FindLaw | Find a Lawyer. Find Answers.
Are you a legal Professional?
| Featured Attorneys | |
|
(818) 920-2113
|
|
Nonprofit Basics
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.
If your group obtains tax-exempt status, not only is it free from paying taxes on all income from activities related to its nonprofit purpose, but people and organizations that donate to the nonprofit can take a tax deduction for their contributions.
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.
As an example, consider a nonprofit symphony that is sued by a visitor who falls through a poorly maintained railing on a staircase. The court finds in favor of the visitor and issues a judgment against the nonprofit for an amount greater than the nonprofit's insurance coverage. The amount of the judgment is a debt of the corporation, but the directors, officers, and members are not personally responsible for paying it. By contrast, if an unincorporated association of musicians owned the premises, the principals of the unincorporated group could be required to pay the judgment amount out of their own pockets.
FAQs
- Why is protection from personal liability so important?
- What type of business organization is appropriate for my business?
Small Business Center Forms
Cost-effective legal forms to manage your small business.Find the legal documents you need to manage your business partnership. Simple and affordable forms available.
LLCs, Corporations, Corporate Dissolutions, Aged Shelf Corporations. We will beat any competitor's price on Registered Agent or Incorporation services!
Form a corporation or LLC quickly and easily. From LegalZoom, the #1 legal document service.
Legal Ace.com has the turn key online system to make starting a corporation easy and affordable.
- Order LLCs or Corporation, Registered Agent, Trademark, or Dissolution Service or buy Corporate Kits & Seals. One stop shopping!