Non-Profit Corporation

A non-profit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. To qualify for non-profit status, your corporation must be formed to benefit (1) the public, (2) a specific group of individuals or (3) the membership of the non-profit.

Examples of non-profits include: religious organizations, charitable organizations, political organizations, credit unions and membership clubs such as the Elk's Club or a country club.


 

• 1Forming a Nonprofit
• 2Non-Profit Corporation
  • 2.1FAQ
  • 2.2Managing a Non-Profit Corporation
  • 2.3Operating a Non-Profit Corporation
  • 2.4Discussion Forum
  • 2.5Other Links

[top]FAQ

Reasons to Form a Non-Profit Corporation

As someone involved with a charitable cause, you might be weighing the benefits of formally organizing your non-profit. Sure, it will take a little extra work, but only with a state-recognized non-profit corporation can you obtain private and public grants, low-cost postage rates and be exempt from income, sales and property taxes. Most importantly, only a formal non-profit corporation allows individuals to donate money tax-free, while shielding your personal assets from liability.


Comparing a Non-Profit to an LLC or Corporation

Non-profit corporations enjoy the same liability protection as regular corporations and limited liability companies. In other words, your directors, trustees, members, and employees are not responsible for corporate debts and liabilities. There are also significant federal and state tax benefits available for incorporating as a non-profit. But one of the most attractive benefits of forming a non-profit is the opportunity to receive grants from the federal government and private foundations.


Tax Exemption for Non-Profits

It's important to note that simply forming a non-profit corporation does not automatically qualify you for federal and state tax exemption. However, only an officially recognized non-profit corporation can apply for federal and state tax exemption. This application is often referred to as the 501(c)(3) application since that is the IRS code section most commonly applicable to non-profits. In fact, there are more than 20 code sections for non-profit qualification. Another common one is 501(c)(7), which applies to social and recreational clubs.


Commercial Rights of Non-Profits

A non-profit corporation does NOT mean the corporation cannot sell goods or services for money. In fact, many non-profits make money selling everything from clothing to medical services. A non-profit can pay salaries to officers and employees. It just cannot distribute any profits for the benefit of directors, officers or members – for example, in the form of dividends.

[top]Managing a Non-Profit Corporation

Directors are responsible for the management and operation of a non-profit corporation. Non-profit directors can serve with or without compensation. If you decide to compensate directors, remember that compensation must be deemed "reasonable" by the IRS. Directors are under the same constraints of duty and care for a non-profit corporation as they are for a "profit" corporation.

Most states require three directors. Some states only require one, including:

California
Colorado
Delaware
Georgia
Iowa
Kansas
Michigan
Mississippi
Nevada
New Hampshire
North Carolina
Oklahoma
Oregon
Pennsylvania
Virginia
Washington

When submitting a 501(c)(3) application or other exempt application, keep in mind the IRS generally likes to see an independent, financially disinterested board. This is why the IRS usually requires at least three distinct individuals to serve on the board of directors. It also helps if the directors are experienced in non-profit or business affairs. But don't worry if you only initially have one director. You'll have the chance to add more directors later.

The officers of a non-profit corporation run the day-to-day activities. Every non-profit corporation must have a president, treasurer and secretary. In some states, one person can hold every office. In others, one person can hold up to two offices, but cannot be both the president and the secretary. The states where one person may hold every office include:

Arkansas
Delaware
Florida
Georgia
Iowa
Illinois
Hawaii
Kansas
Kentucky
Maine
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nevada
New Hampshire
New Jersey
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Texas
Utah
Virginia
Wyoming


Membership in a Non-Profit

Unlike a regular corporation, a non-profit corporation does not have stockholders. This is because non-profit corporations do not issue stock. Instead, non-profit corporations can choose to have members.

A formal membership structure often grants members certain basic rights, such as the power to vote for directors and approve a sale or merger. Most non-profits (especially smaller ones) do not have members, due to the additional paperwork and required formalities.

Even without members, other people may still participate as advisors, patrons or contributors, but without a formal vote. However, if your non-profit is a club or social organization, it might make sense that all of the members have a formal vote on certain important matters.


Tax Exemption for Non-Profits

Section 501(c)(3) of the IRS code exempts payment of federal income taxes for charitable, religious, scientific, literary and educational organizations. It is the most commonly used section in the IRS code granting tax exemption. Section 501(c)(3) covers organizations formed for the following purposes:

1. Charitable organizations provide services beneficial to the public interest. Examples include battered women's shelters or low-cost medical clinics.

2. Religious organizations are valid as long as the organization's directors, officers and members appear to truly and sincerely hold the values and beliefs espoused by the religion.

3. Scientific organizations are individuals and groups who conduct scientific research for public benefit.

4. Literary and educational organizations instruct the public on topics for which there are sufficient facts to permit the formation of an independent opinion or conclusion.

Unless a non-profit corporation files a 501(c)(3) application with the IRS, it will not be exempt from paying federal income taxes. If your non-profit's purpose qualifies under 501(c)(3), then LegalZoom can help prepare the application for you. Each state also requires a tax exempt application. However, most states accept the federal tax exempt application in place of their own


Other Types of Non-Profits

If you do not qualify under 501(c)(3), do not be concerned. You may be eligible for tax-exempt status under a different IRS code section. Other common codes include:
Labor and agricultural organizations: 501(c)(5)
Business leagues: 501(c)(6)
Social and recreational clubs: 501(c)(7)
Fraternal benefit societies: 501(c)(8)
Credit unions: 501(c)(14)
Farmer's cooperatives: 501(c)(16) and 521(a)

You can certainly prepare the 501(c)(3) application on your own. However, the application is complicated and can be tedious and time-consuming. The IRS estimates it takes 30 hours for a first-time 501(c)(3) applicant to complete the paperwork.


Applying for Tax Exempt Status

It will take the IRS 3-5 months to examine and approve your 501(c)(3) application. Keep in mind that a 501(c)(3) application is randomly assigned to an IRS agent for examination. Since each agent has a different work load, processing times vary. You can get a jump start on the process by forming your corporation BEFORE completing the 501(c)(3) application. While LegalZoom is filing your incorporation documents, you can select your board members, prepare your financial budget and refine your activities and programs.

[top]Operating a Non-Profit Corporation

Below are some of the most common issues relating to the operation of a non-profit corporation.

1. Keep corporate affairs separate from personal affairs

It's important to keep the affairs of your non-profit corporation separate from the personal affairs of the directors and officers. This means setting up a separate bank account, maintaining separate records and keeping separate books for accounting purposes.

2. Carry out all corporate meetings as required

Like a regular corporation, directors need to hold periodic meetings. Meetings can take place in person or on the phone. Either way, keep a written record of the items discussed and actions approved. Alternatively, you can get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions.

3. Process all non-profit tax forms and licenses in a timely manner

Even non-profit corporations that are exempt from federal and state income taxes sometimes must file an information tax return. Federal income is reported on IRS Form 990 and must be filed by April 15 if your corporation's fiscal year ends on December 31. If you operate certain public charities where your gross receipts are less than $25,000 per year, you may be exempt from filing a return. The IRS will inform you if you qualify for this exemption.

4. Obtain your non-profit’s Employer Identification Number (EIN) and licenses

Every non-profit corporation must obtain a federal tax identification number, which is similar to an individual's Social Security Number. Some states also require a separate state tax number. In addition, county and city business licenses may be required. Please check with your city and county to see if you need any licenses.

To learn more and speak with a representative, please call LegalZoom at 888-381-8758. LegalZoom is happy to answer any questions you may have.


Checklist for New Non-Profit Corporations

Incorporating your non-profit and obtaining tax-exempt status are just two of many required steps. The following is a list of things to do or consider after starting a new non-profit corporation.

• Establish a corporate banking account.
  
• Contact the state tax board for information about obtaining a state tax number and see if additional information must be submitted for state tax exemption.
  
• Check with the state department of consumer affairs or business licensing to obtain any required business licenses or permits.
  
• Contact the state Attorney General's Office to see if registration or reporting is required.
  
• Find out about workers' compensation if you will have employees.
  
• Protect your trade name.

[top]Discussion Forum

Latest threads from the forum Starting a Nonprofit

 

[top]Other Links

Nonprofit Issues: e-Newsletter of Nonprofit Law - A national legal newsletter covering nonprofit law for organizations and lawyers.

Nonprofit Law Blog - Information to Empower and Protect California Nonprofits

ICNL - The International Center for Not-for-Profit Law - ICNL is the leading source for information on the legal environment for civil society and public participation.

WashLaw WEB - Non Profit Law - Non-Profit Law resource page with links to non-profit law related websites, listservs, and research guides.

Nonprofit Law Prof Blog - Providing resources, information and news on nonprofit law developments for tax professors, practitioners, and the general public.

Non-profit organizations - Wex - From Wex, everyone's resource for law learning.

GuideStar - The leading source of information on US nonprofits. A searchable database of more than 1.7 million IRS-recognized nonprofit organizations.

Nonprofits: USA.gov - A network of links to Federal government information and services of interest to nonprofit organizations.

idealist.org - The Nonprofit FAQ - The Nonprofit FAQ (Frequently Asked Questions) is based on questions and answers about nonprofit organizations exchanged on the Internet since 1994.

Tax Information for Charities & Other Non-Profits - From the US Department of the Treasury. Exemption requirements, application, and filing details; also unrelated business and solicitation information.

CNIN Home Page - Principles and Practices for Nonprofit Excellence in Connecticut.

Volunteer and Nonprofit Career and Job Opportunities - A collection of information and resources (links) for volunteer opportunities and non-traditional work options.




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