What is a non profit corporation?
A nonprofit corporation is an organization that is formed to serve the public including charitable, educational, religious, or other public service reasons. Basically, it is not created to earn purely profits for itself, just like other businesses aim to do. One of the biggest benefits of this form of entity is that it is exempt from paying federal and state taxes on any income the corporation earns, unlike the for-profit corporations.
The tax exemption comes from the Internal Revenue Service (IRS) Code Section 501(c)(3), which is why such organizations are often called 501(c)(3) corporations. But the process of creating a nonprofit corporation mirrors that of starting a corporation for business, or profit, purposes.
What are the steps to starting a nonprofit organization?
It is quite easy to open a nonprofit in the USA. Here are the steps to form your own nonprofit 501(c)(3) corporation:
- Choose a name – Select a name for your non-profit making sure that it is not the same as any other business name. It will also have to end with a corporate designator, such as “Corporation,” or “Incorporated,” or an abbreviation of any of those words.
- File the articles of Incorporation – You will need to fill in the basic business information for this form just like you would for any other normal business. IncParadise can help you with filing for this.
- Apply for your IRS tax exemption – Once you are done, you need to file the federal 501(c)(3) tax exemption application to the IRS along with your article of incorporation to get the nonprofit status. Again, this is something IncParadise can help with; connect to know more.
- Apply for state tax exemption – After your federal tax exemption has been applied for, in some states, you will have to apply for the state tax exemption as well. Contact your state tax agency to learn more.
- Draft bylaws – These are the internal governing rules of how the meetings would be held, electing officers and directors, and voting issues.
- Obtain licenses & permits – Check with your state and local government agencies to see if you need additional licenses or permits for your business and get it.
For help in registering your nonprofit, contact us at IncParadise so that we can take all the headache of the incorporation and you can concentrate on the business.
How to choose a name for a non profit corporation?
Just like for every other business, the name of your nonprofit cannot be the same as another business. Additionally, the name has to end with a corporate designator, such as “Corporation,” or “Incorporated,” or an abbreviation of any of those words.
A tip: Choose the name that represents the purpose of your nonprofit.
What is the difference between Nonprofit and Tax-Exempt Status?
Both are not the same. If you are forming a nonprofit corporation, it does not automatically mean that the corporation is tax-exempt for the federal and/or state tax. A tax-exempt corporation is an entity that has gained the exemption from the income tax liability. And a nonprofit is not eligible for the exemption from the income tax liability until it applies for the tax-exempt status and the IRS has approved it.
Additionally, the nonprofit status refers to incorporation status under state law. And the tax-exempt status refers to federal income tax exemption under the Internal Revenue Code. This kind of business is usually barred from distributing profits and accumulating equity appreciation for private benefit. All the money is reinvested to make the lives of others better.
Are non profit directors and officers the same?
No, they are not the same. In fact, many nonprofits fail to respect the differences between officers and directors. When an individual holds both the position of director (i.e., board member) and an officer position (e.g., chair of the board), we often see such individuals elected for only the officer position. It is assumed that such people automatically become a director as well, but this only happens if the governing documents of the nonprofit provide that the officer is an ex officio director. And most of the nonprofits do not have this clause in their documents.
So, what are the differences nonprofits must respect here? Each has been explained below:
- Directors – A director is a member of the board of directors and has a vote on each matter that comes before the board. As an individual, the director does not have any inherent powers, except for the right to vote, to sue the corporation and other directors, to receive certain reports, and to inspect the corporation’s documents and properties. A single director never has any control in managing the company. The ultimate power just lies in the company board of director’s hands.
- Officers – Unlike directors, officers are hired by the board of directors and have individual duties related to managing some aspects of the corporation’s affairs and activities. These duties are not defined by the corporate law but by the bylaws of the company, on how the company needs to be run. State laws typically require a president or chair of the board, treasurer, and secretary. Corporations can choose more officers based on their needs and structure.
And to be clear, the officers do not have any position on the board of directors, that is they are not one of the directors themselves just like the directors work isn’t to manage the company and operate it, unless they have been elected by the board of directors to do so. So, it is always better to keep the duties clear and the differences clear as mixing them up can lead to a bad structure of the company. A bad structure can end up bringing confusions in the long ran and resulting in a badly handled business.