Question 1

What is a non-profit corporation and how do non-profit organizations begin?

Accepted Answer

A nonprofit corporation is a group of people who join together to do some activity that benefits the public, such as running a homeless shelter, an artists' performance group, or a low cost medical clinic. Making an incidental profit from these activities is allowed under legal and tax rules, but the primary purpose of the organization should be to do good work, not to make money. Nonprofit goals are typically educational, charitable, or religious. Most nonprofits start out as small, informal, loosely structured organizations. Volunteers perform the work, and the group spends what little money it earns to keep the organization afloat. Formal legal papers (such as a nonprofit charter or bylaws) are rarely prepared in the beginning. Legally, groups of this sort are considered nonprofit associations, and each member can be held personally liable for organizational debts and liabilities. Once a nonprofit association gets going and starts to make money, or wishes to obtain a tax exemption to attract public donations and qualify for grant funds, the members will formalize its structure. Usually the members decide to incorporate, but forming an unincorporated nonprofit association by adopting a formal association charter and operating bylaws is an alternative. Most groups form a nonprofit corporation because it is the traditional form-the IRS and grant agencies are very familiar with it. Also, once incorporated, the individual members of the nonprofit are not personally liable for debts of the organization-a big legal advantage over the unincorporated association. Form a Non-Profit Corporation with LegalZoom

Question 2

What are the tax consequences of operating as a non-profit corporation?

Accepted Answer

Non-profits will want to apply for and obtain federal and state nonprofit tax exemptions. Many groups don't want to form a non-profit unless they can qualify for tax-exempt status. Unfortunately, you must form your corporation before you submit your federal tax exemption application because the IRS requires that you submit a copy of your filed articles with the exemption application. Still, you should carefully review the tax exemption application before you submit your corporation papers. Doing so will give you a good idea of whether your organization will qualify for a tax exemption or not. Most organizations obtain a federal tax exemption under Section 501(c)(3) of the Internal Revenue Code, for charitable, educational, religious, scientific, or literary purposes. States typically follow the federal lead and grant state tax-exempt status to nonprofits recognized by the IRS as 501(c)(3) organizations. To qualify for a 501(c)(3) IRS tax exemption the organization must meet the following conditions: The assets of your nonprofit must be irrevocably dedicated to charitable, educational, religious, or similar purposes. If your 501 (c)(3) nonprofit dissolves, any assets it owns must be transferred to another 501(c)(3) organization. (In your organizational papers, you don't have to name the specific organization that will receive your assets-a broad dedication clause will do.) Your organization cannot campaign for or against candidates for public office, and political lobbying activity is restricted. If your nonprofit makes a profit from activities unrelated to its nonprofit purpose, it must pay taxes on the profit (but up to $1,000 of unrelated income can be earned tax-free).

Question 3

Will your association benefit from becoming a non-profit corporation?

Accepted Answer

Here are some circumstances that might make it worth your while to incorporate and get tax-exempt status: You want to solicit tax-deductible contributions. Contributions to nonprofits are generally tax deductible for those who make them. If you want to solicit money to fund your venture, you'll make it more attractive to potential donors if their contributions are tax-deductible. Your association makes a taxable profit from its activities. If your association will generate any kind of income from its activities, it's wise to incorporate so that you and your associates don't have to pay income tax on this money. You want to apply for public or private grant money. Without federal tax-exempt status, your group is unlikely to qualify for grants. Your members want some protection from legal liability. By incorporating your association, you can generally insulate your officers, directors, and members from liability for the activities they engage in on behalf of the corporation Your advocacy efforts might provoke legal quarrels. If, for instance, your association is taking aim at a powerful industry (such as tobacco companies), it might be worth incorporating so that your association's officers and directors will have some protection from the spurious lawsuits that are sure to come-and will also receive compensation for their legal fees. Forming a nonprofit corporation brings other benefits as well, such as lower non-profit mailing rates and local real estate and personal property tax exemptions.

Non Profit Law

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Circuit splits in non profit

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Primary law

Key definitions

Key cases of the U.S. Courts of Appeals

Frequently asked questions

Non Profit Law by state

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