Have you ever wonder how a nonprofit operates if it doesn't "make a profit." A nonprofit, also known as a "charitable" or 501(c)(3) organization, can be a charity or private trust, but it must benefit the broad public interest, not just the interests of its members. Here are the answers to the questions we get asked most about nonprofit corporations and organizations.
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Q: I've heard of them, but what exactly is a nonprofit corporation?
A nonprofit corporation is an organization that is incorporated for the purpose of carrying out a charitable, educational, religious, literary, or scientific purpose. Unlike conventional corporations, a nonprofit corporation does not pay income taxes (state and federal) on profits it makes from engaging in activities related to the corporation's purpose. This tax exemption recognized by the IRS and state tax agencies supports the broader objective of a nonprofit corporation to serve the public.
For a little background, nonprofit corporations are sometimes referred to as "501(c)(3) corporations." This is because the most common federal tax exemption that applies to nonprofit corporations is found in section 501(c)(3) of the Internal Revenue Code.
Q: Are there benefits that come with forming a nonprofit corporation?
Perhaps the biggest advantage of forming a nonprofit corporation is that the corporation is not taxed on profits that it raises from activities related to the corporation's state purpose. In addition, nonprofit corporations are allowed to raise money through public and private grants as well as donations from both individuals and companies. Indeed, the tax laws are even set up in a way that encourages individuals and companies to donate to nonprofit corporations. Lastly (and like all corporations), the officers, directors and members of a nonprofit corporation enjoy some limited personal liability from any liabilities of the non profit corporation.
Q: How do I go about forming a nonprofit corporation?
As it turns out, forming a nonprofit corporation is much like forming a conventional, for profit corporation. The first thing that you must do when forming a nonprofit corporation is to file a document that is called the "articles of incorporation" with the appropriate division of your state's government (typically part of the secretary of state's office). When you file this document, you must also a pay a filing fee. The articles of incorporation typically need to contain:
- The name of the nonprofit corporation,
- The nonprofit corporation's address
The name and address of the "registered agent," or "agent of register" for the nonprofit corporation (this is the person that the public will contact in regards to lawsuits on behalf of or against the corporation), and sometimes
- The names of the officers of the nonprofit corporation (depending on your state).
After you have filed your articles of incorporation, you need to apply for your nonprofit corporation to receive state and federal income tax exemptions (with 501(c)(3) being the main exemption for federal income tax). This generally requires that you fill out a series of rather long forms.
Once you have applied for tax-exempt status for your nonprofit corporation, you will need to draft a set of corporate bylaws. These rules set out the details for how the nonprofit corporation will be run, including member voting rights. Lastly, before you start in on your business, you will need to elect a board of directors and hold an initial board meeting. At this meeting, the bylaws will be ratified.
Q: Are there difficulties that come with running a nonprofit corporation?
Running a nonprofit corporation is much the same as running a for-profit corporation. When you are running a nonprofit corporation, you must maintain an eye for details and keep accurate records. For example, meetings for the directors and members must be held and minutes of the meetings must be recorded for the records book.
In addition, the Internal Revenue Service will also have some issues that need to be taken care of. As an example, nonprofit corporations cannot make political lobbying a substantial part of the nonprofit's state goals and activities. In addition, the nonprofit must ensure that its activities do not personally benefit its members, officers or directors.
Hiring a Lawyer to Help With Your Nonprofit
Now that you have the basics of a nonprofit organization down, let a legal expert explain the subtle nuances of the law. Especially if you are considering starting a nonprofit, speak to a business and commercial law attorney in your area.