Becoming a nonprofit corporation requires some paperwork, but for many groups, the benefits are worth it.

Nonprofit (or not-for-profit) corporations work well for all sorts of groups, from artists and musicians to people active in education, health, and community services. Often the reason for doing this is simple -- nonprofit status is usually a requirement for obtaining funds from government agencies and private foundations. Obtaining grants, however, is not the only reason to incorporate. Here, we discuss two additional important benefits of forming a nonprofit -- tax-exempt status and personal liability protection. We then introduce you to some of the basic rules for setting up and running your nonprofit corporation.

Tax-Exempt Status

In addition to qualifying for public and private grant money, most nonprofit groups seek nonprofit corporate status to obtain exemptions from federal and state income taxes. The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.

Protection From Personal Liability

Forming a nonprofit corporation normally protects the directors, officers, and members of the nonprofit from personal liability for the corporation's debts and other obligations. Called "limited liability," this shield ensures that anyone who obtains a judgment against the nonprofit can reach only the assets of the corporation, not the bank accounts, houses, or other property owned by the individuals who manage, work for, or participate in the business.