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Top Five Reasons To Incorporate a Nonprofit Organization

Starting a nonprofit organization is a fantastic way for entrepreneurs to make a difference. Unlike a for-profit business, a nonprofit focuses on making an impact rather than earning money for owners or shareholders. However, creating a successful nonprofit means more than just having a great idea or a passion for a cause. You must follow certain rules and set up a solid business structure.

If you have just started a nonprofit organization, you have probably given thought to incorporating it as a nonprofit corporation. Becoming a nonprofit corporation requires some paperwork, but it is often well worth the trouble for many nonprofits. If you are not sure whether you want to incorporate your nonprofit organization as a nonprofit corporation, here are the top five reasons to do so.

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1. Incorporate a Nonprofit When Your Association Makes a Profit From Its Activities

Even if your group is not in it for the money, you might find that you make some profit from the activities you do. When you incorporate, your group becomes a formal business entity. This means that even if your organization earns money, the income is not for personal gain but to help you further your cause.

Your organization's name goes on the articles of incorporation, and the state recognizes you as a separate legal being. This is key because the Internal Revenue Service (IRS) has special rules for tax-exempt organizations. The Internal Revenue Code codifies these rules. By setting up a proper business structure, paying your filing fees, and installing bylaws, your group can focus on its mission statement rather than federal or state tax issues.

2. Incorporate a Nonprofit When You Are Applying for Public or Private Grant Money

If your organization does not have tax-exempt status, you may be excluded from applying for many public and private grants. Many grant applications require that you have a board of directors. They also may require that you are formally recognized at the state level as a legal business entity. 

This means you need to file articles of incorporation with the secretary of state, which can give you credibility with funders. Plus, your board members can help with fundraising ideas and may know how to fill out those tricky IRS forms. Remember, grants are not free money. They come with expectations that your nonprofit is running professionally.

You may be able to apply for and receive tax-exempt status solely as an organization or association. It will be harder to achieve tax-exempt status than it would be if you were incorporated. Getting tax-exempt status as an association requires that you prepare and adopt a complicated set of organizing papers and rules that govern the association's operation. In addition, in most situations, it is easier to get the IRS to approve tax-exempt status for a corporation than for an organization.

3. Incorporate a Nonprofit When You Will Solicit Tax-Deductible Donations or Contributions

When you incorporate your organization as a nonprofit corporation and are granted tax-exempt status, gifts and donations that are given to your corporation can be deducted from the donors' federal and state income tax returns.

For example, let's say a charitable organization wants to sponsor a food drive that will help the local homeless population get free meals. The organization already knows it has plenty of volunteers to help hand out the food, but it wants to give back to the volunteers and needs to rent a space to hand out the food.

There are plenty of wealthy individuals that may donate to the organization. If the organization is incorporated as a nonprofit and receives tax-exempt status, it may be able to get more donations. They can do this by allowing the donors to apply their donations as tax-deductible on their tax returns.

4. Incorporate a Nonprofit When You Want To Limit Your Personal Liability

If it appears that your nonprofit organization may be the target of a lawsuit or has the possibility of defaulting on future loans, you may want to consider incorporating to limit potential personal liability. Just like regular corporations, nonprofit corporations can be sued. 

However, like normal corporations, the members and directors of nonprofit corporations are shielded from the liability of the nonprofit corporation. This means that you can shield your personal assets (cars, bank accounts, homes) by incorporating your nonprofit organization.

For example, suppose that Bill directs a nonprofit organization that delivers food by truck to various homeless shelters around the city. To avoid any personal liability that could result from a car accident and to stop the organization's creditors from seeking his personal assets in case the truck loans are not paid, Bill can incorporate the nonprofit.

5. Incorporate a Nonprofit When Your Political Activities Could Lead to Lawsuits

As a general rule, nonprofits can engage in very limited political activities. If want to limit your personal liability for any lawsuits that come from overzealous advocacy that takes your nonprofit out of the safe political arena, you should incorporate it. If you do not and your organization is sued and loses, your personal assets may be at risk if the organization's assets do not cover the monetary award.

More Benefits of a Nonprofit Corporation

  • Special Postage Rates: Nonprofit corporations can apply for a mailing permit that gives the right to use a special, reduced postage rate for mailings. Nonprofits that expect to do a lot of solicitation by mailing will enjoy this advantage.
  • Property Tax Exemptions: Another advantage is that nonprofit corporations are often exempt from property taxes. To find out more about this, you should contact your county's assessor's office.

Make Sure Your Nonprofit Makes the Right Decisions: Contact an Attorney

If you are thinking of incorporating your nonprofit, an attorney can help ensure that you are eligible for nonprofit status. They can help assemble the documentation and make the filings to get your business started. An ounce of prevention is worth a pound of cure, and the best time to set your enterprise up for success is at the very beginning.

Contact a local small business attorney and learn how they can help plan a successful start for your nonprofit organization. Their legal advice can ensure that your business plan to incorporate goes smoothly.

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