Starting a nonprofit corporation is more complicated than starting a for-profit corporation. A reasonably savvy business owner can often figure out the incorporation process for a for-profit corporation by reviewing the resources provided by a state's business registration office. Nonprofit incorporation can be difficult to figure out on your own. Mistakes at the start-up stage can cause problems for the organization down the road.
Generally, nonprofits are formed in the same way as for-profit corporations: by filing articles of incorporation with a state business registration office. Nonprofits, however, are covered under a special section of the state's corporation laws. Nonprofit laws require the formation paperwork to state that the organization is forming for charitable purposes to benefit the public.
Nonprofits Have No Owners
Nonprofit corporations do not have shareholders. If you start a nonprofit, you do not own the organization and cannot pass it on to your heirs. Instead, it is an independent entity that exists to serve the public and has no owners. Nonprofit laws require the formation paperwork to state that the operation of the organization will not provide financial profit for individual persons.
The Board of Directors Oversees Operations
The nonprofit corporation's board of directors provides the organization with oversight. The nonprofit board is legally required to make sure that the organization is operating properly and for the benefit of the public. The board is the final authority and can hire or fire management.
Nonprofits Can Qualify for Special Tax Treatment
A nonprofit corporation can typically apply for an exemption from state taxation based on its incorporation under the state nonprofit laws. Most nonprofits also want to qualify for exemption from federal taxation. The Internal Revenue Service (IRS) accepts applications for tax exemption from different types of nonprofits. If the nonprofit also wants donations to the organization to be tax-deductible for the donors, it must apply for tax exemption under 501(c)(3) of the Internal Revenue Code. The IRS typically wants to see specific language in a nonprofit's state formation paperwork before the agency will approve its application. Coordinating state and IRS requirements can be complicated.
Permission to Raise Money From the Public
Many states require nonprofit corporations to register with a state charities oversight agency before the nonprofit can raise money from the public. The registration process ensures that the nonprofit is properly set up and managed so that it can be held accountable for its actions.
A Business Lawyer Can Help
The law surrounding creation and operation of a nonprofit corporation is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.