Starting Nonprofit Corporations

February 02, 2007

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A nonprofit corporation is an organization formed as a corporation for purposes other than generating a profit, and in which no part of the organization's income is distributed to its directors or officers. Nonprofits are formed pursuant to state law, often under the Revised Model Non-Profit Corporation Act of 1986.

A nonprofit can be a church or church organization, school, charity, medical provider, legal aid society, volunteer service organization, professional association, research institute, museum or sports organization. Being formed with the state as a nonprofit corporation does not automatically provide an organization with tax-exempt status. Nonprofits must apply for tax-exempt status with the IRS, and sometimes at the state level as well.

Advantages of nonprofit corporations

Nonprofits corporations receive the same limited liability protection as do for-profit corporations. This means that directors or trustees, officers and members are typically not personally responsible for the debts and liabilities of the organization. Other benefits include:

A nonprofit corporation's life is not dependent upon its members. It possess the feature of unlimited life. If an owner dies or wishes to sell his or her interest, the nonprofit will continue to exist and do businesss.
Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a nonprofit corporation.

How to apply

The first step is to file nonprofit articles of incorporation with the proper state agency, making sure to include the required clauses to ensure your nonprofit will later qualify for tax-exempt status. In some states, you may need additional approvals from specific state departments. In New York, for example, several state agencies must approve of the business purpose of the nonprofit. This requires additional time and fees.

Then, you must apply for tax-exempt status with the IRS, completing Form 1023, which can be a lengthy process. In addition, a few states also require some paperwork to be filed in order to receive tax-exept status; check with local authorities.

Because the nonprofit is a corporation, it must comply with all the usual corporate formalities--holding annual meetings of directors and members, adopting bylaws, recording of the meetings minutes. It also needs to acquire a federal tax ID number from the IRS by filing Form SS-4. Some states may require a state tax identification number; check with local taxing authorities.