Nonprofit Corporations in the United States

Primary Purposes

Making an incidental profit is allowed under legal and tax rules, but the primary purpose
of the Nonprofit Corporation should not be to make money. Nonprofit goals are typically educational, charitable, or religious.

Nonprofit organizations begining

Most nonprofits start out as small, informal, loosely structured organizations. Volunteers
perform the work, and the group spends what little money it earns to keep the organization afloat. Formal legal papers (such as a nonprofit charter or bylaws) are rarely prepared in the beginning.

Legally, groups of this sort are considered nonprofit associations, and each member can be held
personally liable for organizational debts and liabilities.

Once a nonprofit association gets going and starts to make money, or wishes to
obtain a tax exemption to attract public donations and qualify for grant funds,
the members will formalize its structure.

Usually the members decide to incorporate, but forming an unincorporated nonprofit
association by adopting a formal association charter and operating bylaws is an
alternative.

Most groups form a nonprofit corporation because it is the traditional form—the IRS
and grant agencies are very familiar with it. Also, once incorporated, the individual
members of the nonprofit are not personally liable for debts of the organization—a big
legal advantage over the unincorporated association.

Nonprofit Corporation Benefits

Here are some circumstances that might make it worth to incorporate
and get tax-exempt status:

To solicit tax-deductible contributions. Contributions to nonprofits are generally tax deductible for those who make them.
The organization makes a taxable profit from its activities. In this case, the associates don’t have to pay income tax in relation to the nonprofit activity.
The Nonprofit applies for public or private grant money. Without federal taxexempt status, the organization is unlikely to qualify for grants.
The members want some protection from legal liability. By incorporating the association, officers, directors, and members may be generally insulate your from liability for the activities they engage in on behalf of the corporation.
The advocacy efforts might provoke legal quarrels.

Forming a nonprofit corporation brings other benefits as well, such as lower nonprofit mailing rates and local real estate and personal property tax exemptions.

Forming a Nonprofit Corporation

To form a nonprofit corporation, one of the organization’s founders prepares
and files standard articles of incorporation — a short legal document that lists the name
and the directors of the nonprofit plus other basic information. The articles are filed with
the secretary of state’s office for a modest filing fee.

After the articles are filed, the group is a legally recognized nonprofit corporation.

Obtaining Federal and State Nonprofit Tax Exemptions

In addition to filing articles of incorporation, the organization’s founders may want to apply for
and obtain federal and state nonprofit tax exemptions. Many groups don’t want to form a nonprofit unless they can qualify for tax-exempt status. They must form your corporation before to submit the federal tax exemption application. Because the IRS requires the founders to submit a copy of the filed articles with the exemption application.

Types of Tax Exemptions most Nonprofits get

Most organizations obtain a federal tax exemption under Section 501(c)(3) of the
Internal Revenue Code, for charitable, educational, religious, scientific, or literary
purposes. States typically follow the federal lead and grant state tax-exempt status to
nonprofits recognized by the IRS as 501(c) (3) organizations.

In order for the organization to get a 501(c)(3) tax exemption, the founders need to get the IRS Package 1023 exemption application. This is a lengthy and technical application with many references to the federal tax code.

Restrictions imposed on 501(c)(3) nonprofits

The Nonprofit must meet the following conditions to qualify for a 501(c)(3) IRS tax exemption:

The assets of the nonprofit must be irrevocably dedicated to charitable, educational, religious, or similar purposes. If the 501(c)(3) nonprofit dissolves, any assets it owns must be transferred to another 501(c)(3) organization. (In the organizational papers, you don’t have to name the specific organization that will receive the assets—a broad dedication clause will do.)
The organization cannot campaign for or against candidates for public office, and political lobbying activity is restricted.
If the nonprofit makes a profit from activities unrelated to its nonprofit purpose, it must pay taxes on the profit (but up to $1,000 of unrelated income can be earned tax-free).

Main Source: “Nonprofit Corporations”, Nolo’s Encyclopedia of Everyday Law

Nonprofit Corporations in State Statute Topics

Introduction to Nonprofit Corporations (State statute topic)

The purpose of Nonprofit Corporations is to provide a broad appreciation of the Nonprofit Corporations legal topic. Select from the list of U.S. legal topics for information (other than Nonprofit Corporations).

Nonprofit Corporations