Should My Nonprofit Startup Incorporate?

Use these links to jump to different sections:

• To Incorporate or Not?
• Obtain 501(c)(3) Status

Starting a nonprofit organization has become more popular in recent decades. As of 2018, there are between 1 and 1.5 million nonprofit organizations in the U.S. Much of this is because of the simple process for start-up. For some, it may be as simple as getting a group together to perform charitable work for others. There is no requirement that a nonprofit incorporate, or form an Limited Liability Company (LLC), and there is no requirement the nonprofit obtain federal tax-exempt status under U.S. code section 501(c)(3). However, there are good reasons many nonprofits do form corporations and obtain federal and state tax exempt status. These moves allow the nonprofit to grow larger and provide greater benefits. But these moves are complicated. Before making these decisions, the persons organizing the nonprofit should determine what they want their nonprofit to be, by considering:

• What is the mission for the organization and how will it accomplish its mission?
• Is there a need for your organization?
• Is there another similar existing nonprofit that you could team up with in some way?

If the nonprofit will remain small and local, members could consider remaining an unincorporated association. But there are risks.

To Incorporate or Not?

Protection from personal liability for business debts and claims is the biggest benefit for incorporating the nonprofit. Incorporation creates a new legal entity, separate from the people who organized the nonprofit. For example, if the nonprofit can’t pay a debt, the creditor cannot recover from the members’ personal assets, like their home or retirement accounts. To incorporate in Florida, the nonprofit must file Articles of Incorporation with the Department of State. The state of Florida provides forms and instructions for incorporating your Florida nonprofit organization. The process involves:

• Choosing a distinguishable corporate name for the nonprofit
• Listing a business address and person to serve as registered agent
• Listing a corporate purpose

Florida will also require corporations to file annual reports, or else risk the state administratively dissolving the corporation.

Obtain 501(c)(3) Status

Tax-exempt status provides a huge benefit to nonprofits. It ensures the nonprofit isn’t taxed on contributions and, perhaps more importantly, it ensures the nonprofits’ donors are not taxed on their contributions to the nonprofit. Nonprofits aren’t required to obtain 501(c)(3) status from the IRS, but the growth of the nonprofit is clearly limited without this benefit. Filing for tax-exempt status with the IRS is complicated. The process requires a lengthy tax filing: IRS form 1023, application for recognition of exemption. The IRS provides a lot of background to prospective nonprofits on types of nonprofit organizations that typically qualify for tax-exempt status. It lists 29 different types here. Depending on the type of charity or nonprofit, there are many requirements applicants must meet to qualify and retain their tax-exempt status, which are outlined by the IRS here. If the application is too much work for an interested nonprofit, fiscal sponsorship is an option. It allows a nonprofit to use, or piggyback, the tax-exempt status of an already-qualified tax-exempt nonprofit. Nonprofits may also want to pursue state tax exempt status from the state of Florida. If the nonprofit will solicit donations, the state requires that nonprofit to register with the state. There are many complicated issues, from filing the IRS form 1023, to drafting articles of incorporation and bylaws, to perhaps obtaining licenses or permits for the nonprofit activities. Anyone considering starting up a nonprofit should first talk to an experienced Florida nonprofit attorney. For general information on nonprofit corporations (nonprofit businesses), for-profit corporations, business entities, charitable organizations, and business plans, see our business organizations overview.