Overview: Non-profit Benefits

A non-profit organization can be incorporated or unincorporated. A non-profit corporation is an organization with a specific not-for-profit mission that uses incorporation as its business structure. A non-profit that chooses not to incorporate is an unincorporated organization. A non-profit organization works for public good rather than for profit like a private business. Non-profits enjoy the benefits of tax-exempt status and the protection of directors, officers, and members from personal liability.

Benefits of a Non-profit

Because the mission of a non-profit is to work toward the public good, the organization is eligible for benefits that are not applicable to for-profit organizations.

Tax-Exempt Status

An incorporated or unincorporated non-profit association can qualify for tax-exempt status if it meets certain conditions. The federal government offers a variety of different types of tax exemptions for non-profits. The most popular kind is called a 501(c)(3). Under this code, the non-profit is exempt from paying federal income taxes and contributions made to the non-profit are tax-deductible for the donors. To qualify, the non-profit must engage in religious, charitable, scientific, educational, or literary endeavors for the benefit of the public.

Non-profits can also apply for tax-exempt status under other tax codes. The possibilities for non-profit associations include foundations, social welfare organizations, and professional and trade associations. In most states, if a non-profit qualifies for a federal tax exemption it will also automatically qualified for a state tax exemption.

Funding from Private and Public Organizations

Another benefit for a non-profit is that it is eligible for public and private grants and can receive contributions from individuals. If the non-profit is a 501(c)(3), the donation is tax deductible for the individual or organization that made the contribution.

Limited Liability

Like a corporation, an incorporated non-profit limits personal liability. The directors, officers, and members of a non-profit corporation receive protection from personal liability for the legal obligations of the non-profit. For example, if a legal judgment exceeds what the non-profit can pay, the claimant will not be able to collect the remainder from the organization's directors, officers, or members.

In certain circumstances, limited liability will not provide protection when a director or officer:

• Personally commits a tort
• Personally guarantees a loan or business debt that is defaulted on by the non-profit
• Co-mingles personal funds with non-profit funds
• Engages in fraudulent or reckless behavior that causes harm

Under these circumstances, an officer or a director may be held personally liable.

How to Form a Non-profit Corporation

Like a corporation, a non-profit must file paperwork with the appropriate state agency. Each state's rules vary, but in general, a corporation must file a document called "articles of incorporation." A non-profit must undertake the additional step of applying for tax-exempt status with state and federal governments. After incorporation, the non-profit must create the corporation's bylaws, select a board of directors, and hold board meetings. Each state has rules that determine the minimum number of directors allowed and eligibility requirements for the directors.

How Non-profits are Managed

A non-profit must follow the guidelines set up for corporations. It must keep corporate records, prepare minutes of meetings, and have a separate bank account. A non-profit corporation may not distribute profits to its members.

The board of directors will typically make collaborative decisions regarding the operation of the non-profit organization. The board will define the mission and the policies of the non-profit, create budgets and oversee finances, and hire an executive director. If the non-profit has an executive director, the director will carry out the daily functions of the non-profit under the management of the board. The executive director's job is also to advise and report information to the board about activities and programs, and to monitor finances.

Dissolving a Non-profit Corporation

If the directors of a non-profit wish to terminate the organization, the non-profit must pay off all debts and distribute any remaining assets to another tax-exempt non-profit corporation.