Forming a Nonprofit Organization

Do you want to make a difference by setting up a nonprofit corporation like a charity, shelter, food bank, school, or religious organization? The list of businesses that could have nonprofit status is long and the difference they make to the people they help is immense.

Nevertheless, you’ll need to know the ins and outs of nonprofit business formation before you begin. For example, you’ll have to define what your nonprofit does, who it benefits, and who will be running it before you’re ready to join the 1.3 million nonprofit corporations working to make life better for people in the United States and overseas.

What is a nonprofit organization?

Don’t get your nonprofit organization mixed up with a not-for-profit as they are different things. A nonprofit organization works towards a common good, enjoying tax-exempt status while everyone involved concentrates on making a difference and distributing money where it helps most.

Importantly, a nonprofit corporation is a separate legal entity in its own right. Therefore, you get the same legal and financial protection from debts and legal judgments with a nonprofit corporation as you do with a Limited Liability Company or Corporation. That means if your nonprofit accrues liabilities it can’t pay, no one can come after your personal assets—like your car or home—to pay them off.

A not-for-profit, on the other hand, doesn’t usually give you limited liability protection. A further important difference is that it doesn’t have to be run for the public good like a nonprofit, only for the aims of its owners. For this reason, nonprofits are often formed for sports teams or business organizations.

Nonprofits and taxation

Tax is one of the key differences between a nonprofit corporation and a profit-making entity like an S or C Corporation.

Because nonprofit corporations do essential and valuable work, much of which is handled by volunteers, they get exemptions from most of the taxes that are leveled at profit-making businesses. After all, it’s only fair that businesses that make money through using public infrastructure help to fund it through the profits they make.

Paying any tax at all could make your nonprofit nonviable, which is why nonprofits are usually tax exempt. However, this tax-exempt status means that your nonprofit must satisfy certain criteria and, aside from fixed costs like paying salaries to its employees, every cent it makes must go towards the cause that it promotes.

Advantages of forming a nonprofit corporation

• If your business is charitable or has a public good at its core, there are some strong pluses to forming with nonprofit status.
• Your nonprofit will pay no taxes at either a state or federal level on the income it makes. Furthermore, many grants and bursaries are open to nonprofits, and these can help with your operating costs. On top of this, donations from your nonprofit’s supporters and donors can be substantial once you get going.
• Also, you and the other board members receive the same limited liability protection as a corporation because your nonprofit is designated as a separate legal entity.
• As well as exemption from income tax, your nonprofit avoids real estate taxes too. So, if your nonprofit buys a building, it will be cheaper. And if it sells a building, it gets the full sale price.
• Even better, while promoting your organization can be expensive, with a nonprofit it can be a little cheaper (or even free) as many media channels like TV and radio will air announcements for you at no cost.
• Finally, you are doing good, meaningful work that makes a positive difference in the world.

Disadvantages of forming a nonprofit organization

There are some disadvantages, however. Namely:

• Not every business can become a nonprofit organization. You’ll need to prove compliance with specific criteria that show you are working for the public good.
• You can expect more paperwork involved in setting up a nonprofit, and considerable scrutiny as you continue to operate.
• Your board of directors won’t receive payment for their services. This can make it harder to appoint them.
• If your nonprofit has to close, all the assets must go to another nonprofit. Nothing can be kept to be shared among the board like it could with a corporation.
• Paying your employees enough to ensure you get the right people to complete your nonprofit’s goals while avoiding damaging criticism of high salaries can be a constant balancing act.
• Finding funding and maintaining a steady stream of investment can be unreliable. You need good fundraising skills to run a nonprofit, especially in the first few years.

The types of nonprofit organizations you can form

There are 27 different types of nonprofit organizations. The most commonly formed are listed here along with their official IRS classification.

• Professional – 501(c)(6): Mostly funded through members’ dues, these entities work for the business and professional interests of their membership.
• Social and Political – 501(c)(4): These organizations work towards lobbying for social and political change, like the ACLU.
• Public charities and Foundations – 501(c)3: Only organizations that have this IRS classification can offer tax-deductible donations. They also have strict operating requirements to maintain their status. For example, they must pay employees market-average wages and pass ongoing scrutiny that they remain committed to their charitable mission. Organizations that are religious, charitable, educational, or that work to prevent cruelty to children or animals come under this umbrella.

Can founders earn a salary from their nonprofits?

Most people need to earn a salary to live and this is no different for the founders of nonprofit corporations. Certainly, your nonprofit can pay you a salary. However, the IRS defines this as “reasonable compensation”. This means you can get the average market rate for your type of organization and not more.

Remember, you can’t take any of the profit your nonprofit organization makes. All this must go back into running the business or be spent on helping your nonprofit’s end beneficiaries.

The good news is that there are often grants, financial awards, and willing volunteers available to help people wanting to start a nonprofit. Many founders of nonprofit corporations start small, often running their organizations from their own homes.

Growing your organization and building donors and supporters can be an exciting journey, especially when you know you are working towards a good cause.

Forming your nonprofit corporation

The rules for forming your nonprofit corporation vary depending on the goals of your organization, how it is funded, your members, and the state where you want to file. Because of this, it’s best to get expert advice so that you have everything in place and ready to go.

Contact our team of nonprofit experts at IncReg to find out how to form your nonprofit corporation conveniently, efficiently, and with the minimum cost.

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