Incorporating your company is not always an easy process. Incfile is here to help you decide not only how to incorporate, but to understand exactly which type of status to file.
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.
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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:
- Food Banks
- Homeless Shelters
Advantages and Disadvantages of Starting a Nonprofit
There are many advantages to becoming a nonprofit. Tax exemption is a major advantage of becoming a 501c3 classified nonprofit. Once an organization is tax-exempt, any charitable donations made by individuals are tax-deductible. A nonprofit can also receive discounts on postage and advertising rates which makes for more efficient operation.
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.
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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:
- Public Charities: Typically, a charity provides low cost or free services to the public using funds received from the public, known as a donation. This can be obtained through private donations or fundraising events specifically designed to solicit members or advocates of the organization.
- Social Advocacy Organizations: This type of group is member-based and sets out to achieve specific goals without achieving a profit. The organization uses donations and member dues to send out information that promotes a particular social agenda.
- Foundations: This type of organization often works to better the community, whether contributing financially to local charities, or holding events that benefit residents. They are funded by and contribute on behalf of another for-profit corporation.
- Trade and Professional Organizations: People in the same organization can benefit from the activities of this type of non-profit. They are funded primarily through membership dues.
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:
- For most states, you must name a Board of Directors to manage the high-level decisions of the non-profit corporation. These must be individuals and not corporations.
- You must create a purpose statement and operate solely within the guidelines it sets forth. Purposes that are acceptable include charitable, educational, scientific, literary, sports competition and preventing cruelty to animals or children.
- When incorporating, the assets of your nonprofit must be dedicated to other charities, especially should the corporation dissolve. This would be written as a dissolution statement in your Articles of Incorporation.
All other steps associated with Incorporation apply to the creation of a nonprofit organization, such as paying fees, registering for business locally and applying for your EIN.
How to Start a Nonprofit Corporation
Pick a Name
If you haven’t already, choose a business name for your nonprofit. Once you have decided upon a name and entered your information online, IncFile automatically performs a name search against the corporate database of the state of incorporation to check the availability.
- File Paperwork
In order to form a nonprofit, you will have to file nonprofit Articles of Incorporation with the appropriate state agency and pay the necessary state filing fees. The paperwork and fees vary by state.
- File for Tax Exemption
Nonprofits are not automatically tax exempt, the IRS must approve it first. In the United States, nonprofits can apply for tax exemption status by filing a 501c3 with the IRS. The application fee is around $500, but prices vary from state-to -state.
- Create Bylaws & Acquire Licenses
Bylaws describe your nonprofits’ purpose and layout your operating rules.
Bylaws should include:
- How directors are elected and what authority they have.
- How, when and where directors’ meetings are held.
- How decisions can be reached with or without a meeting.
- Duties and responsibilities of officers and how long they serve.
- Officers, constituency rights and responsibilities, and standing committees.
- Organizational structure of the nonprofit. You may need to acquire certain license for your nonprofit. Check with your state department of consumer affairs for more information.
- Appoint Directors and Hold Your First Meeting
Normally a corporation’s officers include, at a minimum, a president, treasurer and secretary, or their functional equivalents. The initial board is the most important decision as you will vote with them to elect others later. Some things to go over in the first board meeting:
- Elect any officers
- Form your bylaws
- Choose your headquarters
- Designate a corporate bank account
- Designate the accounting period
- Document the receipt of tax exemptions
After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book. You should hold board meetings annually.