Key Takeaways

  • Yes, a nonprofit can be incorporated, and doing so offers legal and financial benefits.
  • Incorporation provides limited liability protection and improved credibility.
  • Nonprofit corporations have a clearer governance structure than unincorporated associations.
  • Incorporation is often essential for obtaining grants and tax-exempt status.
  • Certain states impose additional compliance requirements post-incorporation.
  • Filing IRS Form 1023 or 1023-EZ is necessary for federal tax exemption.
  • Seeking legal guidance ensures full compliance with incorporation requirements.

Can a nonprofit be incorporated is a common question that many people may ask when starting a nonprofit business. The short answer is yes, but it is usually only beneficial in certain situations. Five situations in which it might be worth your time to incorporate as a nonprofit include:

  • If your nonprofit association makes a profit from its activities: Whether your nonprofit currently makes a profit or will in the near future, you could benefit from incorporation. It is essential to make sure that the money you make is from the various charitable activities your organization performs. If the profit is not related to charitable activities, you could find yourself owing taxes.
  • If your nonprofit is applying for grant money: You must have tax-exempt status to be able to apply for both private and public grants. While you can apply for tax-exempt status whether you are incorporated or not, the process is easier once incorporated. To achieve tax-exempt status, you must adopt organization rules that will govern the operation of your association.
  • If your nonprofit will solicit tax-deductible contributions or donations: Many donators will want to make their contributions tax-exempt which requires a tax-exempt status from the IRS. Wealthy donors are more likely to donate to worthy causes through tax-exempt donations so they can use them as a write-off.
  • If you wish to limit your liability from the activities of the organization: One of the most common reasons nonprofits will choose to incorporate is to protect themselves from personal liability in the event of a lawsuit. Incorporated members' and directors' personal assets will be protected in the event the association defaults and is sued.
  • If the political activities you engage in could possibly lead to lawsuits: Nonprofits may engage in political activities. Sometimes overzealous advocacy can lead to legal complications which can put members' and directors' personal assets at risk.

Additional Benefits of Incorporating a Nonprofit

There are other benefits to incorporating a nonprofit besides liability protection and ease of gaining tax-exempt status. Some of the benefits that an incorporated nonprofit will enjoy include:

  • Special rates on postage: Nonprofit organizations have the benefit of applying for a mail permit that allows them to take advantage of a special discounted rate. This can be important as they often perform many of their solicitations for donations through mailings.
  • Exemption for property tax: A nonprofit corporation is exempt from property taxes which can save them considerable money over time.

When you have a nonprofit organization, it is essential to make the right decisions to ensure your organization will provide the most benefits it can. If you are considering incorporating your nonprofit, you should seek out a nonprofit attorney to help you assemble all of the important documentation and make the appropriate filings.

Enhanced Legal Protections and Public Trust

Incorporating a nonprofit not only limits personal liability for directors and officers, but also enhances the organization’s credibility. This structure demonstrates long-term commitment and accountability, which is especially attractive to donors, grantmakers, and government agencies. An incorporated nonprofit must adhere to state and federal regulations, including the establishment of bylaws and regular board meetings, which signals professional governance and builds public trust.

Additionally, incorporated nonprofits often receive preferential treatment when applying for licenses, insurance, and lease agreements, as they are viewed as stable legal entities rather than informal groups.

Comparison With Unincorporated Nonprofit Associations

Before incorporating, many nonprofits begin as unincorporated nonprofit associations. While this informal structure may suit short-term or low-risk projects, it has significant limitations compared to incorporation:

Key differences include:

  • Liability Exposure: Unincorporated associations do not shield members or leaders from lawsuits or debts incurred by the organization.
  • Legal Recognition: Incorporated nonprofits are recognized legal entities that can enter into contracts, own property, and sue or be sued.
  • Tax Benefits: Gaining 501(c)(3) status is more straightforward for incorporated nonprofits. Unincorporated entities can apply, but they often face more scrutiny and may be ineligible for some benefits.
  • Perpetuity: An incorporated nonprofit continues to exist beyond the involvement of its original founders, offering operational continuity and long-term stability.

Choosing incorporation helps nonprofits avoid common legal pitfalls and strengthens their organizational legitimacy.

Steps to Incorporating a Nonprofit

While there are pros and cons of incorporating your nonprofit, it is vital to note that most charitable organizations will incorporate to take advantage of the many available benefits. Incorporating your nonprofit can be similar to incorporating a for-profit, though there are some added steps to be able to gain tax-exempt status.

There are a few primary steps involved when incorporating your nonprofit, including:

  • Choosing a legally available business name in your state.
  • Preparing your Articles of Incorporation with your state's corporate filing office and sending it along with the required fee.
  • Creating a set of bylaws that will dictate how your corporation will be operated.
  • Appointing a board of directors.
  • Holding the first board of directors meeting.
  • Applying for necessary permits and licenses that you will need to operate your organization in the state of incorporation.

The state corporation filing division will often be part of your Secretary of State's Office. Inquire with them to receive a packet of the forms you will be required to fill out as well as samples of Articles of Incorporation to follow.

State-Specific Requirements and Compliance

After forming a nonprofit corporation, organizations must also comply with state-specific obligations, which may include:

  • Annual Reports: Many states require nonprofits to file periodic reports with updated director information.
  • Charitable Solicitation Registration: If your nonprofit solicits donations, you may need to register with your state’s charitable division.
  • State Tax Exemption: Incorporation does not automatically grant exemption from state taxes. Separate applications are often required for state sales or property tax exemptions.
  • Franchise Taxes or Fees: Some states impose minimal franchise taxes or maintenance fees on nonprofits, even if they are tax-exempt federally.

Understanding and fulfilling your state's ongoing compliance rules is critical to maintaining good standing and protecting your nonprofit’s legal benefits.

Filing for Federal Tax Exemption

After filing your nonprofit incorporation paperwork with the state, you can then move on to file with the IRS to gain tax-exempt nonprofit status as a 501(c)(3) organization. It is best practice to file for your tax-exempt status within the first 27 months of being incorporated. You will need to file a 1023-EZ to apply for tax-exempt status with the IRS.

Choosing Between Form 1023 and 1023-EZ

When applying for 501(c)(3) status, nonprofits must decide whether to file IRS Form 1023 or the streamlined Form 1023-EZ. Each has specific qualifications:

  • Form 1023-EZ: Suitable for small nonprofits with projected annual gross receipts of $50,000 or less and assets under $250,000. This form is faster and less costly to file but offers limited opportunity to explain unique organizational goals or structures.
  • Form 1023: Required for larger organizations or those with more complex activities. This comprehensive form provides a full picture of your nonprofit’s purpose, programs, and finances and may be necessary for higher-level donors or grant applications.

Choosing the appropriate form affects not only your IRS review timeline but also how funders perceive your organization’s legitimacy.

Frequently Asked Questions

  1. Can a nonprofit be incorporated in any state?
    Yes, a nonprofit can be incorporated in any U.S. state, but each state has its own filing procedures and fees.
  2. What is the main reason to incorporate a nonprofit?
    The primary reasons include limiting personal liability for directors and officers, establishing credibility, and making the nonprofit eligible for tax exemptions and grants.
  3. Do you need an attorney to incorporate a nonprofit?
    While it's not required, having an attorney can ensure compliance with all legal and tax obligations, especially when drafting bylaws or applying for 501(c)(3) status.
  4. Can an unincorporated nonprofit receive donations?
    Yes, but donors may not receive tax deductions unless the organization has separately obtained tax-exempt status from the IRS.
  5. What happens if a nonprofit doesn’t incorporate?
    Unincorporated nonprofits risk legal liability for their members and face challenges with fundraising, opening bank accounts, and applying for grants or tax-exempt status.

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