Primary Documentation of a Charitable Organization: Requirements and Risks

Today in Ukraine, a charitable foundation is not only a calling of the heart, but a fully fledged institution that operates as an organized system with clear processes, responsibilities, and requirements for internal procedures. In this model, primary documentation becomes a tool that structures the foundation’s activities, ensures process control, and protects its non-profit status.

Under martial law and during crises, the role of charitable organizations has become critical, which has naturally led to increased oversight by both the state and society. In this environment, transparency is not a slogan, but a clear set of verified documents that confirm every step taken by your team.

In this material, we will examine the role of primary documentation in the work of a charitable foundation, the risks that arise when it is absent, and how to build a documentation support system for stable and secure operations.

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The Importance of Primary Documents for a Charitable Organization

Professional foundation management requires understanding that documentary support is a tool for protecting the foundation. Primary documentation serves as legal confirmation that the charitable foundation’s activities are lawful. It is your main response to any requests regarding the transparency of financial flows and the targeted use of contributions.

For a charitable organization, having properly prepared primary documents performs several important functions, namely:

• Relevant financial, tax, and donor reporting. Without properly executed primary documents, no legal entity can prepare accurate reporting.
• Legal protection during inspections and avoidance of the risk of losing non-profit status. Incorrectly documented business transactions or the absence of documents may become grounds for losing the charitable foundation’s non-profit status.
• Confirmation of the targeted use of funds. Donors and supervisory authorities must see that resources are used in accordance with the statutory purpose of the charitable foundation.
• Transparency of activities. The openness of a charitable foundation and the availability of reporting increase trust and improve the chances of stable funding.

Consequences of Missing Primary Documents for a Charitable Organization

Legal negligence in working with documents comes at a price that can be measured in specific fines, suspension of activities, and reputational losses. Any inconsistency in the documents of a charitable organization may become a formal basis for sanctions in the following areas.

Tax Risks

Non-recognition or recognition as fictitious of transactions without proper documentary support may lead to the loss of non-profit status and penalties under Article 123 of the Tax Code of Ukraine:

• 10% of the assessed tax liability if there is no intent;
• 25% if intent is established;
• 50% if intent is established and the violation is repeated within 1095 calendar days.

The amount of penalty interest is provided for by Article 129 of the Tax Code of Ukraine and equals 120% per annum of the discount rate of the National Bank of Ukraine.

Such violations are followed by the transfer of the charitable foundation to the general taxation system, where the charitable organization becomes subject to corporate income tax at a rate of 18% on its taxable financial result.

Financial liability and fines for improper preparation or absence of primary documents range from UAH 1,020 to UAH 2,040.

Legal Risks

• inspections and investigations;
• suspicions of misappropriation of charitable funds;
• criminal liability.

Conflicts with Donors and Grant Providers

• failure to meet obligations to donors and grant providers, who may demand the return of funds;
• loss of the foundation’s reputation.

Full List of Documents a Charitable Organization Needs for Safe Operations

When carrying out their activities, charitable organizations must follow general accounting rules as well as specific regulations applicable to non-profit entities. Accordingly, all documentation supporting their work can be structured into the following main groups:

1. Founding documents. These include the charter, minutes of general meetings, extracts, ownership structure, information about founders, certificate of inclusion in the register of non-profit organizations, and other documents regulating or related to the legal entity’s activities.
2. HR documents. These cover relationships with employees, including employment contracts, employee applications, job descriptions, timesheets, and similar records.
3. Accounting and financial documents. These include bank documents, budgets, invoices, acts of services rendered and received, delivery notes, payroll records and related payments, acts of transfer of charitable aid, customs documentation, and more.
4. Reporting. This includes financial statements, tax reports of a non-profit organization, donor reports, and annual public reports.
5. Contracts and legal documents. These include donation agreements, charitable aid agreements, purchase agreements for goods and services, contracts, grant agreements, correspondence with donors, and powers of attorney.
6. Documents confirming the transparency of operations. These may include registers of aid recipients, photo and video confirmations, reports on completed activities, and similar materials.
7. Other internal organizational documents. These include regulations governing management bodies such as the board or supervisory board, as well as internal policies such as anti-corruption, financial policies, conflict of interest policies, procurement policies, and others.

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Legal Requirements for Documenting a Charitable Foundation’s Activities

The main requirements for primary documents include:

• presence of mandatory details such as the document title, date of preparation, name of the organization (both parties to the transaction), content and scope of the transaction, unit of measurement, transaction value where applicable, signatures of responsible persons with their positions and initials, and the organization’s seal if available;
• preparation of documents at the moment the transaction takes place or immediately after;
• retention of documents for at least the установленный срок, usually 3 to 5 years, depending on the type;
• maintenance of accounting records in accordance with national accounting standards, unless otherwise specified in internal accounting policies, and in compliance with current tax legislation.

An important condition for charitable foundations is that documents must also ensure:

• clear documentation of the targeted purpose of assistance;
• confirmation of the transfer of assets to beneficiaries;
• consistency between sources of income, such as donations, grants, or humanitarian aid, and expenditures, which must correspond to the foundation’s statutory purposes and approved budget.

Typical Documentation Mistakes in a Charitable Foundation

During inspections of charitable organizations, the following problems are most often identified:

1. Missing primary documents. A business transaction was carried out, but was not documented.
   
   Example 1. A charitable foundation transferred charitable aid to beneficiaries, but the following documents are missing: a request letter for charitable aid, a charitable aid agreement, and an act of acceptance and transfer of such aid.
   
   Example 2. The foundation purchased goods for further transfer as charitable aid to beneficiaries. The goods were transferred to the beneficiaries with properly prepared documentation, but the foundation did not have documents confirming the purchase of the goods, such as a purchase agreement, invoice, and delivery note.
   
   Example 3. The foundation purchased goods for further transfer as charitable aid to beneficiaries. The goods were transferred to the beneficiaries with properly prepared documentation, but the date of transfer was earlier than the actual date of purchase.
   
   
2. Incomplete or incorrectly prepared documents. Signatures, dates, or the content of the transaction are missing.
   
   
3. Mixing targeted and non-targeted expenses. The charitable foundation received funds for targeted financing but spent them on non-targeted needs without additional approval from the donor, grant providers, or benefactors.
   
   
4. Discrepancy between data on business transactions in accounting systems and the actual data stated in the documents.
   
   
5. Lack of a document archiving and storage system. Documents are lost, unstructured, and extra resources are spent searching for them.

Legal Support and Review of Charitable Foundation Documents 

High-quality primary documentation is not about bureaucracy. It is about protection, trust, and the sustainability of a charitable organization’s activities. By investing time and resources in proper accounting today, a charitable foundation secures a stable future and the reputation of a reliable partner.

We help charitable organizations build a legally secure and transparent system of work:

• development of document templates, including acts, agreements, statements, and other documents adapted specifically to the needs of your charitable foundation;
• setup and support of accounting and tax records, taking into account the specifics of non-profit organizations;
• consultations for your team.

Order in your documents today means access to major funding tomorrow. We create a system that protects your organization during inspections and is attractive to investors.

Book a consultation to audit your documentation and receive professional legal support from the “Legal Assistance” team.

Read more about legal support for charitable organizations here.