{"id":4891,"date":"2016-04-04T10:47:49","date_gmt":"2016-04-04T15:47:49","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/top-five-reasons-to-incorporate-a-non-profit-organization.html"},"modified":"2025-10-20T00:10:00","modified_gmt":"2025-10-20T05:10:00","slug":"top-five-reasons-to-incorporate-a-non-profit-organization","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/top-five-reasons-to-incorporate-a-non-profit-organization.html","title":{"rendered":"Top Five Reasons To Incorporate a Nonprofit Organization"},"content":{"rendered":"\n
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Top Five Reasons To Incorporate a Nonprofit Organization<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

The main benefits of incorporating a non-profit venture are the personal <\/span>liability<\/span> protection<\/span> of its board and members, the tax-exempt status<\/span>, and ability to secure grants and tax-deductible<\/span> donations<\/span>.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

Starting a nonprofit organization<\/span> is a fantastic way for entrepreneurs<\/span> to make a difference. Unlike a for-profit<\/span> business, a nonprofit focuses on making an impact rather than earning money for owners or shareholders. However, creating a successful nonprofit means more than just having a great idea or a passion for a cause. You must follow certain rules and set up a solid business structure.<\/p>\n

If you have just started a\u00a0nonprofit organization<\/span><\/a>, you have probably given thought to incorporating it as a nonprofit corporation<\/span>. Becoming a nonprofit corporation<\/span> requires some paperwork. You must file as a nonprofit corporation<\/span> with the secretary of state\u2019s office in your state and apply to the Internal Revenue Service (IRS<\/span>) as a 501(c)(3) organization<\/span>. But\u00a0it is often well worth the trouble for many nonprofits<\/a>. If you are not sure whether you want to incorporate your\u00a0nonprofit organization<\/span><\/a>\u00a0as a nonprofit corporation<\/span>, here are the top five reasons to do so.<\/p>\n

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1.\u00a0Incorporate a Nonprofit When Your Association Makes a Profit From Its Activities<\/h2>\n

Even if your group is not in it for the money, you might find that you\u00a0make some profit<\/a>\u00a0from the activities you do. When you incorporate<\/a>, your group becomes a formal business entity<\/span>. This means that even if your organization earns money from charitable activities<\/span>, the income is not for personal gain but to help you further your cause.<\/p>\n

Your organization\u2019s name goes on the articles of <\/span>incorporation<\/span>, and the state recognizes you as a separate legal being. This is key because the\u00a0Internal Revenue Service<\/a>\u00a0(IRS<\/span>) has special rules for tax-exempt organizations<\/span>. The Internal Revenue Code<\/span> codifies these rules. By setting up a proper business structure, paying your filing fees, and installing bylaws<\/span>, your group can focus on its mission statement rather than federal or state tax<\/span> issues.<\/p>\n

2. Incorporate a Nonprofit When You Are Applying for Public or Private Grant Money<\/h2>\n

If your organization does not have tax-exempt status<\/span>, you may be excluded from applying for many\u00a0public and private grants<\/a>. Many grant applications require that you have a board of directors<\/span>. They also may require that you are formally recognized at the state level as a legal business entity<\/span>.\u00a0<\/p>\n

This means you need to file articles of <\/span>incorporation<\/span> with the secretary of state, which\u00a0can give you credibility with funders. Plus, your board members can help with fundraising<\/span> ideas and may know how to fill out those tricky IRS<\/span> forms<\/span>. Remember, grants are not free money. They come with expectations that your nonprofit<\/a> is running professionally.<\/p>\n

You may be able to apply for and receive tax-exempt status<\/span><\/a>\u00a0solely as an organization or unincorporated association<\/span>, however there is no liability protection<\/span> for members. Getting tax-exempt status<\/span> as an association requires that you prepare and adopt a complicated set of organizing papers and rules that govern the association\u2019s operation. In addition, in most situations, it is easier to get the IRS<\/span> to approve tax-exempt status<\/span> for a corporation than for an unincorporated organization.<\/p>\n

3. Incorporate a Nonprofit When You Will Solicit Tax-Deductible<\/span> Donations<\/span> or Contributions<\/h2>\n

When you incorporate your organization as a nonprofit corporation<\/span> and are\u00a0granted tax-exempt status<\/span><\/a>, gifts and donations that are given to your corporation can be deducted from the donors\u2019 federal and state\u00a0income tax<\/span> returns<\/a>.<\/p>\n

For example, let\u2019s say a charitable organization wants to sponsor a food drive that will help the local homeless population get free meals. The organization already knows it has plenty of volunteers to help hand out the food, but\u00a0it wants to give back to the volunteers\u00a0and\u00a0needs to rent a space to hand out the food.<\/p>\n

There are plenty of wealthy individuals that may donate to the organization. If the organization is incorporated as a nonprofit and receives tax-exempt status<\/span>, it may be able to get more donations. They can do this by allowing the donors to apply their donations as tax-deductible<\/span> on their tax returns.<\/p>\n

4.\u00a0Incorporate a Nonprofit When You Want To Limit Your Personal Liability<\/span><\/h2>\n

If it appears that your nonprofit organization<\/span> may be the target of a lawsuit or has the possibility of defaulting on future loans, you may want to\u00a0consider incorporating<\/a>\u00a0to limit potential personal liability<\/span>. Just like regular corporations, nonprofit corporations<\/span> can be sued.\u00a0<\/p>\n

However, like normal corporations, the members and directors of nonprofit corporations<\/span> are shielded from the liability of the nonprofit corporation<\/span>. This means that you can shield your personal assets<\/span> (cars, bank accounts, homes) by incorporating your nonprofit organization<\/span>.<\/p>\n

For example, suppose that Bill directs a nonprofit organization<\/span> that delivers food by truck to various homeless shelters around the city. To avoid any personal liability<\/span> that could result from a car accident and to stop the organization\u2019s creditors from seeking his personal assets<\/span> in case the truck loans are not paid, Bill can incorporate the nonprofit.<\/p>\n

5. Incorporate a Nonprofit When Your Political Activities<\/span> Could Lead to Lawsuits<\/h2>\n

As a general rule, nonprofits can engage in very limited political activities<\/span>.They may not participate in a political campaign but may be allowed to do some lobbying. If you want to limit your personal liability<\/span> for any lawsuits that come from overzealous advocacy<\/span> that takes your nonprofit out of the safe political arena, you should incorporate it. If you do not and your organization is sued and loses, your personal assets<\/span> may be at risk if the organization\u2019s assets do not cover the monetary award.<\/p>\n

More Benefits of <\/span>Nonprofit<\/span> Corporations<\/span><\/h2>\n