What is a not-for-profit corporation?
Nonprofit Corporation is a corporation formed to carry out a charitable, educational, religious, literary or scientific purpose. A nonprofit corporation can raise funds by receiving public and private grant money and donations from individuals and companies. Certain federal, state, and local income, property and sales tax exemptions are available to nonprofit corporations. The federal and state governments do not generally tax nonprofit corporations on money they make that is related to their nonprofit purpose, because of the benefits they contribute to society.
Is a nonprofit corporation exempt from taxes?
The mere fact that a corporation is organized under a not-for-profit corporation law does NOT mean that contributions to it are necessarily tax deductible. For donations to be “tax deductible” the organization must file an “Application for Recognition of Exemption” with the Internal Revenue Service and be approved pursuant to Internal Revenue Code.
How does a nonprofit organization, including a nonprofit corporation, become tax-exempt?
The IRS requires you to submit a copy of your filed articles with your application. To apply for your exemption, you must complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and IRS Package 1023, Application for Recognition of Exemption. For instructions on filling out these forms, read IRS Publication 557, Tax-Exempt Status for Your Organization. After the IRS reviews your application, it will send you a letter indicating that it has approved your nonprofit status, or it might ask you for more information about your organization. The IRS can also deny your application outright.
A few states require you to complete a separate application to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption.
How do I form a “501(c)(3)” corporation?
Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. The basic steps to follow include:
- Obtain nonprofit materials from your state’s corporate filing office. This packet should include sample or fill-in-the blank articles of incorporation and your state’s nonprofit corporation laws. It should also contain a filing fee schedule, as well as forms and instructions for checking the availability of your proposed business name. The articles of incorporation will contain the name of your corporation, the corporation’s address, a “registered agent” (a person who agrees to receive legal papers on behalf of the corporation), and sometimes the names of the corporation’s directors.
- Choose an available business name that meets the requirements of state law. State requirements vary, but generally, the name of your nonprofit cannot be the same as the name of another corporation on file with the corporations division, the name must end with a corporate designator, such as “Corporation,” “Incorporated,” “Limited,” or “Corp.,” “Inc.” or “Ltd.”, and the name cannot contain certain words prohibited by the state, such as Bank, Cooperative, Federal, National, United States or Reserve. Also, you must make sure your name won’t violate a trademark owned by another company (in your state or out of state). To do this, you’ll need to conduct a trademark search. You aren’t usually required to file or reserve the name with your state. Once you file your articles of incorporation, your nonprofit’s name will be automatically registered.
- File formal paperwork, usually called “articles of incorporation,” and pay a small filing fee (typically $30 or $40).
- Apply for your federal and state tax exemptions.
- Create corporate “bylaws,” which set out the operating rules for your nonprofit corporation, including procedures for holding meetings, making major business decisions, voting rights and other important guidelines.
- Appoint the initial directors. Directors, who meet and make decisions collectively as the board of directors, have the authority (and responsibility) to manage and run the nonprofit corporation. Many states allow nonprofits to have just one director, but other states require at least three. Some states require the directors to be chosen before filing the articles of incorporation because you must list their names in the document.
- Hold the first meeting of the board of directors. Before you start doing business, you must elect a board of directors and hold an initial meeting of the board. Typically, the bylaws are adopted by the corporation’s directors at their first board meeting. The directors also will elect officers — state law usually requires a president, secretary and treasurer, and sometimes a vice president as well. Then, the directors should authorize the newly elected officers to take actions necessary to start the business of the nonprofit, such as setting up bank accounts and admitting members. Minutes of the meeting should be created and filed in the corporate records book.
- Obtain licenses and permits that may be required for your corporation. A local business license (sometimes called your “tax registration certificate”) may be required for your activities, and if you sell anything to consumers, you’ll need a sales tax permit
Who can form a nonprofit organization?
There are no restrictions as to who can form a nonprofit organization. There are no age, residency or other legal requirements.
Do I need an attorney to form a nonprofit organization?
No, an attorney is not a legal requirement to form a nonprofit organization. You can prepare and file the articles of incorporation yourself; however, you should understand the requirements of the state in which the corporation will be formed.
What should I name my nonprofit organization?
Legally, the name you select must not be “deceptively similar” to any existing corporation or must be “distinguishable on the record” of your state. For example, if a corporation named Acme Company exists in your state, you probably would not be allowed to name your organization Acme, Inc. Additionally, the name you choose must show your business is incorporated. Many states require that the nonprofit name be followed by “Corporation,” “Incorporated,” “Company” or an abbreviation of those terms, such as “Corp.” or “Inc.”
What are the (Internal Revenue Service) IRS classifications of nonprofits?
The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations. The following is a list of other types of tax-exempt organizations recognized by the IRS:
- § 501(c)(1) Corporations Organized Under Act of Congress (including Federal Credit Unions);
- § 501(c)(2) Title Holding Corporations for Exempt Organization;
- § 501(c)(11) Teachers’ Retirement Fund Associations;
- § 501(c)(12 Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, or Like Organizations (if 85 percent or more of the organization’s income consists of amounts collected from members for the sole purpose of meeting losses and expenses);
- § 501(c)(13) Cemetery Companies (owned and operated exclusively for the benefit of their members or which are not operated for profit):
- § 501(c)(14) State Chartered Credit Unions, Mutual Reserve Funds;
- § 501(c)(15) Mutual Insurance Companies or Associations;
- § 501(c)(16) Cooperative Organizations to Finance Crop Operations;
- § 501(c)(18) Employee Funded Pension Trusts (created before June 25, 1959):
- § 501(c)(21) Black Lung Benefit Trusts:
- § 501(c)(22) Withdrawal Liability Payment Funds;
- § 501(c)(25) Title Holding Corporations or Trusts with Multiple Parents;
- § 501(c)(26) State-Sponsored High-Risk Health Coverage Organizations;
- § 501(c)(27) State-Sponsored Worker’s Compensation Reinsurance Organizations;
- § 501(d) Religious and Apostolic Associations;
- § 501(e) Cooperative Hospital Service Organizations;
- § 501(f) Cooperative Service Organizations of Operating Educational Organizations;
- § 501(k) Child Care Organizations; and
- § 521(a) Farmers’ Cooperative Associations’
How many directors is a nonprofit corporation required to have?
Most states require nonprofit corporations to have a minimum of three directors; however, some only require one director.
Q. Where should I form a nonprofit corporation?
It is not required to form the organization in the state where it will be physically located. It can be incorporated in any state or Washington D.C. Two factors are often considered when deciding where to form a nonprofit. The first factor is the cost of forming in the home state versus the cost of forming in another state. The second factor pertains to taxation and nonprofit laws governing the states under consideration.
What is a registered agent and do I need one?
Virtually all states require corporations, limited liability companies, nonprofits, limited partnerships and limited liability partnerships formed or foreign qualified there to have a registered agent in the state. The registered agent must have a physical presence and address (not a post office box), and must be available during normal business hours.
The registered agent is responsible for receiving important legal and tax documents on behalf of the business. Service of Process (which is the document that informs the defendant of the lawsuit and when the complaint or petition must be answered), is served on the registered agent. Additionally, the registered agent often receives mail and tax documents from the state on behalf of business.
What is the difference between non-profit and tax-exempt status?
Non-profit status is a state law concept. Non-profit status may make an organization eligible for certain benefits, such as state sales, property, and income tax exemptions. Although most federal tax-exempt organizations are non-profit organizations, organizing as a non-profit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income taxes, an organization must meet requirements set forth in the Internal Revenue Code.
Do I need a tax-exempt number for my organization?
Some states issue numbers to organizations to indicate that these organizations are exempt from state sales taxes. The IRS does not issue numbers specifically for exempt organizations. While the Internal Revenue Service does issue Employer Identification Numbers (EINs), these are merely a unique identifier, similar to a Social Security number for an individual. Applying for and receiving an EIN says nothing about the organization’s tax status; however, your organization needs an EIN to apply for tax exemption.
How do I get an Employer Identification Number (EIN) for my organization?
You can apply for an EIN on-line, over the telephone, via fax or through the mail. To get an EIN over the IRS’s toll-free telephone number, call (800) 829-4933. To request an EIN via fax, dial the fax number at the location accepting applications from your state. The instructions on the Form SS-4 indicate which location will accept your faxed request. To receive an EIN through the mail, complete Form SS-4 . The instructions on the form provide the correct address.
How long does it take to process an application for exemption?
Applications are processed as soon as possible. The process can be delayed, however, for reasons ranging from simple errors on the application to issues concerning the qualification of the organization for exemption.
How an I get my application expedited?
In general, applications are processed in the order received by the IRS. Sometimes, however, the IRS will work a case outside the regular order. For expedited processing to be granted, however, there must be a compelling reason to process the case ahead of others.
What if purposes or programs change after the application is submitted?
If the organization’s organizing documents, purposes, or programs change while the IRS is considering an application, you should report the change in writing to the IRS office processing your application.
Must an organization whose corporate charter is reinstated after being administratively revoked or suspended by the state submit a new exemption application?
No, if a corporation is reinstated by the state after an administrative suspension or dissolution of its corporate charter, its exempt status will be reinstated without the need for the corporation to reapply. The organization must generally submit evidence from the state that its charter has been reinstated, indicating the effective date of reinstatement. In addition, the organization should provide evidence that it has complied with any filing requirement for annual returns during the period during which its corporate status was administratively suspended or dissolved.
Are there limitations on the activities in which a tax-exempt organization may engage?
Depending upon the nature of its exemption, a tax-exempt organization may jeopardize its tax-exempt status if it engages in certain activities. For example, under IRS rules, nonprofit corporations must abide by the following restrictions to retain their tax-exempt status:
- Nonprofit corporations with a 501(c)(3) tax exemption cannot participate in or contribute money to political campaigns. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
- Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any “substantial degree” face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities.
What is the difference between a private foundation and a public charity?
Every section 501(c)(3) organization is classified as either a private foundation or a public charity. Private foundations and public charities are distinguished primarily by the level of public involvement in their activities. Public charities generally receive a greater portion of their financial support from the general public or governmental units, and have greater interaction with the public. A private foundation, on the other hand, is typically controlled by members of a family or by a small group of individuals, and derives much of its support from a small number of sources and from investment income. Because they are less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions.
Must an exempt organization notify the IRS if it changes its purposes or activities?
Once the IRS recognizes an organization’s tax-exempt status, it must notify the IRS if it amends its organizing documents or by-laws, or materially changes its activities from those described in its exemption application.
Can a nonprofit corporation pay a salary to its officers, directors and/or employees?
Yes, any corporation may pay reasonable compensation for services rendered to the corporation.
Who has authority to investigate the activities of a nonprofit corporation?
The state’s attorney general will probably have statutory authority to (1) investigate charities that operate as nonprofit corporations, and (2) inspect the books and records of all corporations, including nonprofit corporations. In some states, such investigations are the duty of the state’s secretary of state. The IRS can revoke a nonprofit corporation’s tax exemption for violations of federal tax laws.