Many fundraising organizations ask whether there is any benefit to becoming a non-profit corporation. In reality, this is two questions: first, whether to incorporate at all and second, after incorporation, whether to seek non-profit status. There are many benefits to non-profit incorporation and, once incorporated, many benefits to non-profit status.
The decision to incorporate as a non-profit corporation may be triggered by a number of events. If your charitable activities have generated a profit, non-profit incorporation is a great way to ensure that the extra money is not taxed. Incorporation also limits any personal liability of the directors, officers, and employees when they are working for the non-profit corporation. All corporations have a perpetual lifespan thus the corporation may continue its operations even if its directors have passed away if they have been replaced by new directors.
Incorporation is not mandatory in order to apply for tax exempt status. If your fundraising activities are short-term and poses no personal risk, it may be simpler to remain a “non-profit association.” If you decide to remain a non-profit association, however, you will forego the advantages of a non-profit corporation discussed above.
Steps to non-profit incorporation
Non-profit incorporation is a relatively simple process governed by state law. First you choose a name for your non-profit corporation which cannot be the same as any other corporation. Next you appoint directors. It is perfectly acceptable to have only one director but many organizations prefer a larger board of directors. These may be friends of yours, business associates, or anyone you believe will be helpful to the corporation. Frequently, initial directors are asked to provide the seed money to get the non-profit corporation established.
The actual non-profit incorporation process begins by filing Articles of Incorporation with the proper state agency and paying the filing fee. Frequently, that state agency will provide a simple form to fill out that will become your Articles of Incorporation. Many choose to incorporate in Delaware because of its relatively relaxed corporate and tax laws but, if you do so, you will have to register as a “foreign corporation” in the state where you actually do business.
Your Articles of Incorporation must state that your purpose is either charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sport competition, or preventing cruelty to children or animals, whichever is appropriate to your activities.
The Internal Revenue Service defines “charitable” to include:
• relief of the poor, the distressed, or the underprivileged;
• advancement of religion, advancement of education or science;
• erecting or maintaining public buildings, monuments, or works;
• lessening the burdens of governments;
• lessening neighborhood tensions;
• eliminating prejudice and discrimination;
• defending human and civil rights secured by law; and
• combating community deterioration and juvenile delinquency.
After filing your Articles on Incorporation, you will need to create your “bylaws” to establish your non-profit corporation’s operating procedures such as meeting notices, election of officers and directors, company policies, and other internal matters. Sample Bylaws are available online. You may also want to pay one of the many online companies that will perform all the non-profit incorporation tasks for you, e.g. Legal Zoom. Most likely you will also need a local business license.
Apply for §501(c)(3) tax-exempt status
Once you have completed the non-profit incorporation process, the next step is to decide whether to apply for tax exempt status non-profit status with the Internal Revenue Service under §501(c)(3) of the Internal Revenue Code by filing Form 1023. If you decide to pursue tax exempt status, you must file Form 1023 by the end of the 15th month after incorporation. Your completed Form 1023 will be available for public inspection. The IRS will also require you to obtain an Employer Identification Number or “EIN” by filing Form SS-4.
Your tax exempt status will not be official until you have received a letter from the IRS approving your application. While you are waiting to receive the IRS determination letter, you may operate as if your tax exempt status had been approved, including accepting donations, but you must inform donors that your status is “pending.”
Advantages of tax-exempt status
There are a number of advantages to tax exempt status.
– The most frequently cited advantage is that non-profit corporations are eligible for many public and private grants from which private individuals and for-profit corporations are excluded.
– Donors to a non-profit corporation may deduct their contributions from their personal income on their federal and state tax returns.
• Income from the non-profit corporation’s charitable activities will not be taxed at the corporate level.
• Non-profit corporations are exempt from state and local income taxes and may also be exempt from state and local property taxes.
• The US Post Office provides special reduced postage rates to non-profit corporations.
• Free or reduced fee advertising may be available in the form of “public service announcements.”
Should you apply for tax-exempt status?
There are a handful of limitations which bear discussing as part of the decision whether to apply for tax exempt status:
• All of the assets of the non-profit corporation must be used for its charitable purposes.
• Non-profit corporate income must be derived from charitable activities. Any income derived from non-charitable activities may be subject to a special excise tax.
• Certainly you are allowed to pay reasonable salaries but no corporate assets or profits may be distributed to individuals.
• If you dissolve the corporation at some future date, you must pledge that all of the assets will be transferred to another non-profit corporation.
• Non-profit corporations may not participate in political campaigns and may devote only an insubstantial portion of their assets to lobbying activities.
• Non-profit corporations must file an annual Form 990 detailing their activities and finances. Form 990s are publicly available online.
The main advantage to non-profit incorporation is that the tax exempt status allows you to accept donations and apply for grants which are frequently the only sources of funding for charitable activities. While the record keeping seems to be daunting, the same sort of financial information is maintained by every legitimate business. In other words, don’t let the amount of paperwork deter you: as your organization is growing so will your paperwork, regardless of your tax status.
More about Steps to Starting a Successful Non-Profit.
Note: This article is not meant to be legal advice. When it comes to legal matters, we suggest you consult a legal adviser.
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