A 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 a profit like private businesses. Non-profits enjoy the benefits of tax-exempt status and the protection of directors, officers, and members from personal liability.
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Benefits of a Nonprofit
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.
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 qualified for a state tax exemption.
Funding from Private and Public Organizations
Another benefit for a nonprofit is that it is eligible for public and private grants and can receive contributions from individuals. If the nonprofit is a 501(c)(3), the donation is tax deductible for the individual or organization that made the contribution.
Like a corporation, an incorporated 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;
- Personally guarantees a loan or business debt that is defaulted on by the nonprofit;
- Co-mingles personal funds with nonprofit funds; or
- 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. Each state's rules vary, but in general, a corporation must file a document called "articles of incorporation." 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.
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 and 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
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.
Consulting with a Legal Expert
Running a nonprofit corporation has a vast array of benefits and drawbacks. If you have further legal questions, contact an experienced business and commercial law attorney today.