Our local, state and national economies benefit greatly from non-profit organizations. Not only do they provide millions of jobs to our friends and neighbors across the country, they also generate revenues, from fees for goods and services to tuition payments for higher education. Without nonprofit organizations, we’d have far less capability to research life-threatening diseases, provide meals to those who are in need, and mentor our youth.
Forming a nonprofit organization may seem overwhelming, but the benefits an organization can receive may just be enough to push through the uncertainty and help fuel the passion that ignited the initial desire to start one.
Once the nonprofit organization has been legally created in the state of incorporation, the government allows corporations to file for state and federal tax benefits which could include relief from corporate income tax as well as similar state and local taxes. It is best for each corporation to contact their state’s department of taxation to determine the necessary steps for receiving state tax relief.
Keep in mind that the organization must meet the exempt purposes as outlined by the IRS for a 501(c)(3) organization to apply for federal tax-exempt status.
Before applying for federal exempt tax status, the IRS asks that you complete the following steps:
- Determine if your organization is a trust, corporation or association.
- Prepare and provide an exact copy of the organization’s organizing document. This means the articles of incorporation for a corporation, articles of organization for a limited liability company, articles of association or constitution for an association, or trust agreement or declaration of trust for a trust. If the organization does not have an organizing document, it will not qualify. Each individual state determines whether or not an organization has been properly created and what the requirements are for the details inside the organizing documents. Be sure to check with the state laws before proceeding with federal filing.
- Ensure the corporation has met the state’s requirements for registering for tax-exempt status.
- Obtain an employer ID number (EIN) for the organization. Do not apply for an EIN until the organization has been legally formed. If the organization fails to file a required return or notice for three consecutive years, the tax-exempt status could be revoked. The three-year period begins once you file for the EIN.
- Upon completion, the corporation may begin the process to file for federal exempt status. The IRS provides forms, guidelines and frequently asked questions to help you complete the application process. If the organization is a 501(c)(3), complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. If your corporation falls under the other tax codes, visit this IRS website to find the appropriate form.
Learn more about Non-Profit Taxes.
The organization is afforded the same liability protection as a regular corporation or limited liability company (LLC), meaning the directors, trustees, members and employees are not held responsible for debts or liabilities of the corporation.
In times of trouble, the courts or creditors may only take assets belonging to the organization. This can be especially beneficial if the organization determines the need for debt financing. This liability protection allows the corporation to take calculated risks, but not at the expense of the people running the organization.
Nonprofits are able to apply for and receive grants from the federal government and private foundations. While grants are not meant to fund operating expenses, they can help establish organizations, support specific projects, or increase their ability to provide more services or do more research. Keep in mind when applying for grants that most will want to know the plan for sustaining the project or program.
If your organization relies on donations, legally creating a nonprofit organization increases the chances that others will be willing to donate because the organization feels credible to the outside eye. It also allows individuals the ability to donate to recognized nonprofit corporations in a tax-free capacity as long as the organization falls under the 501(c)(3) tax code.
Make a Difference
Chances are, the idea to start a nonprofit organization came from a burning desire to make a difference and to make the world a better place. Perhaps there is a glaring need for a service in your community, or additional funding would help a project grow and be sustainable. Tackling the issues and providing support in the community earns a level of respect from others as well as fuels the desire to have a lasting impact on people’s lives.
Other Nonprofit Benefits
A legally incorporated, nonprofit organization may be eligible to offer its’ employees such benefits as life insurance, health insurance or a pension plan. Those benefits are not available if the organization has not met the legal requirements.
In addition, nonprofit organizations may receive other benefits such as lower postage rates, cheaper advertising rates or free public service announcements.