This article will help you understand the reasons why people incorporate a nonprofit organization and help you make a decision as whether it is right for you.
Should You Incorporate a Nonprofit OrganizationIf you have just started the process of setting up a not for profit company you might wonder whether or not to incorporate. You may have already heard something about advantages of having a 501(c)(3) corporation. Although there will be some paperwork to be completed in order to get your nonprofit organization incorporated, the benefits that you will receive will almost certainly make any cost and hassle worthwhile. The following are a list of popular reasons why you should consider incorporating your nonprofit company.
Profits Made From Activities of the Nonprofit OrganizationIt can be very beneficial to have your nonprofit organization incorporated if you expect the company to generate a profit from activities. If you do so, the profit made may not incur a responsibility to pay income tax since those profits have been derived from charitable activities – they can have tax exempt status.
Example: You set up a not for profit company that assists people in setting up weekly meetings in homes so that parents of disabled children can have local support groups. Initially all the meetings don’t cost the nonprofit organization at all as parent members are happy to pay for all the hosting costs being dedicated to a good cause. A local hospital learns about the group and the nonprofit organization and is willing to offer you a fee to move the meetings to the hospital. Since the not for profit company will now generate a profit from activities, federal income tax would be due unless you already had created a nonprofit incorporated and applied for federal tax exempt status.
Applications for Private or Public GrantsUnless you have tax exempt status, your nonprofit will probably not qualify for many different private and public grants. You can apply for tax exemption as an association rather than a corporation but it is much more difficult and complicated. It is much easier to get approval for tax exemption from the IRS if you are a nonprofit corporation rather than a nonprofit organization.
Fundraising: Tax Deductible ContributionsWhen you are running a nonprofit corporation with tax exempt status, you can seek donations from individuals and companies. These donations will be tax deductible for the donor.
Example: You set up a not for profit company that cleans up local neighborhoods and consists of volunteers. The company still needs to hire a truck to move the garbage the volunteers collect. The local neighborhood people would be glad to donate money to this cause if the company was recognized as a public charity and especially if all donations could also be deducted from tax returns. As you can see, establishing a nonprofit corporation with federal tax exempt status will certainly positively help with fundraising efforts.
Limited Personal Liability for the Nonprofit CorporationLike for profit corporations, a nonprofit corporation shields the officers, directors and employees from personal liability. A not for profit group that is not incorporated and merely consists of member volunteers could place the personal assets of the members at risk.
Political Advocacy GroupsNonprofit organizations are generally not permitted to engage in political advocacy unless they elect to follow special federal lobbying rules and laws. If they do engage in political advocacy, the only way to protect the officers and directors from a lawsuit is to incorporate the nonprofit company. For example, if a group wanted to campaign for certain legislation to limit cigarette distribution, a nonprofit organization would be an optimal business structure that would protect those involved from lawsuits that they would expect to face from big tobacco companies.
Property Tax ExemptionsIn addition to income tax exemption, nonprofit corporations also are not required to pay tax on property or real estate. This tax exemption is also known as a “welfare exemption” – more information can be obtained by contacting the office of the county assessor or an experienced real estate attorney.
Reduced Postage CostsNonprofit corporations are entitled to reduced rates for mailing from the United States Post Office. As many nonprofit corporations send out a large volume of mail, the cost savings from this benefit can be significant.
- Business, Corporate & Nonprofit Law:
- Formation of a Business
Non-profit Benefits of Forming a Nonprofit Organization
By Michael Wechsler |
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