What is a nonprofit corporation?
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A nonprofit corporation is a corporation formed for purposes other than
generating a profit and in which no part of the organization's income
is distributed to its directors or officers. Nonprofit corporations
are formed pursuant to state law, often under the Revised Model
Non-Profit Corporation Act(1986). A nonprofit corporation
can be a church or church association, school, charity, medical provider,
legal aid society, volunteer services organization,
professional association, research institute, museum, or in some cases
a sports association. Nonprofit corporations must apply for tax-exempt
status at both the federal and state level.
What steps need to be taken to form a nonprofit corporation?
The first step is to file nonprofit articles of incorporation
with the proper state agency. It is important that
the articles contain the required clauses to make
sure your articles will qualify for tax-exempt status.
Business Pro Net Incorporated prepares and files nonprofit
articles of incorporation.
After the nonprofit articles are filed, tax-exempt
status must be applied for at both the federal and
state levels. To apply at the federal level, a timely
filing of form 1023 must be made. Business Pro Net
does not prepare IRS form 1023. To determine what
form needs to be filed at the state level, contact
the state department that deals with taxation.
The corporation must comply with corporate formalities
and hold annual meetings of directors and members.
Bylaws must be adopted for the corporation. Documents
that help you comply with these corporate formalities
are contained in Business Pro Net corporate kit.
What purposes are valid for a nonprofit?
To qualify for federal tax-exempt status under 501(c)(3) of the federal tax code,
the nonprofit corporation must be organized and operate for some religious,
charitable, educational, literary, or scientific purpose permitted under this section
of the code. Nonprofit corporations may also be formed for other purposes pursuant
to different sections of the IRS code. To qualify for federal tax-exempt
status as a nonprofit under a different section of the code, your corporation must
comply with the requirements of that federal tax code section.
The religious category refers to general types of religious organizations and
more formal institutionalized churches.
Charitable purpose is defined in section 501(c)(3)as providing services beneficial
to the public interest.
Scientific research that is carried on in the public interest qualifies for
tax-exempt status; however, research incidental to commercial or industrial
operations does not qualify.
The literary purpose includes writing, publishing and distribution of books which
are directed toward promoting the public interest rather than engaging
in commercial book writing and selling.
The educational purpose is a broad purpose that allows instruction for both
self-development and the benefit of the community.
The purpose must be listed in the articles of incorporation; therefore, it is very
important that the purpose of the corporation be well described in the articles
of incorporation. Additionally, certain states require approvals from state
departments prior to approving the formation of a nonprofit corporation. One example
of this is New York. New York often requires one or several departmental approvals based
on the business purpose of the prospective nonprofit corporation. Please keep in mind
that there may be additional time required to obtain these approvals, and additional
fees charged, This varies by state. If you would like Business Pro Net to obtain these
approvals on behalf of your prospective nonprofit corporation, the fee is $100 per approval.
For a specific answer to whether or not your company's purpose is acceptable to be
classified as a nonprofit corporation, contact an attorney or accountant.
What are the IRS classifications of nonprofit corporations?
Business Pro Net Incorporated prepares articles of incorporation
for nonprofit corporations pursuant to section 501(c)(3)
of the IRS code. Nonprofits formed under 501(c)(3)
must be formed for some religious, charitable, educational,
literary, or scientific purpose.
Nonprofit corporations may also be formed for other purposes
pursuant to different sections of the IRS code. If
you want Business Pro Net to form your nonprofit pursuant
to a different provision of the IRS code, please let
us know the code section in the purpose portion of our order form.
To determine if your nonprofit needs to be formed pursuant to another
provision of the IRS code, please consult the IRS organizational reference
chart. (Click
here to view the IRS organizational chart.)
For specific advice, please consult an attorney or accountant.
What form needs to be filed to apply for federal tax-exempt status?
For a nonprofit company to qualify for 501(c)(3) federal
tax-exempt status, a timely filing of IRS form 1023 must be made.
A few groups are NOT technically required to file form 1023. Examples of these include:
- A church, interchurch organization, convention of churches, or an integrated
auxiliary of a church
- A subordinate organization covered by a group exemption letter
(a parent tax- exempt company must submit a letter saying its subsidiary company will
be tax-exempt).
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A group that qualifies for public charity status and which normally has gross receipts
of LESS than $5,000 per year.
However, the only way to be assured that the IRS views the corporation as
a 501(c)(3) tax-exempt group. is to file for tax-exempt status.
If the IRS successfully challenges your corporation's
tax-exempt status, your corporation may be subject to back taxes and
tax fines for the period it operated as a corporation. It is always
advisable to discuss your particular situation with an attorney or accountant.
When must form 1023 be filed?
The 1023 application must be filed in a timely manner in order
for tax-exemption to be effective retroactively. This means
it needs to be postmarked within 15 months after the end of the
month when your articles of incorporation were filed.
How many directors are nonprofit corporations required to have?
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Most states require nonprofit corporations to have a minimum of three directors;
however, some only require one director and others allow for less than three members.
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What are the advantages of forming a nonprofit corporation?
If your nonprofit is granted tax-exempt status under 501(c)(3)
of the tax code, your corporation will be exempt from
payment of federal corporate income taxes. With federal
income tax rates at between 15% to 34% this can amount
to quite a tax savings.
A 501(c)(3) nonprofit is eligible to receive both
public and private grants. Individual donors can claim
a federal income tax deduction of up to 50% of income
for donations made to 501(c)(3) groups.
Nonprofits also receive the same limited liability
protection as for-profit companies. This means that
directors or trustees, officers, and members are typically
not personally responsible for the debts and liabilities
of the corporation.
Other benefits include:
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A corporation's life is not dependent upon its members.
A corporation possesses the feature of unlimited
life. If an owner dies or wishes to sell their interest,
the corporation will continue to exist and do business.
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Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation
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501(c)(3) corporations receive lower postal rates on some bulk mailings.
What are the disadvantages of forming a nonprofit corporation?
The main disadvantage of forming a nonprofit company is
the increased paperwork that is required. Articles
of incorporation must be filed with the state, bylaws
prepared, and meeting minutes must be kept with your
corporation's records. Business Pro Net Incorporated
can help with these steps by preparing and filing your incorporation
papers, and our nonprofit kit contains sample bylaws
and meeting minutes.
Also, applications for tax-exempt
status must be filed at both the federal and state
levels. Business Pro Net does not prepare the necessary
federal or state tax forms; therefore you will need to
complete this process separately. It is important to remember
that nonprofits cannot be used to generate profits for
the owners, and the purpose must conform to IRS regulations.
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