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Non-Profit Corporation
- A nonprofit corporation is a
corporation formed for purposes other than generating a profit and in which no
part of the organization's income is distributed to its directors or officers.
Nonprofit corporations are formed pursuant to state law, often under the Revised
Model Non-Profit Corporation Act (1986). A nonprofit corporation can be a church
or church association, school, charity, medical provider, legal aid society,
volunteer services organization, professional association, research institute,
museum, or in some cases a sports association. Nonprofit corporations must apply
for tax-exempt status at both the federal and state level.
What
steps need to be taken to form a nonprofit corporation?
The first step is
to file nonprofit articles of incorporation with the proper state agency. It is
important that the articles contain the required clauses to make sure your
articles will qualify for tax-exempt status. Business Filings Incorporated
prepares and files nonprofit articles of incorporation.
After the
nonprofit articles are filed, tax-exempt status must be applied for at both the
federal and state levels. To apply at the federal level, a timely filing of form
1023 must be made. Business Filings does not prepare IRS form 1023. To determine
what form needs to be filed at the state level, contact the state department
that deals with taxation.
The corporation must comply with corporate
formalities and hold annual meetings of directors and members. Bylaws must be
adopted for the corporation. Documents that help you comply with these corporate
formalities are contained in Business Filings' corporate
kit.
What
purposes are valid for a nonprofit?
To qualify for federal tax-exempt
status under 501(c)(3) of the federal tax code, the nonprofit corporation must
be organized and operate for some religious, charitable, educational, literary,
or scientific purpose permitted under this section of the code. Nonprofit
corporations may also be formed for other purposes pursuant to different
sections of the IRS code. To qualify for federal tax-exempt status as a
nonprofit under a different section of the code, your corporation must comply
with the requirements of that federal tax code section.
- The religious
category refers to general types of religious organizations and more formal
institutionalized churches.
- Charitable purpose is defined in section
501(c)(3) as providing services beneficial to the public
interest.
- Scientific research that is carried on in the public interest
qualifies for tax-exempt status; however, research incidental to commercial or
industrial operations does not qualify.
- The literary purpose includes
writing, publishing and distribution of books which are directed toward
promoting the public interest rather than engaging in commercial book writing
and selling.
- The educational purpose is a broad purpose that allows
instruction for both self-development and the benefit of the
community.
- The purpose must be listed in the articles of incorporation;
therefore, it is very important that the purpose of the corporation be well
described in the articles of incorporation. Additionally, certain states require
approvals from state departments prior to approving the formation of a nonprofit
corporation. One example of this is New York. New York often requires one or
several departmental approvals based on the business purpose of the prospective
nonprofit corporation. Please keep in mind that there may be additional time
required to obtain these approvals, and additional fees charged, This varies by
state. If you would like Business Filings to obtain these approvals on behalf of
your prospective nonprofit corporation, the fee is $100 per approval.
For
a specific answer to whether or not your company purpose is acceptable to be
classified as a nonprofit corporation, contact an attorney or
accountant.
What
are the IRS classifications of nonprofit corporations?
Business Filings
Incorporated prepares articles of incorporation for nonprofit corporations
pursuant to section 501(c)(3) of the IRS code. Nonprofits formed under 501(c)(3)
must be formed for some religious, charitable, educational, literary, or
scientific purpose.
Nonprofit corporations may also be formed for other
purposes pursuant to different sections of the IRS code. If you want Business
Filings to form your nonprofit pursuant to a different provision of the IRS
code, please let us know the code section in the purpose portion of our order
form.
To determine if your nonprofit needs to be formed pursuant to
another provision of the IRS code, please consult the IRS organizational
reference chart. (Click here to view the IRS organizational chart.)
For
specific advice, please consult an attorney or accountant.
What
form needs to be filed to apply for federal tax-exempt status?
For a
nonprofit company to qualify for 501(c)(3) federal tax-exempt status, a timely
filing of IRS form 1023 must be made.
- A few groups are NOT technically
required to file form 1023. Examples of these include:
- A church,
interchurch organization, convention of churches, or an integrated auxiliary of
a church
- A subordinate organization covered by a group exemption
letter (a parent tax- exempt company must submit a letter saying its subsidiary
company will be tax- exempt).
- A group that qualifies for public
charity status and which normally has gross receipts of LESS than $5,000 per
year.
However, the only way to be assured that the IRS views the corporation
as a 501(c)(3) tax-exempt group. is to file for tax-exempt status. If the IRS
successfully challenges your corporation뭩 tax-exempt status, your corporation
may be subject to back taxes and tax fines for the period it operated as a
corporation. It is always advisable to discuss your particular situation with an
attorney or
accountant.
When
must form 1023 be filed?
The 1023 application must be filed in a timely
manner in order for tax-exemption to be effective retroactively. This means it
needs to be postmarked within 15 months after the end of the month when your
articles of incorporation were
filed.
How
many directors are nonprofit corporations required to have?
Most states
require nonprofit corporations to have a minimum of three directors; however,
some only require one director and others allow for less than three
members.
What
are the advantages of forming a nonprofit corporation?
If your nonprofit
is granted tax-exempt status under 501(c)(3) of the tax code, your corporation
will be exempt from payment of federal corporate income taxes. With federal
income tax rates at between 15% to 34% this can amount to quite a tax
savings.
A 501(c)(3) nonprofit is eligible to receive both public and
private grants. Individual donors can claim a federal income tax deduction of up
to 50% of income for donations made to 501(c)(3) groups.
Nonprofits also
receive the same limited liability protection as for-profit companies. This
means that directors or trustees, officers, and members are typically not
personally responsible for the debts and liabilities of the
corporation.
Other benefits include:
A corporation's life is not
dependent upon its members. A corporation possesses the feature of unlimited
life. If an owner dies or wishes to sell their interest, the corporation will
continue to exist and do business.
Retirement funds and qualified retirement
plans (like 401k) may be set up more easily with a corporation
501(c)(3)
corporations receive lower postal rates on some bulk mailings.
What
are the disadvantages of forming a nonprofit corporation?
The main
disadvantage of forming a nonprofit company is the increased paperwork that is
required. Articles of incorporation must be filed with the state, bylaws
prepared, and meeting minutes must be kept with your corporation뭩 records.
Business Filings Incorporated can help with these steps by preparing and filing
your incorporation papers, and our nonprofit kit contains sample bylaws and
meeting minutes.
Also, applications for tax-exempt status must be filed
at both the federal and state levels. Business Filings does not prepare the
necessary federal or state tax forms; therefore you will need to complete this
process separately. It is important to remember that nonprofits cannot be used
to generate profits for the owners, and the purpose must conform to IRS
regulations.
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