If you're wondering why form a 501c3, you first need to understand what this type of entity is. A 501c3 is a type of organization that has been deemed by the Internal Revenue Service as being tax-exempt. Much of the time, these types of entities are called charities.

What Types of Purposes Do 501c3 Organizations Have?

Being a charitable organization means your organization has purposes relating to one or more of the following:

  • Scientific
  • Educational
  • Religious
  • Fostering of national amateur sports
  • Fostering of international amateur sports
  • Charitable
  • Testing for public safety
  • Prevention of cruelty to animals
  • Literary

A 501c3 corporation can only be established when it has a specific purpose in mind, and this purpose must benefit a certain segment of people, such as society as a whole, a certain community, or a particular membership of people. Before you can receive tax-exempt status, you must incorporate your organization as a 501c3; this requirement is mandated by both state and federal statutes.

Difficulties of Incorporating a 501c3

There are certain difficulties that come along with incorporating an organization as a 501c3. For starters, there is a massive amount of paperwork that must be completed. Once you have set up your corporation and it has been approved as a being tax-exempt, you then have a large amount of tax and reporting paperwork to file with the state, as well as with the IRS. All monies and activities of the non-profit organization must be recorded.

The organization must also have an appointed board of directors, and these directors must meet together for regular meetings. There are several restrictions that a non-profit must follow in regards to paying its directors along with any officers. There are also restrictions in place that outline how the corporation can be dissolved and control its political activities.

Oversight of a 501c3 corporation is determined by the State Attorney General. Another difficulty associated with incorporating a 501c3 is that there are certain steps that must be followed when selecting the board of directors. When it is determined who will have control of the organization, this must be included in the bylaws.

Alternatives to 501c3

There are several alternatives to 501c3 organizations. First of all, you can organize a school. This type of entity is tax-exempt and is legally able to receive contributions that are tax deductible. Another type of alternative is to form a Parent Booster Club. This type of entity can make purchases and help schools manage their operations. To form a Parent Booster Club, you will need to have supportive parents who are willing to volunteer their time. Also, the money being handled by the Parent Booster Club must be carefully monitored to ensure it is being spent appropriately.

Other types of entities that can be organized to operate under a tax-exempt status include:

  • 4-H program
  • Community Foundations
  • Girl Scouts and Boy Scouts
  • Custodial Accounts at Colleges and Universities

Advantages of Forming a 501c3

When you form a 501c3, you are able to take advantage of a federal tax exemption, meaning you don't have to pay corporate income tax. It also means you will likely not have to pay certain state and local taxes. Any charitable contributions that you receive are tax-deductible.

A 501c3 also means you are eligible to be awarded public and private grants. There are many entities that provide grants that limit them to 501c3 organizations. In addition to benefiting from your own tax-exempt status, any individuals or businesses that make charitable donations to you will also be able to take advantage of tax deductions.

The formal structure of a 501c3 organization means that the best interest of the organization's mission is put before the best interests of those associated with it. It is a legal entity and is kept separate from the founders' legal entities.

The founders of a 501c3, along with its members, directors, and staff members, cannot have their personal assets seized to pay for any debts that the company is responsible for. There are exceptions to this, though. A fiduciary responsibility lies in the hands of the 501c3's directors when they partake in activities that are not in the best interest of the charity. If the charity is harmed, the directors can be held responsible.

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