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Top Five Reasons to Incorporate a Nonprofit Organization

Why You Should Consider Incorporating as a Nonprofit Corporation

If you are not sure whether you want to incorporate your nonprofit organization as a nonprofit corporation, here are the top five reasons to do so.

If you have just started a nonprofit organization or have recently joined ranks with a few others to do just that, you have probably given thought to incorporating as a nonprofit corporation. Even though becoming a nonprofit corporation requires some paperwork, it is often well worth the trouble for many nonprofits. Here are five situations in which it could be well worth your time and trouble to incorporate as a nonprofit corporation.

1. Incorporate a Nonprofit When Your Association Makes a Profit from its Activities

If your nonprofit is already making a profit, or will make a profit, from engaging in its stated activities, your organization could benefit significantly from incorporating. However, you must make sure that the money made is related to the charitable activities of your organization. If the profit is so related, you will not have to pay income tax, either federal or state.

For example, suppose that Frank and Gene started an organization devoted to setting up experimental labs in middle schools around where they live. In the beginning, both Frank and Gene bought science supplies from their own pockets and never got paid in return for their services. Now, however, a school district wants to pay Frank and Gene's organization to set up science labs for their high schools. Because Frank and Gene will turn a profit on this deal, they may want to incorporate so that they will not pay income taxes because the profit will be related to the organization's educational purpose and activities.

2. Incorporate a Nonprofit When You Are Applying for Public or Private Grant Money

If your organization does not have tax-exempt status, you may be excluded from applying for many public and private grants. Although you may be able to apply for and be granted tax-exempt status solely as an organization or association, it will be harder to achieve the tax-exempt status that it would be if you incorporated. Getting tax-exempt status as an association requires that you prepare and adopt a complicated set of organizing papers and rules that govern the association's operation. In addition, in most situations, it is easier to get the IRS to approve tax exempt status for a corporation than for an organization.

3. Incorporate a Nonprofit When You Will Solicit Tax-Deductible Donations or Contributions

When you incorporate your organization as a nonprofit corporation and are granted tax exempt status, gifts and donations that are given to your corporation can be deducted from the donors' federal and state income tax returns.

For example, let's say a charitable organization wants to sponsor a food drive that will help the local homeless population get free meals. The organization already knows it has plenty of volunteers to help hand out the food, but it wants to give back to the volunteers and it also needs to rent a space to hand out the food from. There are plenty of wealthy individuals that may donate to the organization. If the organization incorporates as a nonprofit and receives tax exempt status, it may be able to get more donations by allowing the donors to apply their donation as tax-deductible on their tax returns.

4. Incorporate a Nonprofit When You Want to Limit your Personal Liability from the Organization's Activities

If it appears that your nonprofit organization may be the target of a lawsuit, or has the possibility of defaulting on future loans, you may want to consider incorporating to limit potential personal liability. Just like regular corporations, nonprofit corporations can be sued. However, like normal corporations, the members and directors of nonprofit corporations are shielded from the liability of the nonprofit corporation. This means that you can shield your personal assets (cars, bank accounts, homes) by incorporating your nonprofit organization.

For example, suppose that Bill directs a nonprofit organization that delivers food by trucks to various homeless shelters around the city. To avoid any personal liability that could result from a car accident and to stop the organizations creditors from seeking his personal assets in case the truck loans are not paid, Bill can incorporate the nonprofit.

5. Incorporate a Nonprofit When Your Political Activities Could Lead to Lawsuits

As a general rule, nonprofits can engage in very limited political activities. If want to limit your personal liability for any lawsuits that come from overzealous advocacy that takes your nonprofit out of the safe political arena, you should incorporate. If you do not and your organization is sued and loses, your personal assets may be at risk if the organization's assets do not cover the monetary award.

For example, suppose that a nonprofit organization is planning to campaign the local state government to ban the sale of alcohol after 9 pm. However, the organization is predicting a strong response from the alcohol industry and fairly expects to be sued in court. In order to protect the personal assets of the directors and to be able to use organization funds to pay for the director's legal fees, the nonprofit decides to incorporate.

More Benefits of a Nonprofit Corporation

  • Special Postage Rates: Nonprofit corporations can apply for a mailing permit that gives the right to use a special, reduce postage rate for mailings. Nonprofits that expect to do a lot of solicitation by mailing will benefit from this advantage.
  • Property Tax Exemptions: Another advantage is that nonprofit corporations are often exempt from property taxes. To find out more about this, you should contact your county's assessor's office.

Hire an Attorney to Assist with Nonprofit Incorporation

If you are thinking of incorporating your nonprofit, speak to a qualified attorney in your area today. A business and commercial law attorney can walk you through the steps of incorporation and help you file the necessary paperwork.

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