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How is a nonprofit different from a benefit corporation?
Benefit corporations are a relatively new type of business structure that allows private profits to its shareholders while providing public benefits to society. In contrast, a nonprofit must operate solely for some type of charitable or public purpose. In a nonprofit, there are no shareholders and no benefits can flow to individuals who control the organization. However, a benefit corporation is owned by shareholders and is expected to earn profits. (In fact, private benefit will cost the nonprofit its tax-exempt status, while a benefit corporation cannot be tax-exempt.)
What is a nonprofit corporation?
A nonprofit corporation (also called non-profit, nonprofit organization, NPO, or not-for-profit) is formed exclusively for a "public benefit" and not to make a profit for the owners/shareholders. In most cases, nonprofits are formed as corporations, particularly those who will seek tax-exempt status. Not all states permit an LLC to be a non-profit—and specific language in required in the state formation documents and this can be more difficult with an LLC.
Nonprofits, like for-profit corporations, are formed under state laws and the formation process is similar in many ways. Like for-profit corporations, nonprofits provide limited liability protection. The personal assets of the directors, members and officers typically cannot be used to satisfy the debts and liabilities of the nonprofit. However, unlike a regular corporation, a nonprofit does not have shareholders; no stock is issued. And, also unlike a regular corporation, a nonprofit that wishes to become a tax-exempt organization (and most wish to do so) must provide very specific language in the purpose clause of the articles of incorporation.
Are nonprofits automatically tax-exempt?
No. Although the groundwork for tax-exempt status is laid in the purpose clause of the articles of incorporation, a nonprofit must apply for federal and state (if applicable) tax-exempt status. Tax-exempt status is not automatically granted once the nonprofit is formed. To apply for federal tax-exempt status, Form 1023 must be filed with the Internal Revenue Service (IRS). Smaller organizations can use the somewhat less cumbersome Form 1023-EZ. However, the guidance of a tax professional is strongly recommended regardless of the form used. Most states honor the federal determination, although some require an additional filing. For state requirements, it is best to contact the department responsible for taxation in the state of formation.
Do I need an attorney to form a nonprofit?
No, you don’t need an attorney to start a nonprofit. You can prepare and file the Articles of Incorporation yourself. However, the rules regarding nonprofits are complex—particularly if you hope to obtain tax-exempt status. While CT will assist you with preparation and filing all state-required documents, consultation with an attorney or a tax professional is recommended.
What steps do I take to form a nonprofit?
The first step is to file nonprofit Articles of Incorporation with the proper state agency. It is important that the Articles of Incorporation contain the required clauses to ensure your nonprofit will qualify for tax-exempt status. You must also appoint a registered agent as part of the filing process and, of course, pay the state-imposed filing fees. CT prepares and files nonprofit Articles of Incorporation in every state and our experienced incorporation specialists are available throughout the process. We also are prepared to serve as your registered agent in your formation state and in any states where the nonprofit conducts operations.
After the Nonprofit Articles of Incorporation are filed, you must apply to obtain tax-exempt status—if you plan to operate as a tax-exempt organization. The initial filing must be with the IRS, but some states require their own filings. To determine what form needs to be filed at the state level to obtain tax-exempt status, contact the state department responsible for taxation.
In addition, a nonprofit must comply with corporate formalities, other than issuing stock certificates. It must hold annual meetings of directors, members, and officers. Bylaws must also be adopted. Documents that help you comply with these corporate formalities are contained in CT's Compliance Kit and Seal. Many states require that you register as a charity or nonprofit as well.
What should I name my nonprofit corporation?
As with naming any business or organization, naming a nonprofit is an important business step when starting a nonprofit organization. The name should project the image you want for your new nonprofit. Legally, the name must not be "deceptively similar" to any existing corporation in your state of incorporation or must be "distinguishable on the record" of your state.
Additionally, the name must show your nonprofit is incorporated. Many states require that the nonprofit name be followed by "Corporation," "Incorporated," "Company" or an abbreviation of those terms, such as "Corp." or "Inc." Some states require a designation that the corporation is organized as a nonprofit, such as “NFP”.
What are the owners of a nonprofit called?
Because nonprofits are formed for purposes other than making a profit, the entity is a non-stock entity. As a result, there technically are no owner(s) of a nonprofit corporation like there are for for-profit corporations. Nonprofits may have members; some states require you to indicate on the articles of incorporation whether directors and/or members will be involved in the nonprofit.
Nonprofits are similar to for-profit corporations, in that they are governed by a board of directors. The nonprofit directors are responsible for making the major decisions for the nonprofit, and appointing and supervising the officers of the nonprofit. The officers are responsible for the day-to-day operations of the nonprofit.
How many directors must a nonprofit have?
Many states require nonprofits to have a minimum of three directors. However, some only require one director. If you are going to apply for tax-exempt status, bear in mind that the IRS generally requires three directors before it will approve the application.
Where should I form a nonprofit?
Once the decision is made to incorporate, the next step is to determine the best state for incorporation. You are not required to form the organization in the state where it will be physically located, but there are factors to consider when evaluating which state is best: the cost of incorporating in the home state versus the cost of incorporating in another state, the cost of foreign qualification if you incorporate in a state where you are not doing business; the ongoing compliance requirements (which double if you are incorporated in one state and are operating in another); and taxation and nonprofit laws governing the states.
If the nonprofit will operate primarily within a single state, local incorporation may be best. The cost of local incorporation will usually be less than incorporating and starting a nonprofit in another state and registered to do business as a foreign nonprofit in the state (foreign qualification). A foreign nonprofit that qualifies to do business in another state is subject annual report fees in both the state of incorporation and the qualifying state. You will also have to appoint two registered agents: one for the state of incorporation and one for the state of operation. Another disadvantage of incorporating outside of your home state is the possibility of having to defend a lawsuit in another state. For advice regarding which state is optimal for starting a nonprofit, consult an attorney or an accountant.
What is a registered agent?
When you form a nonprofit corporation or qualify/register to transact business in another state, you must appoint a registered agent for your nonprofit. The registered agent is responsible for receiving important legal and tax document on behalf of your nonprofit. Additionally, the registered agent must have a physical address in the state of incorporation or qualification (post office boxes are not allowed) and be available during normal business hours. CT includes Registered Agent Service as part of its incorporation service packages.
Having CT as your registered agent is important if you:
- Want to avoid the risk of noncompliance. You have enough to worry about with running your nonprofit. Let compliance experts help you address the compliance requirements imposed on your nonprofit by your state of incorporation. CT will help you maintain your company's good standing in your state of incorporation and/or qualification.
- Value privacy. When an organization is served with a Service of Process, it is often delivered by local law enforcement. Most people do not want police officers showing up in front of clients, employees or neighbors to serve them notice that their nonprofit is being sued. Having CT as your registered agent service provider ensures you receive any Service of Process promptly and privately.
- Have irregular business hours. The registered agent for a business must be available during normal business hours to accept important documents as they are delivered. If you set your own hours, or you are often away from your nonprofit's office, having CT as your registered agent ensures that you never miss these important communications.