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Top Five Reasons to Incorporate a Non-Profit Organization

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

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

1. Incorporate a Non-profit When Your Association Makes a Profit from its Activities

If your non-profit is already making a profit, or will make a profit, from engaging in its stated activities, your organization could benefit significantly from incorporating. However, in order to realize the biggest benefits of incorporating as a non-profit, 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.

Here is an example that will clarify this situation. 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 Non-profit When You Are Applying for Public or Private Grant Money

If your organization does not have tax-exempt status, you may be excluded from apply 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 Non-profit When You Will Solicit Tax-Deductible Donations or Contributions

When you incorporate your organization as a non-profit 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.

Here is an example that will help explain this system. Suppose that a local 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 non-profit 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 Non-profit When You Want to Limit your Personal Liability from the Organization's Activities

If it appears that your non-profit 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, non-profit corporations can be sued. However, like normal corporations, the members and directors of non-profit corporations are shielded from the liability of the non-profit corporation. This means that you can shield your personal assets (cars, bank accounts, homes) by incorporating your non-profit organization.

Here is an example to help clarify this point. Suppose that Bill directs a non-profit 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 non-profit.

5. Incorporate a Non-profit When Your Political Activities Could Lead to Lawsuits

As a general rule, non-profits can engage in very limited political activities. If want to limit you personal liability for any lawsuits that come from overzealous advocacy that takes your non-profit 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.

Here is an example that shows the benefits of incorporating a non-profit. Suppose that a non-profit organization is planning to campaign the local state government to ban the sale of alcohol after 9 pm in the evening. 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 non-profit decides to incorporate.

More Benefits of a Non-profit Corporation

Although what you have read above may have already convinced you to incorporate as a non-profit, there are other advantages to incorporating as a non-profit corporation. For example:

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