Non-Profits

A non-profit organization (abbreviated as NPO, also known as a not-for-profit organization) is an organization that does not distribute its excess profits to owners or shareholders, but instead uses them to help pursue its goals.

Non-profit organizations are established for a variety of purposes, most commonly charitable, educational or religious. Some common examples are schools, hospitals, houses of worship, museums, fraternal organizations, food banks, homeless shelters, trade unions and other volunteer organizations. Non-profit organizations must be organized as either trusts, associations or corporations.

Non-Profit Corporations

Forming your non-profit organization as a corporation, instead of a trust or an association, will offers you all the same benefits as a for-profit corporation. The most significant benefit is limited liability protection for the officers, directors, and shareholders of the corporation, so that their bank accounts, homes, and other personal assets cannot be used to satisfy the debts and liabilities of the non-profit corporation.

The main advantages of a non-profit corporation over a for-profit company are exemptions from State and Federal income tax and property tax (although the exemptions must be applied for separately). There also some other, smaller benefits, such as reduced rates at the U.S. Postal Service.

Unlike for-profit corporations, non-profits cannot distribute any profits to their members, contribute money to political campaigns, or engage in political lobbying, except in very limited circumstances.

Formalities of Running a Non-Profit

Even after a non-profit is formed, the company must observe many formalities and make timely filings with the IRS. Non-profit corporations are required to observe all of the same corporate formalities as their for-profit counterparts, including holding regular meetings of the board of directors and recording the minutes of these meetings.

In addition, non-profit corporations are required to keep books and records detailing all activities, both financial and non-financial. Financial information, particularly information on the sources of support (contributions, grants, sponsorships, and other sources of revenue) is crucial to determining an organization’s private foundation status.

Any non-profit qualified under Section 501(c)(3) exemption must file an annual information return: Form 990, Form 990-EZ, Form 990-PF or Form N-990. Each State also has it’s own filing requirements for non-profit corporations. We recommend consulting an accountant about these filings. Finally, all 501(c)(3) non-profits are required to have a Federal Tax ID (EIN) number, regardless of whether they have any employees.

Forming a Non-Profit Organization

Forming a non-profit organization is a multi-step process.

1. Forming a Non-Profit Corporate Entity
   The first necessary step is the formation of a corporate entity in one of the United States. Although this step closely resembles formation of a regular for-profit corporation, there are specific requirements that must be observed when forming a non-profit entity. State fees may also be different from those for for-profit corporations, usually lower.
2. Applying for Federal Tax Exemptions
   Once the non-profit entity is formed, the second step is application for tax-exempt status with the federal government. The most commonly-used federal tax exemption used for non-profit corporations is in Section 501(c)(3) of the Internal Revenue Code, which is why most non-profit organizations are referred to as “501(c)(3)” companies. The application is lengthy and complex and usually requires an experienced specialist to complete it. Once the non-profit is granted its tax exempt status by the Internal Revenue Service (IRS), only one step remains.
3. Applying for State Tax Exemptions
   The final step is to obtain tax-exempt status in the State where the company is incorporated. Some states grant this status automatically, based on the non-profit formation documents and the 501(c)(3) status. In other states, a separate application is required.