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Why to Incorporate as a Nonprofit and How to Do It
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Why to Incorporate as a Nonprofit and How to Do It
Is your organization trying to solve a problem or address an issue in society? Maybe you're looking to start an organization that has a benefit for a specific community or works to help remedy a social problem. If this sounds like you, you might be wondering whether to start a nonprofit.
As with most things in life, nonprofit incorporation has pros and cons, but generally, if your goal is something like the above, the benefits outweigh the drawbacks. It might be that your organization does indeed have a social mission, but you still want to make a profit. In that case, you'll need to consider other options like an LLC or an S Corp.
Table of contents
Just what is a nonprofit?...Read more
Do nonprofits pay taxes?...Read more
What does it mean to incorporate a business?...Read more
What Are the benefits of forming a nonprofit?...Read more
Are there disadvantages of incorporating as a nonprofit?...Read more
Lesser-known reasons you might want to incorporate as a nonprofit...Read more
What are the steps to incorporate as a nonprofit?...Read more
How does a nonprofit file for federal tax exemption?...Read more
Just what is a nonprofit?
Organizations that take in money and spend it in ways that address a social cause or have a public benefit differentiate themselves from businesses in that they exist for a purpose other than making a profit. You've probably heard terms like "nonprofit" and "501(c)(3)," as well as "NGO" (non-governmental organization).
NGO is sometimes used as a catchall for nonprofit organizations of any kind, but in fact, these organizations usually operate at an international level, tackling global social issues or problems like famine around the world. Nonprofits are incorporated at the state level and can apply for federal tax-exempt status. These organizations work on issues that plague our communities or take on problems related to the local environment, for example.
Do nonprofits pay taxes?
You might be asking yourself, "How much taxes do I owe for my nonprofit?" Nonprofit status is famous for meaning that an organization doesn't have to pay tax on things every private individual has to pay tax on, and that's true for things like sales tax and property tax. A nonprofit is not required to pay sales tax when it buys office supplies, for example, or to pay property tax on the building it owns.
That might leave you wondering, "do non profits pay taxes?" Nonprofits are still businesses, and if they have employees, they need to pay Social Security, unemployment taxes and Medicare for each employee in the form of estimated taxes. And if they have sales, they have to charge sales tax on anything they sell. This is where a Medicare tax calculator comes in handy.
What does it mean to incorporate a business?
Incorporation sounds like a complicated legal term that only experts can understand. It is a legal process, but like any process, all it takes is a bit of patience to understand it – and to use it. Essentially, a corporation of any kind, nonprofits too, separates the organization's assets, or valuables, from the people who own the entity or have invested in it.
When you incorporate a business, it provides your organization with a formal structure recognized by the state. This structure's main function is to keep those assets and cash flow, which allow an organization to function, separate from the finances of its owners.
What Are the benefits of forming a nonprofit?
Keeping the company's finances separate from the owner's finances is true of any corporation, but the benefits of incorporation as a nonprofit are many more.
Existence in perpetuity
Tax exemption
Limited liability
Ability to apply for grants
Credibility
Are there disadvantages of incorporating as a nonprofit?
Of course there are, but the good news is that if the benefits of nonprofit status don't make sense for you, it's likely that a different organizational structure would work and that there is an incorporation status that fits your needs.
Lesser-known reasons you might want to incorporate as a nonprofit
- Postage discount This might apply to fewer organizations in an age where digital communication and an online presence have become essential to the success of just about any organization. But in the past, and for some organizations still, being able to communicate with the public, potential donors and other audiences through snail mail can make a difference in accomplishing their goals. And postal discounts in the form of bulk mail rates can help make that possible for some organizations.
- A professional registered agent Heaven forbid your organization ever has a lawsuit brought against it, but having nonprofit status means the process will be as smooth as possible if that happens. Every company that incorporates as a nonprofit must appoint a professional registered agent who serves as the organization's legal point of contact in the state where the business operates. This person is tasked with handling court documents properly and in a time-sensitive manner.
- Forced clarity It's not easy to form a nonprofit, but the bureaucracy and steps that need to be taken often help an organization to clarify its mission and develop a more concrete understanding of why they are doing what they're doing. It also helps establish clear operating procedures and rules about decision-making, so things can get done no matter what.
What are the steps to incorporate as a nonprofit?
If you've decided to move forward with incorporating as a nonprofit, and the only thing holding you back is filling out the paperwork, it's time to head to the Secretary of State's office in the state where you want to incorporate.
That office will provide you with an info packet that includes all the forms you will need to fill out as well as sample articles of incorporation. These include information like the personal details of the incorporators, the address of the registered workplace and the location of your registered agent.
How does a nonprofit file for federal tax exemption?
The first step is always to incorporate as a nonprofit in your state. When that's done and dusted, you can take the steps with the IRS to obtain tax-exempt status as a 501(c)(3) organization. But don't wait longer than the first 27 months after you incorporate your nonprofit because the IRS won't entertain your application after that.
The 1023-EZ is the form you'll need to file for federal tax-exempt status.
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