Nonprofit Organization Law

Nonprofit corporations play a vital role in our society, often aiming to make the world a better place. Unlike for-profit businesses, these groups focus on their mission statement over profits. Entrepreneurs who care deeply about a cause might consider starting a nonprofit. A nonprofit organization is one that carries out a religious, scientific, or charitable purpose. The purpose could also be literary or educational.

Nonprofits are tax-exempt to federal and state governments if they meet certain requirements. This is a major advantage of nonprofit organizations. Nonprofit organizations can form as a corporation or as an unincorporated business form. Business owners should understand the rules about incorporation, taxes, and more. This section will help.

FindLaw's Nonprofit Organizations section contains information and resources for interested small business owners. Here you will find tips on legal issues related to nonprofit organizations.

Form your nonprofit with confidence. Our trusted partner LegalZoom has packages starting at $99 + filing fees.

Nonprofit Corporation: Overview

A nonprofit corporation is virtually the same as a traditional for-profit corporation. The major difference is that a nonprofit is not required to pay taxes on its profits, unlike for-profit businesses. Nonprofit business entities serve public or charitable purposes. These purposes might be helping kids learn to read or saving endangered animals, for example.

Understand that only profits related to the nonprofit's purpose and regular services are not subject to taxes. If the nonprofit corporation makes profits performing services that don't relate to its stated purpose, these profits must have taxes paid on them.

Other than the tax difference, nonprofit corporations must follow corporate formalities. A nonprofit corporation also provides some personal liability protection. These protections extend to directors, officers, and members. Still, they have to follow state law and federal rules to get and keep these perks. They often rely on fundraising or donations. Any money they get cannot benefit private organizations or individuals.

Incorporating Your Nonprofit Corporation

To start a nonprofit, you first pick a business name. Then, file articles of incorporation with the secretary of state's office. There's usually a filing fee associated with this. You'll also need a registered agent, someone who's the point of contact for the corporation.

Once you're incorporated, you create bylaws for your nonprofit. These bylaws explain how you'll run things within your organization. The corporate bylaws lay out the rules. The board of directors follows these rules to make big decisions on behalf of the nonprofit.

After you've incorporated, you can get an employer identification number (EIN). This is a number from the Internal Revenue Service (IRS). This number is like a social security number for your business. You can use this number to pay state taxes or open a business bank account. Having a separate bank account for business expenses is essential for organization and clarity. Every state has its own requirements, so be sure you know your state's rules for incorporating your nonprofit.

Maintaining Tax-Exempt Status

To maintain its tax-exempt status, a nonprofit organization must abide by certain rules. Tax-exempt organizations are not allowed to receive substantial profits from certain activities. These are activities that don't relate to the nonprofit's purpose. A nonprofit is not allowed to distribute its profits to officers, directors, or members.

Besides the restrictions involving profits, nonprofits have limitations on their non-business activities. For example, a nonprofit is not permitted to make a monetary contribution to any political campaign. Also, nonprofits can only take part in a limited amount of political lobbying.

Advantages and Disadvantages of Nonprofit Organizations

The main advantage of a nonprofit organization is its tax-exempt status. This status allows more of its resources to be available for achieving the nonprofit's goals. Another advantage to nonprofits is that they can qualify for government funding or special grants. Nonprofits can also sometimes receive special rates for certain services. 

Finally, if you want to get donations or contributions from people, nonprofit status allows donors to deduct such contributions. They can make these deductions in their federal and state income tax returns.

There are, of course, some disadvantages to starting and running a nonprofit organization. As mentioned above, to maintain its nonprofit and tax-exempt status, profits cannot be divided among members. Generally, a nonprofit also has less flexibility and potential for personal gain than a for-profit organization. 

In the event that the directors choose to end the nonprofit organization, the nonprofit must pay off all remaining debts. Then, it must distribute any remaining assets to another nonprofit corporation.

Hiring an Attorney

Starting a nonprofit organization can be a good way to help others and receive an exemption from federal tax.  If your charitable organization is interested in finding out more about the nonprofit business structure, you may want to contact an experienced business attorney in your area.