A nonprofit corporation is created specifically for a collective, public, or social benefit. The purpose of a nonprofit corporation is to do public good in the form of educational, charitable, religious, or other purposes which the nonprofit owners cannot benefit from directly. Nonprofit corporations are tax-exempt. Nonprofits are given the IRS section code with 501© being the most common one.
HOW TO START A NONPROFIT
For the most part, starting a nonprofit requires the same initial paperwork you will need to complete with any corporation. The main difference is that your filing paperwork for a nonprofit needs to include a mission statement defining the purpose of your organization. This purpose must fall under 26 different sub-classes of nonprofits established by the IRS. If your nonprofit does anything beyond the scope of its declared mission it risks losing tax-exempt status.
Like with any other form of business entity, to start a nonprofit you will need to come up with the name (that is not taken by any other organization or company) and register your organization with the Secretary of State office and the IRS. You will also need to choose directors, create articles of incorporation for your nonprofit and decide on the geographic location. Note that tax-exempt status is not automatic and can be denied if the State finds that your nonprofit mission goes outside the accepted public good purposes. You will need to file for tax exemption with both State and Federal authorities.
ADVANTAGES OF A NONPROFIT
Tax-Exempt Status
A nonprofit corporation is exempt from federal, state, and local taxes.
Limited Liability
A nonprofit organization provides limited personal liability. This means that if your nonprofit has legal judgments exceeding the amount the nonprofit can pay, the members and founders of the organization cannot be held liable for these judgments.
Access to Grants
Unlike a for-profit corporation or an LLC, a nonprofit is eligible to apply and receive government and private sector grants, and also can receive contributions from individuals.
Good Cause
Nonprofit organizations are always established with a good deed in mind. If you form a nonprofit or contribute to a nonprofit, it makes you feel like you are contributing to society.
DISADVANTAGES OF A NONPROFIT
Limited Funds
Nonprofit corporations depend on donations from donors, or government grants. That means that you should be prepared for the constant competition for grants or conducting fundraising campaigns. And despite all of your efforts, money may still be tight.
More Paperwork and Administrative Costs
Starting a nonprofit requires more paperwork, than forming a for-profit corporation. You will need to file tax forms and nonprofit incorporation to qualify as a nonprofit. To ensure all your forms are completed correctly, you may want to hire an accountant and lawyer which adds extra costs.
Maintaining a Nonprofit Tax Status
Maintaining a tax-exempt status requires you to meet a very strict annual reporting deadline with the IRS. By IRS regulations, a nonprofit cannot make profits to continue having a tax-exempt status. If a nonprofit does make a profit (called a surplus), all these funds must be used towards the mission of the nonprofit. The tax benefits can be passed through donors and volunteers. Wages of the nonprofit staff can be paid at standard rates.
To receive a tax-exempt status a nonprofit must obtain approval from both Federal and State IRS. These are the main five purposes recognized for qualifying for a nonprofit:
1. Charitable
2. Educational
3. Literary
4. Religious
5. Scientific
Even though a nonprofit is tax-exempt, it is still required to file with the IRS regularly. The filling is necessary to ensure that the organization does not deviate from its mission. If a nonprofit loses its exempt status, it will suffer severe tax consequences, therefore, it is important to keep all records current and accurate.
Dissolving a Nonprofit is Complicated
Nonprofits cannot be sold or dissolved as easily as any other corporation or an LLC. Even though nonprofits are allowed to own assets and generate income (which typically comes from grants or donations) and take out loans, the ownership of a nonprofit cannot be sold in the form of investments. Its assets can be used as collateral and must be transferred to another nonprofit or used towards the purpose of the organization, but they can never be distributed to the owners of the organization directly.
HOW TO START A NONPROFIT CORPORATION
Just like with any other corporation, to start a nonprofit corporation you need to file articles of incorporation with the appropriate state office. In most states, the Secretary of State handles this.
To qualify as a nonprofit and to receive tax-exempt status, the organization must write its Articles of Incorporation using certain language as mandated by the Internal revenue Service. Nonprofit corporations can operate under a special tax-exempt Status of 501(c)(3) and receive tax-deductible donations from individuals and companies if they are engaged in one or several of the activities below:
• Charity
• Education
• Religious activities
• Promotion of literacy
• Scientific activities
• Public safety
To maintain its tax-exempt status a nonprofit must follow certain rules:
• It cannot pay out dividends
• It can engage only in activities as stipulated in the Articles of Incorporation
• In the event of dissolution, all organization’s assets must be distributed to another qualified nonprofit organization or used toward the mission of the nonprofit.
• It must follow filing requirements at both the State and Federal levels.
