Should My Nonprofit Startup Incorporate?

Starting a nonprofit organization has become more popular in recent decades, partly because of the simple start-up process. 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 or charitable organization incorporate or form a Limited Liability Company (LLC), and there is no requirement for the nonprofit to obtain federal tax-exempt status under U.S. Code section 501(c)(3).

However, there are good reasons why many nonprofits do form corporations and obtain federal and state tax-exempt status. These moves allow the nonprofit business 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 the following:

• What is the organization’s mission, and how will it accomplish it?
• Is there a need for your organization?
• Is there another similar existing nonprofit you could collaborate with in some way?

Members could consider remaining an unincorporated association if the nonprofit remains small and local. But there are risks.

What Are the Benefits of Incorporating?

The biggest benefit of incorporating the nonprofit is protection from personal liability for business debts and claims. 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.

How Do I Incorporate?

The process of incorporating will vary depending on your state and jurisdiction. As an example, to incorporate in Florida, the nonprofit must file Articles of Incorporation with the Department of State, which provides forms and instructions for incorporating your nonprofit organization. The process involves:

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

The state also requires corporations to file annual reports or risk the state administratively dissolving the corporation.

The Benefits of Obtaining Tax-Exempt 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 nonprofit’s 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 prospective nonprofits with extensive background on the types of nonprofit organizations that typically qualify for tax-exempt status. Depending on the type of charity or nonprofit, applicants must meet many requirements to qualify and retain their tax-exempt status.

Fiscal sponsorship is an option if the application is too much work for an interested nonprofit. It allows a nonprofit to use or piggyback the tax-exempt status of an already-qualified tax-exempt nonprofit.

Find Experienced Legal Help

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 nonprofit activities. Anyone considering starting up a nonprofit should first talk to an experienced nonprofit attorney.