Non-profit Corporation: Everything You Need to Know
A nonprofit organization is one that has been established to meet certain tax exemptions and serve the public interest.6 min read
Nonprofit Corporation: What Is It?
A nonprofit organization is one that has been established to meet certain tax exemptions and serve the public interest. All assets of a nonprofit must be either reinvested into the organization, given to the public, or given to another charity. Should the nonprofit not meet the needs of the general public, its tax exemption benefit will be taken away.
Benefits of a Nonprofit Corporation
Some benefits of establishing a nonprofit corporation include:
• Federal tax exemptions.
• Obtaining private and public grants.
• Low-cost postage.
• Directors can serve with or without compensation
Although most would think that nonprofits can’t sell goods or services for money, you can. Many nonprofit organizations make money selling all types of products and services. Moreover, a nonprofit can also pay salaries for any employees who work there.
Disadvantage to Nonprofits That are Tax Exempt
Some disadvantages to incorporating include:
• Incorporating a nonprofit means more paperwork, additional fees and requirements, and additional regulation by the IRS.
• Filing for incorporation and tax-exemption can be complex, time-consuming, and a bit more costly than not incorporating at all.
Nonprofit: How Should You Organize Your Business
The most common type of business structure for a nonprofit is a corporation, which is formed and regulated under state law. Therefore, if a nonprofit incorporates, it must abide by the state requirements of a corporation. This includes:
• Drafting bylaws
• Filing the Articles of Incorporation with the state business registrar
• Hiring a board of directors/trustees
However, the nonprofit can still apply for tax-exempt status in an effort to avoid federal corporate income tax. Further, many states allow nonprofit organizations to avoid sales tax and property tax.
While nonprofits are generally organized as corporations, they can also be formed as LLCs in certain states, including Delaware, California, Michigan, Minesota, and Texas. While LLCs do not have tax-exempt status, a nonprofit operating as an LLC generally does so long as the LLC elects to be treated as a corporation for tax purposes. Furthermore, the LLC must have a nonprofit purpose, which some states simply don’t allow. For example, some states require that when a business registers as an LLC, the application must state the purpose of the business. Nonprofits don’t have a specific economic purpose but are rather charitable organizations organized to serve the needs of the public. Therefore, certain states simply do not allow nonprofits to register as LLCs. It is important to note that on a federal level, the IRS will not give a nonprofit LLC tax-exempt status unless all of the members are tax-exempt organizations themselves. For example, if four tax-exempt charities come together to create a nonprofit LLC, then the LLC will benefit from federal tax exemptions.
How Can I Incorporate a Nonprofit?
If you wish to have your nonprofit treated as a corporation, there are several steps you must take in order to incorporate your nonprofit organization, which include:
Choose your business name.
Check availability to see if the name you chose is already taken.
Prepare and file the Articles of Incorporation.
Create the bylaws, which will detail how your corporation will operate on a daily basis. You must also include the decision makers of the corporation. Note that this document does not need to be filed within the state you are incorporating, but you should keep a copy for your own records.
Hold a meeting. This meeting will identify all trustees or board of directors chosen, adopt the bylaws that were previously written, specify an annual budget, fundraising plans, as well as other important matters, i.e. tax records, opening a business bank account, etc. Be sure to keep minutes of the meeting as this is one of the requirements for incorporating.
Apply for an Employer Identification Number (EIN). This can be done online with the IRS as it is necessary for tax purposes. All corporations are required to obtain an EIN. The state in which you incorporate may also require an additional EIN be obtained at the state level.
Submit your tax exemption application. Initially, your nonprofit corporation will be subject to all federal, state, and local taxes; however, you must apply for federal tax exemption in order to enjoy the tax benefits for nonprofits.
Frequently Asked Questions
You may have several questions pertaining to nonprofit corporations, as well as the steps to take for applying for tax-exempt status. Below are some questions to assist you in your quest for either establishing a nonprofit, or determining whether or not to incorporate your nonprofit organization.
- How can I apply for nonprofit status?
First and foremost, you may want to hire an attorney who is well versed in this area to help you through the process. You’ll want to think about the purpose of your organization, and if it makes sense to establish your nonprofit at this time. You can choose to incorporate your nonprofit as a corporation (or an LLC in some states), remain an unincorporated organization, or set your nonprofit up as a trust. You’ll also need to determine, if you do incorporate, what states to incorporate in, if more than one.
- How can I apply for tax-exempt nonprofit status?
You’ll need to first determine whether or not you are in fact tax exempt. It’s probably best to hire an attorney to assist you during this time. Your attorney can help you conduct preliminary research regarding the chances of your nonprofit becoming tax-exempt. Be mindful that, if you don’t currently establish a nonprofit, you’ll need to establish a nonprofit organization and take all steps necessary to register within the state you choose.
- Are all nonprofit organizations tax exempt?
No, not all nonprofits can claim an exemption on taxes. For example, some charitable organizations choose to be unincorporated nonprofits thereby excluding them from a tax exemption. Furthermore, small or temporary charitable activities do not qualify for tax-exempt status. The following three tests must be met in order for a nonprofit benefit from the tax-exempt status:
- Organizational test. A nonprofit must be organized in a manner to benefit the public in some way or another. This can include any number of charitable groups that benefit education, religion, the prevention of cruelty to children or animals, amongst several other categories.
- Political test. A nonprofit cannot participate in a political campaign or spend money for political reasons.
- Asset test. The nonprofit must indicate that it will not allocate any assets for personal gain to anyone, including employees, supporters, relatives, or any other related person.
- What exactly does a tax exemption mean?
Tax-exempt status provides a nonprofit organization from paying corporate income tax on income earned from activities related to the purpose of the organization. As previously noted, a nonprofit is not automatically exempt from paying federal or state taxes. It is a benefit in which a nonprofit must meet three different criteria in order to benefit. However, some states allow tax-exempt status, even if the organization does not meet such requirements for federal tax-exempt status.
- When should and when should I not apply for nonprofit tax-exempt status?
There are times when your nonprofit should in fact claim tax-exempt status, including times when your nonprofit can meet the required criteria. If your organization is committed to remaining in existence and helping a category identified in the tax codes (which specify 29 categories of nonprofit organization), then you should apply for such a benefit. Furthermore, if your nonprofit plans on applying for grants on a consistent basis, then you’ll want to apply for a tax exemption.
However, you will not want to apply for tax-exempt status if you are unsure whether or not the nonprofit will continue business. Furthermore, if your organization doesn’t need the financial assistance, then you may not need this benefit. Lastly, if a fiscal agent is willing to handle all grant applications, then you will not need to file for tax-exempt status.
If you need additional help learning more about incorporating a nonprofit, or you are unsure whether or not you should establish a nonprofit, 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.