Giving Diligence its Due

Guide to Streamlining Series Refresher Part 2

Due-Diligence is a central part of most grantmaking decisions.  Grantmakers want to make sure that the organizations they fund are a good mission fit, fiscally solid, well-managed, well-regarded, and providing needed services.

In our Streamlining Due Diligence Guide, published in 2011, Project Streamline doesn’t try to address all aspects of due diligence, which could encompass everything you do to ensure you’re making a good grant to a worthwhile organization.  Instead, we focused narrowly on this question:

What do you need to do for legal compliance, and what do you choose to do for other reasons?

Here’s why:  funders have – for good reason – wanted to stay out of legal trouble, and having the right paperwork in your files is one way to do that. Sometimes, though, at the advice of legal or financial counsel, funders collect even more than they need – just in case.  We heard tales of file cabinets bursting at the seams with yearly copies of IRS Letters of Determination, organizational budgets from the last five years, audited financials from small organizations, and a whole (former) forest of other just-in-case documents.

We recommend three basic guidelines:

  1. Steer clear of long-standing myths about due diligence that might prompt you to ask for more than you need.
  2. Know the difference between what you must do and what you choose to do.
  3. Understand the different types of grantseekers, the documentation required to grants to them, and the procedures for getting what you need.

Our guide first dispels five common myths:

  1. We must get the same due diligence materials from each grantee.False.  You might have a different process for straightforward 501c3 charities or organizations you know well.

     

  2. We must complete due diligence at the beginning of the grantmaking process.Nope.  You can stage your requirements so that you only require these materials from organizations that you know you’re interested in funding.

     

  3. We must have copies of the IRS Letter of Determination and Form 990 in every fileWrong. This document only tells you that the organization was once granted tax-exempt status.  You’ll need to check for current eligibility using IRS’s Exempt Organizations search or a third party source.

     

  4. We’re required to make sure our grant doesn’t “tip” our grantee into being a private foundationNot your job.  It is the grantee’s responsibility to make sure that they don’t “tip” according to a ruling made in 1989 (Rev. Proc. 89-23)

     

  5. More is betterOh come on!  This is Project Streamline.  We’re never going to tell you that more is better.  We suggest staging requirements and asking yourself:  do we need this information to be legally compliant, or do we want it to help us determine if the grant is prudent?  Do we need it now, or can we get it later in the process?  Can we get it ourselves rather than from the grant seeker?

     

The guide then takes a methodical walk through the types of organizations you might fund and gives guidance for what actually needs to be on file for each. 

The good news?   For grantmaking to 501c3 public charities including universities and other educational institutions, you don’t need anything beyond verifying eligibility.  You could practically hand out funds on the street corner*.

Project Streamline does not necessarily endorse handing out funds on the street corner.

In fact, a funder may make a grant to an organization without doing any due diligence beyond determining if it has a ruling under Section 501(c)(3) and is further classified as one of two types of 501(c)(3) organizations:

  • 509(a)(1): schools, hospitals, churches, and other organizations that receive their public support primarily from gifts, grants and contributions from a broad group of people.
  • 509(a)(2): organizations that receive their support from a combination of gifts, grants and contributions and fees for their exempt services (e.g., museums, symphonies, etc.)

Of course, for other types of organizations – supporting orgs, government entities, domestic non-charities, and international NGOs, you must do more, but grants can be made.  In fact, the question is never whether a grant can be made, but what procedures must be followed as the grant is being made.

You can download Project Streamline’s Guide to Streamlining Due Diligence (PDF).  Please note:  this isn’t legal advice and doesn’t substitute for legal advice.

For a broader look at Due Diligence, check out Grantmakers for Effective Organization’s:  Due Diligence Done Well

To verify tax exempt status, you can look to:

–          The IRS – EO Select Check

–          Guidestar – Charity Check

–          Grantr –  Good to Grant?

Readers – how have you streamlined your due diligence practices?  Send us your stories and get a special Thank You from Dr. Streamline! 

Jessica Bearman

Jessica Bearman works with foundations and other mission-based organizations, focusing on organization development, facilitation, and R&D to help them become more intentional, effective, and responsive to the communities that they serve. She is also known as Dr. Streamline. Follow her on Twitter @jbearwoman.