BASIC INFORMATION

ADVANTAGES AND DISADVANTAGES OF NONPROFIT CORPORATIONS

STARTING YOUR NONPROFIT CORPORATION

RUNNING YOUR NONPROFIT CORPORATION

TAXES AND OTHER LEGAL CONSIDERATIONS

 

BASIC INFORMATION

 

What is a Nonprofit Corporation?

A Nonprofit Corporation is a corporation organized to meet specific tax-exempt purposes. To qualify for nonprofit status, a Nonprofit Corporation must be formed to benefit:

1. The Public;
2. A Specific Group of Individuals; or
3. The Membership of the Nonprofit.

Examples of Nonprofit Corporation include religious, charitable, and political organizations, credit unions as well as some membership clubs the Shriners.

ADVANTAGES AND DISADVANTAGES OF NONPROFIT CORPORATIONS

 

What are the Advantages of a Nonprofit Corporation?

A state-recognized Nonprofit Corporation can obtain private and public grants, low-cost postage rates and be exempt from income, sales and property taxes.

Most significantly, only an official Nonprofit Corporation allows individuals to donate money tax-free while shielding the owners’ personal assets from liability.

What are the Disadvantages of a Nonprofit Corporation?

Unlike a partnership, Corporation, or Limited Liability Company, to maintain its status as a nonprofit a Nonprofit Corporation cannot distribute profits to or for the benefit of directors, officers or members.

STARTING YOUR NONPROFIT CORPORATION

 

How Do I Start a Nonprofit Corporation?

Starting a Nonprofit Corporation generally requires three steps: (1) filing the organizing paperwork in the state in which the Nonprofit Corporation will operate; (2) filing a 501(c)(3) Application with the IRS; and (3) filing for tax-exempt status with your state tax agency.

Once you are ready to form your Nonprofit Corporation, chose from one of TTC Business Solutions’ Nonprofit Corporate Filing Services to incorporate your Nonprofit Corporation.

How Long Does it Take for the IRS to Review and Act on a 501(c)(3) Application?

It typically takes the IRS 3-5 months to examine and issue a decision on a 501(c)(3) Application. This is because it is randomly assigned to an IRS agent for examination and since each agent has a different workload processing times may vary.

Should I Run a Name Availability and Trademark Search before Naming the Nonprofit?

Yes. Prior to adopting and using the name of your Nonprofit Corporation you should always check to make sure that the name is available with your state’s Secretary of State. You should also run a state and federal trademark search to clear use of the same as well as well as any advertising slogans, product or service names you intend to use.

TTC Business Solutions offers a Free Business Name Availability Check as well as trademark Research Report Services to determine if your Nonprofit Corporation’s name is available.

RUNNING YOUR NONPROFIT CORPORATION

 

Can a Nonprofit Corporation Sell Goods and Services Like a Corporation or a Limited Liability Company?

Yes. A Nonprofit Corporation can sell goods and services and pay salaries to officers and employees. However, in to maintain nonprofit status, the Nonprofit Corporation cannot distribute profits for the benefit of directors, officers or members.

How is a Nonprofit Corporation Managed?

Directors are responsible for the management and operation of a Nonprofit Corporation.

Can Nonprofit Corporation Directors be Compensated?

Yes. Nonprofit directors can be compensated or they can serve without compensation. Of note, if they are compensated, that compensation must be deemed “reasonable” by the IRS.

What Duties of Care do Directors Owe to a Nonprofit Corporation?

Directors are under the same constraints of duty and care for a nonprofit corporation as they are for a normal Corporation.

How Many Directors are Required to Run a Nonprofit Corporation?

Most states require three directors. Some states only require one, such as:

  • California
  • Colorado
  • Delaware
  • Georgia
  • Iowa
  • Kansas
  • Michigan
  • Mississippi
  • Nevada
  • New Hampshire
  • North Carolina
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Virginia
  • Washington

 

What Characteristics Should Directors have for a Nonprofit Corporation?

The IRS prefers to see an independent, financially disinterested board of directors. Thus, the IRS usually requires at least three distinct individuals to serve on the board as directors. Of note, it also helps if the directors are experienced in nonprofit or business affairs.

Does a Nonprofit also Need to Have Officers?

Yes.

What are the Responsibilities of Officers of a Nonprofit Corporation?

The officers of a nonprofit corporation run the day-to-day activities.

What Officers Should a Nonprofit Corporation Have?

It varies from state to state, but generally a Nonprofit Corporation should have a President, Secretary, and Treasurer.

Can One Person Serve as All of the Officers?

States have different requirements for officers. Generally, a Nonprofit Corporation should have a president, treasurer and secretary. In some states, one person can hold all offices. In others, one person can hold up to two offices, but cannot be both the president and the secretary.

The states where one person may hold every office include:

  • Arkansas
  • Delaware
  • Florida
  • Georgia
  • Iowa
  • Illinois
  • Hawaii
  • Kansas
  • Kentucky
  • Maine
  • Massachusetts

 

Can a Nonprofit Corporation Have Members?

Yes. Unlike a Corporation a Nonprofit Corporation does not have stockholders. This is because nonprofit corporations do not issue stock. Instead, Nonprofit Corporations can choose to have members.

What Rights Can Be Granted to Members?

In its formal structure a Nonprofit Corporation can grant Members certain basic rights such as the power to vote for directors or approve a sale or merger. Most nonprofits, however, do not have Members due to the formalities and additional paperwork required.

Can a Nonprofit Corporation Have Advisors?

Yes. Even without Members, others may still participate as Advisors, Patrons, or Contributors but cannot participate in formal votes for the Nonprofit Corporation’s affairs. However, if your Nonprofit Corporation is a club or social organization it might make sense that all of the Members have a formal vote on certain important matters.

TAXES AND OTHER LEGAL CONSIDERATIONS

 

Are Nonprofit Corporations Automatically Exempt from Filing Federal Taxes?

No. However, once your Nonprofit Corporation is created by filing the necessary documents with your state a separate application for federal tax exempt status must be filed with the Internal Revenue Service or IRS. This application is often referred to as a 501(c)(3) application since that is the IRS code section most commonly applicable to nonprofits. Of note, depending upon the exact nature of your Nonprofit Corporation, a different code section may apply.

What Types of Organizations are Covered under IRS Code Section 501(c)(3)?

Section 501(c)(3) of the IRS code exempts payment of federal income taxes for charitable, religious, scientific, literary and educational organizations. It is the most commonly used section in the IRS code to gain tax exemption for a Nonprofit Corporation. Section 501(c)(3) covers organizations formed for the following purposes:

1. Charitable Organizations providing services beneficial to the public interest. For example, homeless shelters or food kitchens.

2. Religious Organizations are valid as long as the organization’s Directors, Officers, and Members appear to legitimately hold the beliefs set forth by the religion.

3. Scientific Organizations are Individuals and Groups who conduct scientific research for public benefit. For example, a cancer research organization.

4. Literary and Educational Organizations which inform the public on topics for which there are sufficient facts to permit the formation of an independent opinion or conclusion. For example, an educational organization to inform the public of the hazards associated with smoking.

Unless a Nonprofit Corporation files a 501(c)(3) Application with the IRS, it will not be exempt from paying federal income taxes.

What Other Types of Nonprofit Corporations Are There?

If your Nonprofit Corporation does not qualify under Section 501(c)(3), it may still be eligible for tax-exempt status under a different IRS code section. Other sections that may apply to your Nonprofit Corporation include:
• Labor and Agricultural Organizations, 501(c)(5);
• Business Leagues, 501(c)(6);
• Social and Recreational Clubs, 501(c)(7);
• Fraternal Benefit Societies, 501(c)(8);
• Credit Unions, 501(c)(14); and
• Farmer’s Cooperatives, 501(c)(16) and 521(a).

Are Nonprofit Corporations Automatically Exempt from Filing State Taxes?

No. However, like federal taxes above once your Nonprofit Corporation is created by filing the necessary documents with your state a separate application for state tax exempt status must be filed with the state tax agency. Of note, many states accept the federal tax exempt application in place of their own.