Can a non-profit organization be incorporated? The answer is yes! However, different corporate entities have varying tax rules and regulations, so you want to be sure you choose the best one for your situation.

Do We Need to Incorporate?

The short answer is probably. Your state requires you to complete a variety of tasks to form your nonprofit organization. The incorporation process is the most important step. You can create a non-corporate nonprofit organization and receive tax exemption, but most organizations decide to go corporate.

When you form a corporation, you create a legal entity that is wholly separate from the involved founders and incorporators. Because a nonprofit corporation provides liability protection, most people prefer it over a sole proprietorship. If someone decides to sue your company, your directors' and members' assets would be protected because they are separate from corporate assets.

What Is the Difference Between a Nonprofit Organization and an LLC?

There's a big difference between a nonprofit organization and an LLC when it comes to taxes and business protections. An organization that operates as a “tax-exempt organization” under IRS recognition is considered a nonprofit. LLC stands for "limited liability company." This type of business organization is ineligible for IRS exempt status.

If you operate as a sole proprietorship, your business will not be separate from you as the owner. What this means is that all the company's taxes, income, and liability will be your responsibility and be attached to your social security number. For protection against lawsuits and financial issues, you'll need to form and register your LLC or corporation with the secretary of state.

Steps in Forming an LLC and Corporation

  1. First, you must register an original name that won't compete with any existing businesses. To do so, you'll have to pay a registration fee.
  2. After that, you'll need to get an IRS Employer Identification Number, or EIN, using your articles of organization or incorporation. This is an important step in separating personal and business finances.

Choosing between an LLC and a corporation comes down to the type of business you're running. For example, corporations are less suited for tax purposes than real estate holdings. All business entities will be considered for-profit until given approval by the IRS and will have to pay taxes on revenue.

Getting Nonprofit Status

According to IRS Regulations 501(c), some organizations are ineligible for tax-exempt status. Most eligible organizations are clubs, schools, and government agencies. A full list of organization types that are eligible for tax-exemption is available from the IRS. LLCs are ineligible because the owners can already adjust pass-through revenue with a variety of tax options. However, there is a workaround. If a parent corporation fully owns an LLC, they can apply for the exemption and pass their tax status down to the LLC.

The steps for getting nonprofit status are as follows:

  1. Anyone looking to start a tax-exempt charitable organization must already have their EIN and corporate documents in place.
  2. Once the documents are in place, you'll have to submit your established financial statements and bank accounts to the IRS with your Application for Recognition of Exempt Status.
  3. Next, you'll need to calculate your projected financial revenue and your mission statement.
  4. After all of that is done, you'll receive a letter of approval from the IRS with your exempt status. All your corporation's other information, including your EIN, will remain the same.

Pros and Cons of Nonprofit Incorporation

The following are advantages of nonprofit incorporation:

  • A nonprofit corporation is exempt from high state and federal corporate income taxes, local taxes, and certain other taxes as well.
  • As an incorporated nonprofit charity, you are eligible for donations and grants. Only 501(c)(3) organizations can receive grants from foundations.
  • Owners and members of a nonprofit corporation are protected from personal liability.
  • As a corporation, you can provide employee benefits like group health insurance, life insurance, pension plans, and more that are not available to those working for an unincorporated organization.
  • You'll have clarity when it comes to your corporate structure, including operating rules, mission, and decision-making procedures.

The main disadvantages of incorporation are the amount of paperwork it involves, as well as the time, energy, and money you'll spend on registration and complying with all regulations. There are also restrictions in place that control political lobbying and campaigning, how much you pay your directors, and what happens to your assets upon the close of your company.

Often the benefits of incorporating outweigh the disadvantages. For a nonprofit that expects growth, it's important to get tax exemption in place as soon as you can.

If you need help with nonprofit incorporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.