| Non-Profit Corporations |
What is a Non-Profit Corporation
A nonprofit corporation is simply a corporation that is formed pursuant to a different state law than a standard for-profit corporation. The corporation must be formed for some religious, charitable, educational, literary or scientific purpose. While a standard business corporation is designed to benefit and generate a profit for its shareholders, nonprofit do not have the profit motive. Nonprofit corporations are allowed to apply for tax-exempt status at both the federal and state level.
What are the advantages of filing 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.
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 corporation’s records. Business Filings Incorporated can help by preparing and filing your incorporation papers and our nonprofit kit does contain sample bylaws and meeting minutes. Also, applications for tax-exempt status must be filed at both the federal and state levels.
It is important to remember that nonprofit can not be used to generate profits for the owners and the purpose must confirm to IRS regulations.
What purposes are valid for a nonprofit?
To qualify for federal tax-exempt status, the nonprofit corporation must be organized and operate for some religious, charitable, educational, literary or scientific purpose permitted under 501(c)(3) of the tax code.
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 the purpose of the corporation be well described on the articles of incorporation.
IRS classification 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 the order form.
What form needs to be filed to apply for federal tax-exempt status?
For a nonprofit company to qualify for 503(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.
However, it is recommended that these companies still file for tax-exempt status because this is the only way to be assured that the IRS views the corporation as a 501(c)(3) tax-exempt group. For example, it is possible that the IRS might later challenge your corporation’s tax-exempt status by arguing that your organization is not a church. If their argument is successful, your corporation would be subject to back tax and tax fines for the period it operated as a corporation.
When the IRS approves the tax-exemption, then and ONLY then, can the nonprofit company be assured that contributions made to it are tax deductible, and that your corporation is a tax-exempt company.
When must form 1023 be filed?
The 1023 application is filed in a timely manner if it is postmarked within 15 months after the end of the month when your articles were filed.
If you file on time, the tax-exemption is effective retroactively to the date on which your articles of incorporation were filed.
How many directors are nonprofit corporations required to have?
Most states require nonprofit corporation to have a minimum of three directors. The following states only require, at minimum, one director: CA, CO, DE, IA, KS, MI, MS, NH, OK, OR, PA, SC, VA, WA & WV.
The following states allow less than three directors if there are less than three members: LA, MA, MN & VA.
Other advantages:
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