Nonprofit organizations are essential to the communities we live in. They provide services and programs without regard to profit and are intended to benefit areas of society including economic development, cultural awareness, veterans affairs and health and wellness, just to name a few. While the title “nonprofit” makes it seem as if the organization cannot collect a profit, the reality is that positive revenue allows the corporation to build a fund to ensure its sustainability. A nonprofit organization is not allowed to distribute profits to benefit private interests.
Determining if the Organization is a Nonprofit
To qualify as a nonprofit organization, the purpose of the corporation cannot be to make a profit. These organizations meet specific tax-exempt requirements as laid out by the federal government, and are formed to benefit the public, a specific group of individuals or a membership. Member-serving organizations can include credit unions, trade unions, industry associations and sports clubs, while community-serving organizations focus on providing services such as education, health services, and aid and development programs.
The IRS determines the different types of nonprofit organizations depending on the tax code that they qualify under exempt status. The majority of corporations fall under the 501(c)(3)status, which requires organizations to be described as religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition or prevention of cruelty to children or animals.
Refer to the IRS Organization Reference Chart to help determine what type of nonprofit your organization is, and if it should be formed underneath a different section of the Internal Revenue Code. These could include labor and agricultural organizations, business leagues, social and recreational clubs, credit unions, farmer’s cooperatives and more. However, only those nonprofit organizations that fall under the 501(c)(3) status are able to offer donors a tax-deduction for their contributions.
What Do You Need to Get Started?
To start a nonprofit, begin with incorporating the organization. This includes drafting the Articles of Incorporation, filing them with the incorporating state, and paying the applicable filing fees. It’s important that your documents comply with local and state requirements, as well as federal law to ensure the organization will qualify for tax-exempt status. Incorporating is important because not only does it lend credibility to your services, it also provides limited liability protection to the officers and directors.
Additionally, organizations should consider the creation of a mission statement that defines the purpose of the nonprofit and who it will serve, as well as the creation and adoption of bylaws that will determine the procedures necessary for holding elections, conducting meetings and carrying out other necessary business functions.
Researching to determine the state in which to form the nonprofit is also important. The organization is not required to incorporate in the physical state that it is located. It can incorporate in any state or Washington D.C.
While incorporating in other states may seem appealing, there are many factors to consider, including fees and taxes by state, dealing with the foreign qualification process to do business (a foreign business is one that is doing business in any other state than the one it is incorporated in) and the possibility of having to handle legal matters in a separate state.
Review the Non-Profit Checklist for a Step-By-Step Guide to Starting Your Non-Profit.
What are the Benefits?
Forming a nonprofit organization does have its benefits. From the tangible tax-exempt status from both state and federal governments to the intangible public perception, making your nonprofit a legal entity can improve your organization’s status in the community while also receiving different kinds of breaks to help alleviate financial pressures.
These breaks include lower postage rates and the ability to apply for grants to help support specific projects. Once the corporation achieves the tax-exempt status, other individuals or corporations can then make tax-deductible contributions, helping to create a more stable foundation for the organization.
The organization can also count on receiving the same liability protection as a regular corporation or limited liability company (LLC) which means the directors, trustees, members and employees will not be held responsible for debts or liabilities of the corporation.
Read more about Non-Profit Benefits
Governing a Nonprofit
Because the organization is not intending to make a profit, it is a non-stock entity. What this means is that technically there are no owners of the organization and the governance comes from a board of directors. The directors are responsible for major decisions regarding the organization, and they also appoint and supervise the officers who are responsible for managing the day-to-day operations.
Some nonprofits may also have members, and we recommend checking with the incorporating state’s requirements to determine if the articles of incorporation need to indicate that. States also vary on the number of directors that a nonprofit is required to have. Most require a minimum of three, however, some states have as few as one.
If the nonprofit organization has members, a formal membership structure should be created that allows the members certain basic rights such as voting on directors or approving sales. While most small, nonprofits do not have members, social clubs or organizations may benefit from a membership for voting purposes.