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Pros and Cons of Non-Profit 501(c)3 Incorporation

By Neetal Parekh | Last updated on

Incorporating as a non-profit 501(c)3 organization provides an organization considerable tax benefits, but what are the drawbacks?  Below are some pros and cons for filing for non-profit status.

Pros for incorporating as a non-profit 501(c)3 organization

  • Pay no federal, state, or local taxes
  • Qualify for special grants and government funding, even lower postage rates
  • Encourage donation by providing donors with tax deduction
  • Shield owners and directors from liability through status as a corporation
  • Be eligible for discounted advertising rates, including possible free tv and radio public service announcements (PSA's)

Cons of incorporating as a non-profit 501(c)3 organization

  • Lengthier, more-involved application and qualification process that requires payment of multiple fees and costs
  • Must comply with numerous regulatory requirements, including submitting annual reports to federal and state agencies
  • Can only pay managers reasonable salaries, can't divide profits equally.
  • Can't pay Board of Directors
  • On dissolution, must distribute assets to other non-profits

If you are debating between filing as a corporation or a non-profit 501(c)3 organization, take a moment to answer the questions below.  They will help frame your organization's priorities and help you determine whether non-profit organization status or for-profit incorporation is the better fit.

Does your organization prefer flexibility over cost benefits?

Will your organization be more successful in securing funding by being able to offer a tax exemption for donations or will investors be more drawn by potential returns on investment?

Will your organization be able to attract high-quality leadership with any limits on compensation?

Despite the time and paperwork involved in filing as a 501(c)3 non-profit, will the status enable your organization to focus more time and resources on your mission or cause?

If you have additional questions or concerns about whether non-profit status is right for your organization, consult with an attorney who specializes in non-profit 501(c)3 incorporation.

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