ComplianceLegalFinanceDecember 24, 2020

Understanding how to form and create a nonprofit corporation

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Starting a nonprofit corporation is similar to, but somewhat distinct from, incorporating a for-profit business. This article outlines how to start a nonprofit organization and the most commonly required information for forming a nonprofit corporation.

A nonprofit corporation allows for all the formalities and protections of a corporation, minus the profit motive and tax issues. A nonprofit corporation is an organization formed as a corporation for purposes other than generating a profit, and in which no part of the organization's income is distributed to its directors or officers. There are many types of nonprofits - A nonprofit can be a church or church organization, school, charity, medical provider, community outreach organization, legal aid society, volunteer service organization, professional association, research institute, or a museum or sports organization.

There are several steps required to start a nonprofit organization.

Filing articles of incorporation

As with a for-profit corporation, the first step in formation is to file the Articles of Incorporation or Certificate of Incorporation with the proper state agency. Each state has its own version of the Articles of Incorporation, but much of the requested information is consistent across the states.  When filing the formation documents, it's critical to include the required clauses to ensure your nonprofit will later qualify for tax-exempt status. Being formed with the state as a nonprofit corporation does not automatically provide an organization with tax-exempt status. Nonprofits must apply for tax-exempt status with the IRS, and sometimes at the state level as well.

Filing fees vary by state and timeline. In some states, you may need additional approvals from specific state departments. In New York, for example, several state agencies must approve of the business purpose of the nonprofit. This requires additional time and fees. View requirements for Articles of Incorporation by state.

Naming your nonprofit organization

You’ll need to provide your nonprofit corporation with a name. Many states require a corporate identifier, such as “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation, such as “Corp.” Perform a preliminary name availability search prior to filing, to see if your desired name is available. Keep in mind that the state holds final approval rights on the name and will generally not let you incorporate with a name that is already on its records as being the name of another domestic or qualified foreign corporation or unincorporated business entity.

Defining your business purpose

The business purpose or mission statement is an explanation of what your nonprofit corporation is formed to do or provide. Here is a big difference between the articles of a for-profit corporation and a nonprofit corporation. Many for-profits simply state that their purpose is to transact any lawful business. But for a nonprofit, having a very detailed description is essential. If you plan to apply for tax-exempt status, the Internal Revenue Service (IRS) will require a copy of your Articles of Incorporation and will pay particular attention to your business purpose and use it to classify your business:

  • The most common type of nonprofit is the 501(c)(3) nonprofit: a public charity or private foundation established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children.
  • These nonprofits are called 501(c)(3) organizations because they are formed for the purposes outlined in Section 501(c)(3) of the Internal Revenue Code.
  • There are also 501(c)(4) through 501(c)(27) organizations. View the IRS Organization Reference Chart for a listing of nonprofit classifications.

Choosing a registered agent is an important part of forming a nonprofit corporation

All states require nonprofit corporations to have a registered agent in the state of formation. The registered agent is responsible for receiving legal and tax documents,

must have a physical address (no P.O. boxes) in the state of incorporation and must be available during normal business hours. Remember that the registered agent address is a matter of public record. In states that do not require the nonprofit’s principal office address information documents, the registered agent address is the only one on file for the organization.

Note that supplying the nonprofit’s principal office address is optional in many states, but some require it.

Choosing an incorporator, directors and officers

Because the nonprofit is a corporation, it must comply with all the usual corporate formalities, such as holding annual meetings of directors and members, adopting bylaws, and recording meeting minutes. Like for-profit businesses, defining the organizational structure and nonprofit management is required. Management should include:

  • Incorporator: The incorporator is the person or company preparing and filing the incorporation documents with the state. Many states require the name and signature and address of the incorporator in the formation documents.
  • Directors: The directors are the individuals responsible for overseeing and directing the affairs of the nonprofit, including major decision-making. Many states require the names and addresses of the initial directors or board members in formation documents.
  • Officers: The officers are responsible for the day-to-day activities of the nonprofit corporation. While inclusion of the officer information is optional in many states, a few states do require it. Common officer titles include president, vice president, secretary, and treasurer.

Filing for tax-exempt status

Remember that filing nonprofit Articles of Incorporation does not equate to obtaining tax-exempt status for your nonprofit. Most nonprofits apply for tax-exempt status under Sec. 501(c)(3). In order to apply for 501(c)(3) tax-exempt status, Form 1023 or Form 1023-EZ must be completed and filed with the IRS. Some states also have state tax-exempt organization status procedures. To learn if your state is one of those, it is best to contact your state department of taxation.

Acquiring federal tax ID number to form your nonprofit

To start a nonprofit, the organization must acquire a federal tax ID number from the IRS by filing Form SS-4. Some states may require a state tax identification number; check with local taxing authorities

What are the advantages of nonprofit corporations?

Nonprofit corporations receive the same limited liability protection as do for-profit corporations. This means that directors or trustees, officers and members are typically not personally responsible for the debts and liabilities of the organization. Other benefits include:

  • A nonprofit corporation's life is not dependent upon its members. It possesses the feature of unlimited life. If an owner dies or wishes to sell his or her interest, the nonprofit will continue to exist and do business.
  • Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a nonprofit corporation.
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Mike Enright
Operations Manager
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