two women discussing the benefits of forming a nonprofit company
ComplianceFinanceLegalAugust 14, 2020

The benefits & disadvantages of forming a nonprofit company

Understanding nonprofit corporations

Do you have as a goal addressing a societal problem? Or maybe forming a social club, trade organization, or cooperative? If so you may be wondering if you should operate informally or if your goals could best be accomplished by incorporating.

If you are looking to earn a profit as well as accomplish those other goals, then you would want to form a for-profit corporation, LLC, or benefit corporation. But if you are not looking for profit then you should consider the benefits of forming a nonprofit company. Most nonprofits are formed to provide a benefit to the public, as opposed to clubs, cooperatives, etc. that are formed to benefit their members. They include companies formed for charitable, educational, scientific, religious and literary purposes. These charitable companies are also referred to as Sec. 501(c)(3) organizations, after the section of the Internal Revenue Code that provides them with an exemption from taxation.

Below are some of the benefits of forming a statutory nonprofit company (usually a corporation although an LLC can be a nonprofit as well), rather than continuing to pursue a nonprofit purpose as an informal group or association.

Benefits of forming a nonprofit corporation

  • Separate entity status. A nonprofit corporation (or LLC) has its own separate existence. It can enter into its own contracts, sue and be sued in its own name and is responsible for its own contractual and other obligations. In an informal or non-statutory nonprofit, the person entering into contracts in his or her own name can be liable if there is a breach of the contract.

  • Perpetual existence. A nonprofit corporation or LLC has a statutory right to exist in perpetuity. An informal organization does not have that.

  • Limited liability protection. A nonprofit corporation (or LLC) protects directors, officers and members (if it has any members) against being held personally responsible for their company’s debts and liabilities. Because that limited liability protection is provided for by statute, an informal organization does not have that.

  • Tax-exempt status. Nonprofit corporations (or LLCs) can apply for both federal and state tax-exempt status. While a group or association that has not been formed under state law can apply for tax-exempt status it is generally easier for a statutory business entity (and especially a corporation) to get IRS approval.

  • Access to grants. Some nonprofits are eligible to receive public and private grants, making it easier to get operating capital. For instance, certain grants and other public allocations are only available to 501(c)(3) organizations. Tax-deductible donations. With 501(c)(3) nonprofits, donations made by individuals to the nonprofit corporation are tax-deductible. Possible state sales and property taxes exemption. This benefit varies by state but nonprofit companies may be exempt from paying sales and/or property taxes.

  • US Postal Service discounts. Tax-exempt nonprofits generally can receive discounts on bulk mail rates.

  • Credibility. There may be more established credibility for a nonprofit corporation than for a person or persons informally trying to accomplish their nonprofit purpose. Donors may prefer to donate to nonprofit corporations because of this credibility.

  • Professional registered agent. Statutory nonprofits like corporations and LLCs have to appoint a registered agent. This gives them the ability to appoint a professional registered agent, which helps ensure proper treatment of the critical, time-sensitive court documents that will be served in the event the nonprofit is sued.
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Disadvantages of forming a nonprofit corporation

Below are some of the disadvantages of forming a statutory nonprofit corporation (or LLC).

  • Expenses. Forming a statutory nonprofit company requires filing documents with the state business entity filing office - which means filing fees. In most states there will be annual fees to pay to the state as well. And although a professional registered agent is recommended, there is a cost for that too.

  • Ongoing compliance obligations. Statutory nonprofits also have to comply with the provisions of the statute under which they were formed. That can mean, among other things, the need to file an annual report, draft bylaws (or an operating agreement), retain certain books and records, and make filings with the state upon certain important changes to the company.

  • Management oversight. Nonprofit statutes – especially nonprofit corporation laws - closely regulate how the nonprofit is to be managed. For example, the law may require a board of directors, periodic meetings, quorums, minutes, and other compliance obligations to which informal nonprofits are not subject.

  • No lobbying or political campaigning. Tax-exempt nonprofits have restrictions on their lobbying and political activities, which can affect their ability to advocate for their causes.

If you have questions or would like assistance with forming a nonprofit company, contact us.

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Heather Huston
Assistant Service Manager
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