Archive for April, 2009

Fallacies of Non-Profit Incorporation

Non-profit incorporation is created in a similar way as a regular corporation. However, a non-profit incorporation needs to apply for tax exemption with the state in which it is formed as well as for federal tax exemption. To form a non-profit incorporation, you must:
• Choose a name for the corporation which is legally acceptable in the state
• The articles of incorporation need to be filed along with the filing fee
• You should apply for federal as well as state tax exemptions
• You should develop bylaws which provide details on how the corporation will function
• You must have an initial board of directors
• You must file applications for licenses or permits for the running of the corporation in your state as well as local municipality

Fallacies

A lot of fallacies occur when a non-profit incorporation is set up for tax exemption but does not adhere to the rules and regulations set up for them.
1. One fallacy of non-profit incorporation is that it needs to be set up in the state in which it wants to do business. At times this is not followed and incorporation takes place in one state while business is done in another.
2. Another fallacy which is quite common among non-profit incorporations is that they cannot issue any stock or pay dividends and cannot share the profits among the directors.
3. A third common fallacy is that of “Founder’s Syndrome” which occurs when the organization works based on the whims and fancies of the owner (or founder) rather than based on the mission of the organization.

Non-Profit Business Incorporation and Tax Advantage

Corporations involved in areas like education, scientific research, religion or charity can apply for nonprofit business incorporation. Such incorporation provides limited liability to the members of management. Incorporating a nonprofit company helps in its legal protection to safeguard the personal savings as well as assets from the activities of the corporation. Most forms of nonprofit business incorporation take the benefit of 501(c)(3) tax-exempt status with the Internal Revenue Service (IRS).

Nonprofit corporations that get 501(c)(3) tax exempt status have the following benefits:
• The directors, officers as well as members have complete personal asset protection as well as limited liability
• Tax exemption from federal income tax
• The incorporation is eligible for grants from private and pubic bodies
• The donations offered to these nonprofit incorporations are tax deductible
• They have perpetual existence which means that if the director or owner decides to leave the corporation or passes away, the business still continues to exist
• Property taxes exemption

The main reason for setting up a nonprofit corporation is to get funds from various government agencies as well as from private organizations. Though it enjoys tax-exempt status as well as personal liability protection, it has its own legal and taxation procedures. It is very important to find out all taxation details prior to setting up a nonprofit corporation. As non-profit corporations are business organizations involved in public service, they need to follow special rules. Unlike a for-profit business in which the profit is distributed among owners and shareholders, with a nonprofit setup all the profit remains within the corporation.

Non-Profit Filing in Different States

Non-profit corporations are organizations set up for reasons other than generating revenue and making profit. These organizations need to adhere to the different state laws which depend on the state in which they have been set up. When applying for 501(c)(3) tax-exempt status, you need to apply for federal as well as state tax exempt status which changes depends on the state. These corporations can apply for federal tax-exempt status by filing form 1023 with the IRS.

Documents

To form a non-profit corporation in a particular state, a non-profit certificate of incorporation needs to be filed with the state agency along with the filing fees. The formation documents need to have all the relevant information along with details related to the business (like a detailed business purpose statement for getting tax-exempt status for the particular state). After that, form 1023 needs to be filed with the IRS.

Applying

In most states, it is not necessary to apply to the state for non-profit filing but in some states it is necessary to prepare a simple application. California is the only state that requires a separate application process for setting up a non-profit corporation. In California, along with federal tax-exemption, there is a need for state income tax liability from the California Franchise Tax Board. While some states are satisfied with federal tax-exempt status, some require separate state tax exemption. For filing for non-profit tax exemption status, there is a need to send a copy of the IRS determination letter.