Many companies who incorporate are actually charities that do not intend to make a profit, but rather donate all profits to another organization. In this case, a charity would want to incorporate as a nonprofit and, ultimately, apply for tax exempt status. By having tax exempt status, your donations can be recorded by donors as not taxable by both the federal and state government. This is a great incentive to be able to offer your constituents.
People who start nonprofits are driven by passion about a certain cause. Whatever your cause, creating a nonprofit can make a difference. We've provided as much information as you need to know in choosing to incorporate as a nonprofit corporation.
What Is a Nonprofit Corporation?
A nonprofit corporation is an organization whose purpose is something other than making a profit. A nonprofit donates its revenue to achieve a specific goal that benefits the public, instead of distributing it to shareholders. There are over 1.5 million nonprofit organizations registered in the US.
Being a nonprofit does not mean the organization won’t make a profit. Nonprofits can make money, but all of the money must go back into the organization by paying employee salaries, administrative expenses and other overhead costs. No one person or group owns a nonprofit. Assets from a nonprofit can be sold, but it benefits the whole organization rather than individuals.
While anyone can incorporate as a nonprofit, only those who pass the stringent standards set forth by the government can achieve tax exempt, or 501c3, status. The process of creating incorporation papers is just the first step in becoming a completely recognized nonprofit organization. We discuss the steps to becoming a nonprofit further into this page.
Who Is a Nonprofit Corporation Right For?
Nonprofits are agents of change in the world today. They are established for a specific noncommercial purpose, usually religious, educational or charitable.
Common not for profit businesses include...
Advantages and Disadvantages of Starting a Nonprofit
- Another advantage is legal protection, as the founders and members are generally not held personally responsible for a nonprofit’s debts. The legal advantage is available without 501c3 status, as is the benefits that become available for employees, such as health and retirement plans. Furthermore, a nonprofit corporation that formalizes their existence improve the chances for longevity and success because the mission and vision must be clear and achievable.
Another advantage is legal protection, as the founders and members are generally not held personally responsible for a nonprofit’s debts. The legal advantage is available without 501c3 status, as is the benefits that become available for employees, such as health and retirement plans. Furthermore, a nonprofit corporation that formalizes their existence improve the chances for longevity and success because the mission and vision must be clear and achievable.
- There are few disadvantages of becoming a nonprofit. Nonprofits cost money and time to start. Once a nonprofit is started, you must keep excellent records and make sure to file all paperwork yearly. This can be resolved by hiring the proper professionals to handle such details. Since nonprofits are there to serve the public, they are also under greater public scrutiny.
Types of Nonprofit Companies
There are four main types of non-profits common in the United States. Each contains the ability to achieve tax exempt status despite their slightly different goals and corporate structure. They include:
Political parties are also eligible for tax exempt status, but do not fall under the standard nonprofit category.
How to Achieve 501c3 Status
Corporations may file for federal tax exempt status, also known as 501c3 by the IRS, if they are incorporated as a nonprofit corporation or trust. They must meet and maintain certain stringent criteria to be considered free from paying taxes. These include: