Can a Nonprofit Be Incorporated? Everything You Need to Know
Can a nonprofit be incorporated? The answer is yes, but it is usually only beneficial in certain situations.3 min read
2. Steps to Incorporating a Nonprofit
3. Filing for Federal Tax Exemption
Updated November 4, 2020:
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.
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.
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.
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