefit Company].

While any of these two pieces designates a charitable company, having both there will seal the deal. Item #2 is copied from the description that the company submits to the Registrar of Companies upon opening and is both helpful and telling.

If you’re already on the net, here are some other good links to try:

Rasham Ha’amutot [Registrar of Charities] (Hebrew) - Basic information about Israel’s charitable organizations registered with the Registrar of Charities.

Rasham Hachavarot [Registrar of Companies] (Hebrew) - Basic information about Israel’s companies (including PBCs) registered with the Registrar of Companies.

Guidestar Israel (Hebrew and English) – FOR CHECKING AMUTOT ONLY. The site has yet to incorporate those organizations registered with the Registrar of Companies as PBCs. Here you can find scanned financial statements and other basic information about Israel’s charities.

Mas Hachnasah [Tax Authority] – Tax Exempt Status, Donations (Paragraph 46a Status) – Ability to check if an amutah or chalatz has tax-exempt status.

Tizku Lemitzvot,

Shuey

Disclaimer: This document is intended to summarize and provide basic information and should not to be considered advice. This document should not replace nor supplant recommendations by licensed professionals; such as accountants and/or lawyers. Additionally, this summary might not reflect updates to the Ministry of Justice and/or associated internet sites.

Obtaining government funding seems to be every nonprofit’s goal, at least in Israel. I have heard countless lecturers, founders, and foundation representatives preach the Darwinian virtues of incorporating government grants into an Israeli charity’s fundraising strategy; after all, the nonprofit is servicing the Israeli public. It is to the Government’s benefit – if not its outright duty – to ensure that this charity’s program continues to exist

Not bad on paper. In practice, however, these Israeli government grants can sometimes be more trouble than they are worth.

For the purpose of this post, as a banker I would like to restrict my focus on the budgetary challenges associated with these grants.  Specifically, the two disadvantages that arise because grant monies are dispersed only after expenses are incurred.

1. Cash Flow Problems

Simply put, grants can be released before expenses have been incurred or after expenses have been incurred. Unfortunately for recipients of Israeli government grants, the Government releases grants anywhere from three to nine months after a project has been started (and as long as the appropriate paperwork has been filled out). Many times, the needed funds arrive after the organization has already started to dip into its own cash reserves.

As you can imagine, this can have a negative impact on an organization’s cash flow.

While sometimes nonprofits can float expenses and re-prioritize suppliers, many expenditures, like salaries for example, must be paid immediately. In other words, nonprofit organizations are forced to spend money that they do not have.

These charities are then forced to turn to donors, banks, foundations or suppliers to help them during these tough times, exhausting tremendous resources and favors in the process.

This is, of course, assuming that the organization can find this help.

2. Increased Cost

If the charity is successful in procuring either a line of credit or a bridge loan, increased fees are sure to follow. And the fees are not negligible – even with benefits and discounts. Generally, they include a processing fee and interest fees; additional costs that could have been avoided if the grant had arrived before the program started and not after.

Thus, not only is the Israeli government causing organization’s to waste resources, it is causing these charities to waste hard-earn money, as well.

And the more you receive from the Government, the more credit is needed.

Two Short Examples

Example #1: A nonprofit I was speaking to has a 500,000 NIS budget, totally provided through a government contract. The CEO told me that he occasionally requires a 65,000 NIS line of credit to float him until his next grant payment from the Israeli government. The line of credit stands at 13% of the yearly budget, a percentage that does not sit well with banks and is hard to explain to potential donors. To secure the line of credit, the CEO has put his personal account/money as collateral.

Example #2: Another nonprofit I met with will soon be signing a contract with the government that will increase their yearly operating budget from 10 million NIS to 15 million NIS. In order to absorb the government grants into its cash flow and fundraising strategy, the organization is looking to increase its standing credit at the banks from 300 thousand NIS to 500 or 600 thousand NIS. Assuming the organization can procure a credit line of this size, it can easily cost it upwards 8,000 NIS a year, even as much as 20,000 NIS. .

Conclusion

As mentioned at the beginning of the post, there are other factors to consider that I am not addressing.

From a budgeting perspective, these two consequences raise red-flags and serious doubts about the overall benefits of grants from the Israeli government.

With that said, government aid can be an important part of an organization’s fundraising strategy – particularly for those organizations that have the cash reserves to weather the money’s inherent delayed arrival.

Tizku Lemitzvot,

Shuey

Know of any stories that prove or disprove? We could all benefit from hearing them.

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

“The Office of the Prime Minister invites nonprofit organizations, companies from the business sector that donate to the public or the third sector, and businessmen that work in the fields of philanthropy, to apply for participation in the roundtable.”

No, King Arthur hasn’t been reborn nor are we in Camelot. Heck, we’re not even in Kansas.  What this is, though, is a serious attempt by the Israel Government and a number of foundations that operate in Israel to increase the cooperation, strength, and transparency of Israel’s nonprofit sector.

The initiative was started in February 2008, during Prime Minister Ehud Olmert’s tenure.  There are 30 members, headed by the Prime Minister himself, from the public, business, and nonprofit sectors.  The Hebrew nonprofit-news website Zavit Shalosh, quoting information from the PM Office, summarizes the roundtable as follows:

The purpose of the interdisciplinary conversation, as established in the policy document of the Government of Israel are:

• Strengthening the cooperation and support in the relationship framework between the public, business, and third sectors.
• Maintenance of a framework for discussion and conversation that is based on a culture of understanding, cooperation and agreement.
• Advancement of public purposes in different sectors, through interdisciplinary means.

In plain English (or more accurately, in plain Hebrew) the goal of the roundtable is to pool resources and allow for interdisciplinary cooperation.  After all:

1. Charities are serving the people that the government is sworn to protect and provide for,
2. The private and business sectors already invest time and money in charitable institutions and
3. The private and business sectors can lend their expertise and experience to nonprofit organizations.

Zavit Shalosh explains that in the end of 2009, a third of the round table will be rotating out, as was the agreed upon plan to ensure an ever-widening conversation and continued reinvigoration.  Any organization, company, or professional that is involved with philanthropy can present their candidacy.  It should be noted that an appointment awarded to an organization or company can only be filled by the Director/CEO, except in the case of private businessmen.  It is stressed that members of the roundtable are expected to participate in at least four meetings throughout the year

The approval process and integration of the applicants will be done through an advisory panel to the Roundtable according to the predefined and existing procedures.

Further details can be found on the forms of the framework and also on the site of the roundtable on the internet site of the Department of Regulation Planning at the Prime Minister’s Office, at the following address: www.pmo.gov.il/civilsociety

Requests to join the roundtable can be sent to Mrs. Elisheva Dror until January 20th, 2010 by email to ticnun@pmo.gov.il, by fax to (02) 670-6131, or by mail to Department of Regulation Planning, Prime Minister’s Office, 3 Kaplan Street, Jerusalem.

Additional Resources:

• The Office of the Prime Minister has posted additional background and history on the Roundtable in Hebrew.
• On the website of Sheatufim, one of the main initiators of the initiative, in Hebrew and in English (please note that the English is not a direct translation of the Hebrew).
• For a more current overview of the initiative, one can read PM Netanyahu’s Roundtable Update in English.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

The holiday season of November & December has nonprofits both excited and nervous at the same time. Gaily Perry writes that:

For many nonprofits, one out of every two gifts comes in the last three months of the year…Online Giving is even more important at year-end. About 40 percent of online gifts are made in December. And 40-60 percent of those gifts are made the last two days of the year.

So naturally, everyone is rushing to find the best fundraising medium that will net their organization the most donations possible.  But charities need to take a step back because, believe it or not, proper fundraising encompasses more than just “direct mail vs. email solicitations” and even “Facebook vs. Twitter.”

A few weeks ago I was sitting with Nirit Roessler, Director of the Pradler Empowerment Program.  During the meeting she summarized her five strategic sources of fundraising, or what she calls the chamsa of fundraising (referring to the five fingers of the hand incorporated into the chamsa symbol).  They are:

1. COMMUNITY – private donations from individuals that identify with or benefit from a particular charity.
2. BUSINESS – funding from companies that either agree with a cause or see value in the publicity gained by associating with a cause or organization.
3. INCOME – revenue gained from selling a product or service that benefits others and that advances the mission of the organization.
4. FOUNDATION – grants from local/international foundations and institutions.
5. GOVERNMENT – grants or contracts from either local or federal governments where the nonprofit operates.

These are the points that should be driving the fundraising policy of an organization; these different areas can help an organization decide whether to play to its  strengths or work on its weaknesses.  As with anything else, fundraising after all,  is a question of strategy. Only after a well thought out approach should the medium or mediums to carry out this plan be discussed.

Is it too late for this holiday to rethink strategy? Perhaps.  But with the world’s economies seemingly on the rise and organizations rethinking their fundraising goals and focus, it is vital next year to adopt a pertinent and responsible fundraising strategy.  But don’t be too lazy, next year is only three weeks away.

Good hunting and happy Holidays.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

The arrests of 44 individuals–including, 3 mayors, 5 respected community rabbis, a score of government officials, and others–on Thursday of last week (July 23) should highlight the dangers of organizations donating to international causes; and I guarantee you, the I.R.S. is having similar thoughts.

I believe that two reactions can be expected.

1. Greater Scrutiny of Charities

The fear that a charitable donation might not be used for a charitable purpose is not new. The U.S. Department of Treasury has long known the important role that charities play in financing terror and released in 2006 its third version of “Financing Guidelines: Voluntary Best Practices for U.S. Based Charities.”

(For a more detailed analysis, I published an article entitled, “International Charity in the Face of Global Terrorism: The U.S. Department of Treasurys Response.”)

Until now the guidelines produced by the IRS and other groups have been voluntary in nature and not enforced by the U.S. Government. Incidents like the one from last week and the Spinka Hasidim in 2007 are convincing the IRS that terrorists aren’t the only ones abusing the system.

With President Obama’s civic-minded government, we can expect these recommendations to become laws (click here to read more about Obama’s nonprofit agenda). When the Treasury reviews the practices of international organizations they will find that many of them are not following the guidelines that have been suggested. Organizations that are found to be negligent can find themselves facing criminal charges, fines, and revocation of tax-exempt status.

The U.S. government has already invested the time. The literature exists. In just a few short weeks, we can theoretically find these voluntary principles mandatory, so read the letter of the law and obey even the spirit of the law. Remember, the Patriot Act of 2002 allows the IRS to freeze accounts first, and ask questions later.

2. Restriction of 501(c)3 Tax-Exempt Status

The general locker-room talk, as one accountant put it, is that the easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status. Many Israeli organizations currently have or are thinking of opening “Friends of” organizations in the States to help fundraise from American citizens. Donations to these American-based organizations are exempt from United States federal taxes and are channeled to the final destination in Israel.

The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

This could be done simply by requiring additional paperwork or by imposing a minimum existence period, as is the case in Israel.

(More about the difference between USA and Israeli charities can be found in my article entitled “Defining an Israeli Nonprofit Organization.”)

Those that are worried about obtaining this status should forget about waiting for the “right” time and apply now. For those organizations that do not set up a “Friends of” charities, organizations such as the PEF, Central Fund, FJC, One Israel Fund and others can provide receipts to donors and forward the money to the intended Israeli causes.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 2: The Israel Fallout

Professor Joel Fleishman, author of “The Foundation: A Great American Secret; How Private Wealth is Changing the World,” is very clear on one thing: America has a long history of positive social change affected through the initiatives of private individuals and foundations.   These nongovernmental institutions have been succesful because of their greatest weapon, independence.   An article that was recently forwarded to me in The Commentary Magazine entitled, “The War on Philanthropy”, by David Billet, argues that this autonomy is under fire.

First, by the United States Government.

The Obama administration has been trying to pass a law that will “reduce the charitable deduction for the highest two income-tax brackets by almost 30 percent.”  As it stands right now, these two brackets get to write off 39 percent while the other brackets only get to write off 28 percent; this initiative would cap all citizens at 28 percent.  But not to worry, it is all in the name of fairness.  And no, the President doesn’t address the fact that most charity is received from these top two brackets.  The President only offers a consoling “There is very little evidence that this program has a significant impact on charitable giving.”  Not so consoling when you read that the article cites a noted economist who concludes that “the President’s proposal would reduce the amount of money given to charity by at least 10 percent.”

Billet explains that “the specific indictment against private philanthropy goes something like this: Because the Treasury forfeits some $30 billion every year in various tax exemptions for charity, government has a responsibility to see that this subsidy is  justified by the use to while the money is put.”   Making things worse, the author is worried by the President’s “casual dismissal of the role of incentives in altruism” and that Obama “makes little of the fact that a donor does not consume a single penny of the charitable donation that is currently exempted from taxes.”  While currently, the Senate is refusing to pass the President’s bill, the economic downturn might force the Senate to rethink its position.

Second, by the nonprofit sector itself.

In recent years a number of think-tanks and organizations have sprung up that seek to police the “philanthropic status quo.”  Spurred by ideas of social and racial equality, these organizations are releasing widely-read authoritative reports and taking legal action in an attempt to impose “ideological mandates,” and to establish guidelines and percentages that will govern how foundations can allocate their funds.  In essense, the article concludes, these groups “rather than encourage the proliferation of views and ideas in the nonprofit world, they seek instead to stultify sameness.”

Third, by the socialists.

The article points out that the success of private institutions in providing public works is something that discomforts the public sector: “Virtually, wherever public and private groups take up the same task, the private group outperforms [the public sector].”  This is understanding considering that private individuals and foundations are energetic and passionate about their work, are more flexible than governmental agencies hampered by bureaucracy, are able to take more risks,  are more able to weed out corruption and are more fluid in moving on to the next pressing task.  The role of private philanthropy in the United States, thus, has been a matter of concern to those that believe that these tasks are justly the responsiblity of the government whose true function is “the administrator of social justice.”

This fight for independence is all the more prevalent in Israel, claims Hillel Shmid, Director of the Study of Philanthropy in Israel at the Hebrew Universityand Director of the Haruv Institute.  In a recent conversation I had with him, Prof. Shmid explained that the last decade has seen the government shifting away from being a socialist state.  Israel has been filling its void by contracting much of its former responsibilities out to nonprofit organizations.  To make sure that these institutions are up for the task, the government regularly issues guidelines and regulations.  In essense, Shmid argues, these institutions are slowly turning into mere extensions of the government.  The uniqueness and diversity once prevelant in Israeli nonprofits is starting to disappear.

The cure?  In Israel, the answer, while not easy, is straight forward according to Professor Shmid: He prescribes a complete withdrawal and refusal of governmental financial support.  A tall order, indeed, as these nonprofits would then need to rely soley on donations.  In the United States, the answers vary.  Some argue that as with natural disasters, one can only bunker down and wait for these policing trends to pass.  Others disagree and make a case for taking a stand and fighting in the necessary arenas.  Surely a costly venture.

Note: While I have summarized some of the points of the “The War on Philanthropy,” the full article is worth the read.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey