Non Profit

A Non Profit organization (NPO) is a business entity where making a profit is not a primary mission. Typically, Non Profits are engaged in charitable, educational, religious, or artistic activities of public or private interest. Since Non Profit organizations cannot distribute profit to their directors, officers, or members (those who participate in the management of the Non Profit) any income generated by the Non Profit must ultimately go back into the organization. However, Non Profits can hire and pay staff to carry out operational and administrative functions.

If you choose to incorporate your Non Profit as a 501(c) corporation, you can choose from 26 types – 501(c)(1) to 501(c)(26). Section 501(c)(3) is the most common federal tax exemption for Non Profits, which exempts the Non Profit from taxes on income directly related to the organization’s mission. Therefore, many Non Profits are often referred to as 501(c)(3) corporations. Refer to IRS.gov to learn more about other types of 501(c) incorporation.

Forming a Non Profit 501(c)(3) Corporation

Incorporation for Non Profits is very similar to creating a regular corporation, but with the extra steps of applying for tax-exempt status with the IRS and your state tax department. Becoming a Non Profit corporation requires some paperwork, but for many groups the benefits of Non Profit status outweigh the complications.

Here are the steps you must take to incorporate your Non Profit:

Choose a Business Name. Your business name (1) must be different from an existing corporation registered in your state’s office and (2) must indicate that it is a corporation by ending with the words: “corporation,” “incorporated,” “limited,” or a variation of those designations.
File your Incorporation Paperwork. You must next file formal paperwork, or articles of incorporation, and pay a small filing fee to your state. These "articles" contain basic structural information, such as the Non Profit name, its registered agent and office address, and membership structure, if any. You can find information about filing articles of incorporation by state on sbcacommunity.com’s Business Incorporation page. You can also look up your state office through the National Association of State Charity Officials* (NASCO).
Create Corporate Bylaws. Corporate bylaws outline the rules of operation for your Non Profit corporation, which includes procedures like holding meetings and electing directors. Tax regulations and other state laws are often covered in the bylaws to ensure that the Non Profit is running legally.
Appoint Directors and Hold a Board Meeting. Depending on your state, your Non Profit must appoint at least 1 or sometimes even 3 directors to make major decisions in the corporation. Some states require that you appoint directors before filing your articles of incorporation. Afterward the appointment, directors formally adopt the bylaws and elect officers at the board meeting.
Obtain Licenses and Permits. You must obtain relevant business licenses and permits like any other business. Regulations vary by industry, state and locality. Use the Licensing & Permits tool on sbcacommunity.com to find a listing of federal, state and local permits, licenses, and registrations you’ll need to run a business.
Start Fundraising. Now that your NPO is officially established you’ll need to pay attention to its bread and butter – fundraising. State offices of the National Association of State Charity Officials* (NASCO) provide local fundraising regulations. While individual donors amount to the largest contributors to Non Profits, federal, state and local governments offer grants, loans and programs to fund NPO projects. Learn more about funding opportunities for your Non Profit on USA.gov.
Hiring Employees. If you are hiring employees, read more about federal and state regulations for employers.

Taxes

Most businesses will need to register with the IRS and state and local revenue agencies, and obtain a tax ID number or permit.

Non Profit organizations are not automatically exempt from federal and state taxes. Therefore, Non Profit organizations seeking tax-exemption must formally apply for federal recognition and in many cases state recognition. Before you apply, make sure that your Non Profit organization satisfies the following requirements from the IRS.

Eligible Non Profits can file for federal and state tax exemptions once their articles of incorporation are registered with the state. The instructions below outline the application process for Section 501(c)(3) status, the most common federal and state tax exemption for Non Profits:

Apply for Non Profit Federal Tax Exemptions. Submit an application to the IRS for your federal Non Profit status as a 501(c)(3) organization. You must file a Form 8718, User Fee for Exempt Organization Determination Letter Request and Form 2020, Application for Recognition of Exemption with the IRS. It’s best to file within 27 months after the date of your incorporation. Learn more about the application process and other requirements and responsibilities of 501(c)(3) Tax-Exempt Organizations from the IRS.
Apply for Non Profit State Tax Exemptions. Laws from each state vary. Some states require a separate application, while others automatically grant you tax-exempt status when you obtain federal tax-exempt status. Other states require a copy of the letter from IRS that you have obtained federal tax-exempt status. Contact your state tax agency to find out what steps you must take.

Annual Filing Requirements. Once your Non Profit is deemed 501(c)(3) tax-exempt, you must file annually Form 990 Return of Organization Exempt from Income Tax, Form 990-EZ Return of Organization Exempt From Income Tax, or Form 990-PF Return of Private Foundation. Learn more about annual filing requirements for exempt organizations at IRS.gov.

Filing Requirements for Unrelated Business Income Tax. If your Non Profit earns over $1,000 from unrelated activities, you must file Form 990-T. For more information on taxes on unrelated business income, refer to Publication 598.

Read more about the rules and regulations of Non Profit 501(c)(3) corporations at IRS.gov.

Advantages of Starting/Running a Non Profit 501(c)(3) Organization

Tax Exemptions. Non Profit corporations with 501(c)(3) status are exempt from federal and state taxes only on income from activities related to the Non Profit’s purpose. Federal exemption does not ensure state and local exemption and vice versa. Read more about tax exemptions for Section 501(c)(3) Organizations at IRS.gov.

Grant and Donation Eligibility. Many federal grants and private donations require that Non Profits have tax-exempt status in other to qualify for such a grant or donation. While becoming a 501(c)(3) corporation is not the only method of attaining tax-exempt status, it is a much more straightforward process and makes it simpler for the IRS to approve of tax-exempted grant money.

Encourages Tax-Deductible Contributions. 501(c)(3) status is a tax-exempt status that allows donors to deduct their contributions from federal and state taxes. Therefore, incorporating your Non Profit as a 501(c)(3) encourages people who are looking for tax deductions to donate and also encourages donors to give a larger amount.

Limited Personal Liability. Officers, members, and employees of an incorporated Non Profit organization are protected from personally liability for debts and litigation that the organization may incur. However, directors of a Non Profit organization may still be liable if any injury, debt, and other wrongdoing occurs on a personal level.

Federal Discounts. Eligible Non Profits may receive federal benefits, including discounted postal and advertising rates and free air radio and television public service announcements.

Disadvantages of Starting/Running a Non Profit Organization

Numerous Government Requirements. Since many Non Profits are tax-exempt, there are also more requirements with which you must comply in order to maintain your tax-exempt status. For example, Non Profit 501(c)(3) organizations face lobbying restrictions, which means they cannot engage in candidate election advocacy and can only engage in legislative advocacy in a limited manner. Read more about requirements for Non Profit 501(c)(3) corporations at IRS.gov.

Detailed Bookkeeping. Along with the tax-exempt status comes extra paperwork. To maintain your 501(c)(3) status, you must keep excellent records of meeting minutes, decisions, procedures, and financial transactions. Refer to IRS.gov for more information about keeping records of financial transactions.

Taxes on Unrelated Activities. The IRS requires Non Profits to pay corporate income taxes on sources of income over $1,000 that are unrelated to the mission of the Non Profit. If your Non Profit brings in too much profit from activities unrelated to the mission of the Non Profit, your 501(C)(3) tax-exempt status may be in jeopardy. Refer to IRS.gov for more details on taxes for unrelated activities.

Non-Compensation for Directors. Directors cannot be paid, so there is no monetary reward or financial incentive to lead a Non Profit.

Distribution of Assets to Other Non Profits. If the directors of a Non Profit decide to dissolve the organization, all assets must be distributed to another Non Profit because Non Profits, as an entity, cannot be sold. Furthermore, directors, officers, members, and employees will not receive any assets of the Non Profit.