A nonprofit (also referred to as Not For Profit) corporation is a legal entity that is formed for specific purposes. Nonprofits may be involved in a wide range of areas relating to the arts, charities, education, healthcare, politics, religion, research, sports or some other endeavor.
Nonprofit organizations are formed by incorporating in the state in which they expect to do business. The creation of this legal entity generally requires the preparation and filing of certain documents with the Secretary of State (or other appropriate department) in your state of formation.
The act of incorporating creates a legal entity enabling the organization to be treated as a corporation under law and to enter into business dealings, form contracts, and own property as any other individual or for-profit corporation may do.
A nonprofit operates like a regular corporation. It has directors (often called trustees) and officers. But, there are no shareholders and no stock. Any profit the company earns is supposed to be used to advance the nonprofit corporation’s stated purpose. The directors, officers, and employees may earn reasonable salaries.
After the state has approved your incorporation, most Non-Profits will file for tax exempt status from the federal government. This is commonly known as filing for 501 (c) 3 status with the IRS.
The 501 (c) 3 status will exempt the organization from having to pay most taxes. In addition, it will allow the application for government grants and loans as well as make the corporation appear “more legitimate” in the eyes of potential donors whose donations would then also be tax deductible.
The 501 (c) 3 process is somewhat complex and time consuming. The IRS estimates that it would take someone not familiar with the procedure between 30-100 hours to complete.
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