When it comes to your business structure, does a non-profit come to mind? Are you clear with what a non-profit corporation is? What are the advantages and disadvantages of the non-profit corporation?
A non-profit corporation is a legal entity that has been organized to meet specific tax-exempt purposes. Contrary to their name, non-profit corporations can make profit, but can’t be designed primarily for profit-making. A non-profit may be eligible for some benefits, such as property, sales, and income tax exemptions at the state level.
To qualify for non-profit status, your corporation needs to benefit any of these groups:
- The public
- A specific group of individuals
- The membership of the Non-profit
Non-Profit Corporations are usually used for:
- Non-profit organizations, including charitable and religious organizations
- Political organizations
- Homeowners associations
- Trade associations
- Community organizations
Essential Elements of Non-Profit Corporations:
- Run by a Board of Directors
- Voting members elect the Board of Directors
- Can be structured to produce a self-perpetuating Board
- Membership qualifications are specified in the bylaws
- There are no stockholders, and hence no owners
General Characteristics of Non-Profit Corporations
Strong Board of Trustees
A non-profit corporation is led by a great board of trustees. The team of a strong board of trustees would include experienced executive directors who assist in the organization’s growth. They stay updated with the latest trends by continuing the education and workshops. The main function of the board of trustees is to develop strategic plans and focus on the long-term health of their respective organizations. It includes succession planning and leadership development.
Social Return on Investment (SROI)
High performing non-profit corporations don’t just ask for money, they are dependent on concise and crisp statements of their SROI to raise funds. An SROI statement describes the organization’s main focus, the changes they are planning to make, a proper proof that those changes are occurring, and a perception of the extent of the entire problem it set out to solve and how much of that problem the organization will approach and work.
Non-Profit Corporations have comprehensive and compelling business plans that are built around their SROI statements. These business plans are made to provide the details of key performance indicators (KPIs), aspirational goals, revenue procedures, 3 to 5 year financial predictions, and an expert team/value proposition, among the other essential elements.
- Dashboard – Corporations that convert their business plans into 1-page dashboards, highlight the KPIs around program, quality and reach, financial health, and revenue plans are likely to grow faster.
- Revenue – The best non-profit corporations can easily calculate how much revenue they expect in the coming year and update their revenue pipelines according to it. Furthermore, these corporations can efficiently manage all non-profit revenue domains—individuals, foundations, government, earned income, and affect capital.
- Financial Controls – High performing non-profit corporations exhibit a year-long, month-by-month budget estimates that involve complete income and expense forecasts. These types of non-profits regularly examine their budgets to assure that they have a minimum of 6 months’ cash in the bank. Also, high performer corporations will quickly share their income statements, balance sheets, or other measures of financial health when required.
- Board – A non-profit corporation ensures that it has the right types of experience in place on the board for proper governance and oversight. It is necessary to have people who have extensive experience in business, accounting, and finance on the board.
Advantages of Non-Profit Corporations
Non-profit organizations (just as for-profit organizations) can exist long after their founders leave as long, as their purpose stays relevant and they continue to generate revenue.
As a non-profit corporation, your organization can get federal and state exemptions from corporate income taxes along with other taxes. A tax-exempt non-profit corporation also saves on local taxes from state and county.
Protection Against Personal Liability
One of the most valuable benefits of incorporating non-profit organizations is protecting your organization members from personal liability. Board members, officers, and employees of the non-profit corporation gets protection from liability for corporate debts or lawsuits. Creditors can sue your corporate assets, not the personal assets of the members or volunteers for your non-profit. It is always a wise decision to purchase liability insurance to cover circumstances that may lie outside of incorporation law.
Tax-Exempt Public & Private Status
As a 501(c)(3) non-profit corporation, you can receive grants and donations. Foundations only give grants to 501(c)(3) organizations. Individual donors to your non-profit corporation can demand personal federal and state income tax deductions, and legacies may be exempt from federal estate taxes. All you have to do is create a clear mission and a strategy to collect donations.
The formation of a non-profit corporation is not that simple. The preparation requires clarity about the mission, the on-going rules and the steps for decision making. It’s crucial for a non-profit corporation, whose board members may hold contradicting ideas, to have a list of clear rules about delegation of authorization and how to get things done in a right way. Adding all of these principles in the articles of incorporation and bylaws makes running the organization much easier.
If your non-profit has enough employees, it may qualify for group discounts to health or life insurance benefit programs. Such advantages are not available to workers in unincorporated organizations.
Disadvantages of Non-Profit Corporations
Time and Money to Start
If you’re thinking of starting a Non-Profit Corporation, it may take time for preparations and devoted work. After that, you need to submit the applications to the IRS which is around $800. Also, you may need to hire a professional to file everything.
All Non-Profit Corporations are expected to submit annual filings and adhere to all the laws of incorporation. There are also a few activities that may jeopardize a non-profit’s status. Also, keep in mind that legal requirements differ from country to country.
Prohibition from Political Campaigning or Lobbying
Non-profit corporations who engage in attempts to influence legislation risk their tax-exempt status.
Anyone may request copies of any non-profit’s filings and review their expenditures, salaries, and income. If your non-profit corporation has a large public, you can expect some scrutiny over how you handle administrative expenses. There may be overpaid non-profit CEOs and employees being published.
No individuals or shareholders can receive profits from your non-profit corporation. This can make it more difficult to generate interest from potential investors. This does not mean you will not be paid a salary, it just means that excess funds at the end of the year must be recycled into the non-profit.
Thus, don’t only consider the tax benefits of forming a non-profit corporation, also understand the legal responsibilities that come with this status of your business. Arm yourself with the proper information of the non-profit corporation formation. It is always advisable to contact a skilled attorney to avoid any misunderstanding related to the legal work.