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Overview: Nonprofit Benefits

A nonprofit business is a special type of legal entity. It's different from a for-profit business because it works to help a cause, not just to make money. Many people, like business owners and entrepreneurs, start a nonprofit to follow their passion for a cause. Starting a nonprofit can be like starting a small business, but there are different rules from the Internal Revenue Service (IRS) that you need to follow.

nonprofit organization can be incorporated or unincorporated. A nonprofit corporation is an organization with a specific not-for-profit mission that uses incorporation as its business structure. 

On the other hand, a nonprofit that chooses not to incorporate is simply an unincorporated organization. Nonprofit organizations work for the public good rather than for-profit like private businesses. Non-profits enjoy the benefits of tax-exempt status and the protection of directors, officers, and members from personal liability.

This section provides a brief overview of nonprofit benefits.

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General Benefits of a Nonprofit.

Nonprofit organizations have several advantages that can be very rewarding. Because the mission of a nonprofit is to work toward the public good, the organization is eligible for benefits that are not applicable to for-profit organizations. Unlike a for-profit corporation, a nonprofit does not pay sales tax on things they buy. 

People donate to nonprofits to support the cause. When a nonprofit business makes money from fundraising, that money usually doesn't get taxed. This helps a lot because it makes more money to help their mission.

For the leaders and board members who guide these groups, they gain the opportunity to make positive changes in their communities. Plus, being part of a nonprofit can boost a business owner's image, showcasing their commitment to more than just profits.

Tax-Exempt Status

An incorporated or unincorporated nonprofit association can qualify for tax-exempt status if it meets certain conditions. The federal government offers a variety of different types of tax exemptions for nonprofits. The most popular kind is called a 501(c)(3). 

Under this code, the nonprofit is exempt from paying federal income taxes, and contributions made to the nonprofit are tax-deductible for the donors. To qualify, the nonprofit must engage in religious, charitable, scientific, educational, or literary endeavors for the benefit of the public.

Nonprofits can also apply for tax-exempt status under other tax codes. The possibilities for nonprofit associations include foundations, social welfare organizations, and professional and trade associations. In most states, if a nonprofit qualifies for a federal tax exemption, it will also automatically qualify for a state tax exemption.

Funding From Private and Public Organizations

Nonprofit businesses can get money from lots of places. They can receive grants from the government or private foundations. Nonprofits are eligible for public and private grants and can receive contributions from individuals. These grants are like gifts that don't have to be paid back, but the nonprofit has to use the money in certain ways. They can also raise money through fundraising events.

If the nonprofit is a 501(c)(3), the donation is tax deductible for the individual or organization that made the contribution. This means people who give money to nonprofits can write it off on their own tax returns. This encourages people to donate to nonprofit organizations. Businesses, both small and large, might also support nonprofits.

Nonprofit Organizations: Limited Liability

Like a corporation, a nonprofit limits personal liability. The directors, officers, and members of a nonprofit corporation receive protection from personal liability for the legal obligations of the nonprofit. For example, if a legal judgment exceeds what the nonprofit can pay, the claimant will not be able to collect the remainder from the organization's directors, officers, or members.

In certain circumstances, limited liability will not provide protection when a director or officer:

  • Personally commits a tort (civil wrong)
  • Personally guarantees a loan or business debt that is defaulted on by the nonprofit
  • Co-mingles personal funds with nonprofit funds
  • Engages in fraudulent or reckless behavior that causes harm

Under these circumstances, an officer or a director may be held personally liable.

How To Form a Nonprofit Corporation

Like a corporation, a nonprofit must file paperwork with the appropriate state agency. This is usually the secretary of state's office. Each state's rules vary, but in general, a corporation must file a document called articles of incorporation. You will also need to pay filing fees. This paperwork says what your nonprofit wants to do and how it will run.

You will also need to get an employer identification number (EIN) from the IRS. The EIN is like a social security number for the nonprofit business. A nonprofit must undertake the additional step of applying for tax-exempt status with state and federal governments.

After incorporation, the nonprofit must create the corporation's bylaws, select a board of directors, and hold board meetings. Each state has rules that determine the minimum number of directors allowed and eligibility requirements for the directors. Once you complete these steps, you can start your important work.

How Nonprofits Are Managed

A nonprofit must follow the guidelines set up for corporations. It must keep corporate records, prepare minutes of meetings, and have a separate bank account. A nonprofit corporation may not distribute profits to its members.

The board of directors will typically make collaborative decisions regarding the operation of the nonprofit organization. The board will define the mission and the policies of the nonprofit, create budgets, oversee finances, and hire an executive director. 

If the nonprofit has an executive director, the director will carry out the daily functions of the nonprofit under the management of the board. The executive director's job is also to advise and report information to the board about activities and programs and to monitor finances.

Dissolving a Nonprofit Corporation

Sometimes a nonprofit has to close down, which is called dissolving. When dissolving a nonprofit, there are rules to follow. You can't just give away the nonprofit's money to anyone. 

If the directors of a nonprofit wish to terminate the organization, the nonprofit must pay off all debts and distribute any remaining assets to another tax-exempt nonprofit corporation. The board members decide which nonprofit gets the leftover money. After that, the nonprofit has to file paperwork with the state and the IRS to inform them the nonprofit is closing.

Consulting With a Legal Expert

Running a nonprofit corporation has a vast array of benefits and drawbacks. It's smart to talk with a legal expert when you start a nonprofit. They can help you understand the rules of the IRS and the state. They can also ensure you do everything correctly, like filing the annual report or understanding your nonprofit status. If you have further legal questions, contact an experienced business and commercial law attorney today.

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