Questions About Forming a Nonprofit Organization
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What is a nonprofit company?
- A nonprofit corporation is simply a corporation that is formed pursuant to a different state law than a standard for-profit corporation. The corporation must be formed for some religious, charitable, educational, literary or scientific purpose. While a standard business corporation is designed to benefit and generate a profit for its shareholders, nonprofits do not have the profit motive. Nonprofit corporations are allowed to apply for tax-exempt status at both the federal and state level.
What steps need to be taken to form a nonprofit corporation?
The first step is to file
nonprofit articles of incorporation with the proper state agency. It is
important that the articles contain the required clauses to make sure your
articles will qualify for tax-exempt status. Business Filings Incorporated
prepares and files nonprofit articles of incorporation.
After the nonprofit articles are filed, tax-exempt status must be applied for at
both the federal and state levels. To apply at the federal level, a timely
filing of form 1023 must be made. Business Filings does not prepare IRS form
1023. To determine what form needs to be filed at the state level, contact the
state department that deals with taxation.
The corporation must comply with corporate formalities and hold annual meetings
of directors and members. Bylaws must be adopted for the corporation. Documents
that help you comply with these corporate formalities are contained in Business
Filings' corporate kit.
What purposes are valid for a nonprofit?
To qualify for federal
tax-exempt status, the nonprofit corporation must be organized and operate for
some religious, charitable, educational, literary, or scientific purpose
permitted under 501(c)(3) of the tax code.
The religious category refers to general types of religious organizations and
more formal institutionalized churches.
Charitable purpose is defined in section 501(c)(3) as providing services
beneficial to the public interest.
Scientific research that is carried on in the public interest qualifies for
tax-exempt status; however, research incidental to commercial or industrial
operations does not qualify.
The literary purpose includes writing, publishing and distribution of books
which are directed toward promoting the public interest rather than engaging in
commercial book writing and selling.
The educational purpose is a broad purpose that allows instruction for both
self-development and the benefit of the community.
The purpose must be listed in the articles of incorporation; therefore, it is
very important that the purpose of the corporation be well described in the
articles of incorporation.
For a specific answer to whether or not your company’s purpose is acceptable,
contact an attorney or accountant.
IRS classification of nonprofit corporations?
Business Filings Incorporated prepares articles of incorporation for nonprofit corporations pursuant to section 501(c)(3) of the IRS code. Nonprofits formed under 501(c)(3) must be formed for some religious, charitable, educational, literary, or scientific purpose.
Nonprofit corporations may also be formed for other purposes pursuant to different sections of the IRS code. If you want Business Filings to form your nonprofit pursuant to a different provision of the IRS code, please let us know the code section in the purpose portion of our order form.
To determine if your nonprofit needs to be formed pursuant to another provision of the IRS code, please consult the IRS organizational reference chart.
For specific advice, please
consult an attorney or accountant.
What form needs to be filed to apply for federal tax-exempt status?
For a nonprofit company to
qualify for 501(c)(3) federal tax-exempt status, a timely filing of IRS form
1023 must be made.
A few groups are NOT technically required to file form 1023.
- A church, interchurch
organization, convention of churches, or an integrated auxiliary of a church
- A subordinate organization
covered by a group exemption letter (a parent tax- exempt company must
submit a letter saying its subsidiary company will be tax- exempt).
- A group that qualifies for
public charity status and which normally has gross receipts of LESS than
$5,000 per year.
However, it is recommended that
these companies still file for tax-exempt status because this is the only way to
be assured that the IRS views the corporation as a 501(c)(3) tax-exempt group.
For example, it is possible that the IRS might later challenge your
corporation’s tax-exempt status by arguing that your organization is not a
church. If their argument is successful, your corporation would be subject to
back taxes and tax fines for the period it operated as a corporation.
When the IRS approves the tax-exemption, then and ONLY then, can the nonprofit
company be assured that contributions made to it are tax deductible, and that
your corporation is officially a tax-exempt company.
The 1023 application is filed in
a timely manner if it is postmarked within 15 months after the end of the month
when your articles of incorporation were filed.
If you file on time, the tax-exemption is effective retroactively to the date on
which your articles were filed.
How many directors are nonprofit corporations required to have?
- Most states require nonprofit
corporations to have a minimum of three directors. The following states only
require a minimum of one director: CA, CO, DE, IA, IN, KS, MI, MS, NH, OK,
OR, PA, SC, VA, WA & WV.
The following states allow less than three directors if there are less than three members: LA, MA, MN, & VA.
What are the advantages of filing a nonprofit corporation?
If your nonprofit is granted
tax-exempt status under 501(c)(3) of the Tax Code, your corporation will be
exempt from payment of federal corporate income taxes. With federal income tax
rates at between 15% to 34% this can amount to quite a tax savings.
A 501(c)(3) nonprofit is eligible to receive both public and private grants.
Individual donors can claim a federal income tax deduction of up to 50% of
income for donations made to 501(c)(3) groups.
Nonprofits also receive the same limited liability protection as for-profit
companies. This means that directors or trustees, officers, and members are
typically not personally responsible for the debts and liabilities of the
corporation.
Other benefits include:
 | A corporation's life is not
dependent upon its members. A corporation possesses the feature of unlimited
life. If an owner dies or wishes to sell their interest, the corporation
will continue to exist and do business.
| Retirement funds and
qualified retirement plans (like 401k) may be set up more easily with a
corporation
| 501(c)(3) corporations
receive lower postal rates on some bulk mailings. | |
Disadvantages of forming a nonprofit corporation?
The main disadvantage of forming
a nonprofit company is the increased paperwork that is required. Articles of
incorporation must be filed with the state, bylaws prepared, and meeting minutes
must be kept with your corporation’s records. Business Filings Incorporated
can help by preparing and filing your incorporation papers and our nonprofit kit
does contain sample bylaws and meeting minutes. Also, applications for
tax-exempt status must be filed at both the federal and state levels.
It is important to remember that nonprofits cannot be used to generate profits
for the owners, and the purpose must conform to IRS regulations.
